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Budgeting in the time of COVID-19

Even in these difficult times, we need to be aware of the potential trouble looming ahead.

Dear friends,

I hope you and those you care about are safe and healthy in these troubling times. Sometimes it seems as though we are living in a movie, but the danger is very real. Today, right now, the most important thing to do is to take the recommended steps to protect both ourselves and everyone else. And do what you can to show love to the health care workers, first responders, and other good folks who put themselves at risk by going to work every day to make sure the rest of us have access to the basic necessities.

You haven't heard from us in a while, and this spring was going to feature a major "reboot" of Michigan Parents for Schools to focus on next steps for our public schools. But right now I want to highlight some issues that will be coming down the pike very soon now.

Constant readers will recall that Michigan's state budget process - which determines nearly all public school funding - starts in late winter and usually winds up in the early summer, after a final round of economic forecasts that set overall spending limits. Though things have understandably stalled, the Legislature and Governor must still pass a state budget. For the sake of our local schools, who must pass their own budgets by the end of June, we hope the State will finish its work by late May.

Rough weather ahead

And that's where things get interesting. In mid-May, state law requires that the top economists in Michigan government produce a consensus estimate of what revenues the government can expect to collect next year and for the remainder of the current budget year. Because of the impact of the measures necessary to slow the spread of the COVID-19 infection, they are likely to project that State revenues will be much lower than expected for the next 6-12 months or more. That's going to be a problem, and it's hard to tell right now how bad it's going to get.

Two weeks ago, economists at the University of Michigan produced a revised forecast for the US and Michigan economies including the possible effects of the virus pandemic. They developed two scenarios: one in which measures such as we are taking now in Michigan are widely adopted and limit the outbreak, and one in which adequate measures are not taken in much of the country and the impact of the pandemic last considerably longer.

While Michigan is already taking strong steps to mitigate the epidemic, our state can't fully insulate its economy from what happens in the rest of the country, and we are likely more vulnerable to a downturn:

  • In the optimistic scenario, Michigan unemployment peaks at about 7.25% in the third quarter of this year (compared to 4.4% for the US) and returns to previous levels during 2021. Real disposable income falls about 1.7% by the third quarter of 2020 and recovers in early 2021.
  • In the pessimistic scenario, Michigan unemployment shoots up to over 10% in the third quarter (5.9% for the US), declines only slowly next year and remains above 7% through most of 2022. Real disposable income falls over 6.3%, bottoming out in the fourth quarter of 2020, and does not recover until late 2022. In other words, how well the epidemic is handled will also determine whether the economic downturn lasts one year or more than two years.

Buying less stuff, and more services

One of the issues is that our state sales tax mostly only applies to retail goods purchases. Very view services are covered by the tax. But right now, people are buying a lot less at retail, and we are spending a lot more on things like medical care and other services. But that won't help. An added complication: if the stock markets don't recover quickly, the state-run public school retirement system's investments will shrink and it will have to increase mandatory contributions from school districts - at the same time that funding for districts is in danger.

Update: an article in the Detroit Free Press reports that early estimates from the state Treasury Department indicate that the state budget could have a $1 to 3 billion hole in the current fiscal year, with a $1 to 4 billion shortfall in 2020-21. Much of this comes from sales tax and income tax revenues, which, you will remember, make up the bulk of School Aid Fund revenues but also support the state's General Fund budget.

The problem: under state law, if officials know that there won't be enough revenue, they have 30 days to address the problem or the governor is forced to take action, including sweeping cuts to bring the budget into alignment. The governor and legislature have some tools at their disposal to offset the losses, but they can't wave a wand and fill a $3 billion hole.

We've been through this before, in 2007 and then when the Great Recession started. Michigan was left to fend for itself for a while, but the Federal stimulus package organized by the Obama Administration helped to keep states from going under -- and included funds specifically earmarked to help keep local K-12 schools open.

Now, state lawmakers are watching Washington and worrying about what kind of support the Federal government may offer this time. The projected shortfalls are enormous, and might require sweeping layoffs in public education (among other agencies). Michigan's balanced-budget amendment prevents the state from running a deficit. So all eyes are on Congress, to see what more they may do to help keep public services running. Stay tuned.

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