by Robert Daddow, Deputy Oakland County Executive
October 19, 2008

A Chinese proverb states: “may you live in interesting times.” Financially, these may not be interesting times, but they certainly are troublesome for governmental entities trying to maintain a level of services that the public expects and deserves.

The State of Michigan provides an estimated 57 percent of its collections to local governmental units (schools, cities, counties, etc.). State distributions to local units are used to provides services to the public.

Including the fiscal 2009 appropriated budget for the General, Budget Stabilization and School Aid Funds, the State has eaten away at its net worth (e.g. equity) in eight of the past nine years, to a point where this option is no longer on the table. In fact, a Senate Fiscal Agency report dated September 10, 2008, has indicated that the General and School Aid Funds will have a combined equity of a miniscule $4.3 million after spending $23 billion in fiscal 2009 — just 98 minutes of equity as a cushion for use in resolving the 2010 anticipated operating shortfall. The option of using equity, which has assisted the State in balancing its budget over the past decade, is no longer available.

In fact, the assumptions used in the SFA report are clearly too optimistic given recent events involving foreclosures, unemployment, credit restrictions and the turmoil in the automobile industry. For example, the School Aid Fund (SAF) is highly dependent upon sales and property taxes to fund local school districts. Given the tightening of credit, the October 2008 (first month in FY 2009) sales for automobiles and retail are expected to be dismal. The State has estimated a 1-percent decline in the property taxes flowing into the SAF; while Oakland County is expecting a 4.5-percent decline as of the December 31, 2008, assessment rolls (used for 2009). Oakland represents 18 percent of the state’s taxable value, and its results were similar to metro Detroit — comprising over 60 percent of the taxable value. Both the sales and property tax revenues for SAF are overstated and will require adjustment downward — leaving schools exposed.

The credit crunch has caused the State to delay the borrowing of $1.4 billion in short-term notes. Similar delays have occurred in other states, with the most notable one being California, where they have called upon the federal government to loan the state $7 billion. The Michigan notes would be used to cover vendor and local government obligations arising from fiscal 2008 operations. Vendors and local governments may have their cash flow delayed for services already rendered.

The SFA report also indicates that the 2010 fiscal year will be impacted by “one-time” adjustments in 2009 that adversely impact the budget by almost $600 million. The demands on state government increase in a down economy, and many decisions have been delayed by the State over the past decade. Road funding needs, Cobo Hall renovations, metro Detroit transit, Detroit Public Schools (as well as other fiscally troubled schools) and the City of Detroit will all compete for increasingly scarce State resources at a time when State revenues will be declining.

Delaying any quantification of the 2009 and 2010 operating shortfalls compounds the problem. Use of State equity is no longer possible as has occurred in the past decade. Issuing fiscal stabilization bonds that defer the fiscal “pain” is not possible with the implosion of the municipal insurance market and credit crunch. Reforms require a long time to realize benefits and much longer than the fiscal issues now facing the State. Unfortunately, this leaves the State with only two major options to balance its 2009 and 2010 budgets: significant operating reductions (including those in support of local governmental units) and / or new taxes and fees.

Longer term fiscal planning and cooperation between the executive and legislative branches will be needed. Unfortunately, both have been lacking in the past decade and have contributed to the fiscal position the State currently finds itself in. The new House of Representatives will find itself in interesting times.

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