Late Friday, Michigan’s top lawmakers hammered out a deal which both prevents last-minute cuts to schools and closes the current year’s deficit without a tax increase, but at a cost. Most of the cuts from the regular state budget went to fund increases for health care and prison beds, both of which are projected to increase because of the poor economy. To fill the overall gap, the Legislature intends to sell rights to some future tobacco settlement fund revenues (“securitize” these revenues), among other things. Closing the current year’s deficit without a tax increase is evidently part of an agreement with Senate Republicans not to block a vote on an income tax increase for fiscal 2008.
The keystone of the deal, a revised version of Senate bill 436, makes $140 million in cuts from programs supported by the state’s General Fund. A further $168 million will be drawn from a variety of restricted state funds, which will require separate legislation to enact. Some of the key cuts include:
- State universities, which will lose about $26 million from this year (or about 60% of the increase they were originally given), on top of delaying nearly $70 million in payments into fiscal 2008. Nearly $13 million in payments to community colleges is delayed until next fiscal year.
- Arts and cultural grants, which are cut by 38%, or $3.6 million.
- Healthy Michigan Fund, which is cut by over $3 million and will cut 21 public health programs by as much as 25%.
There were expenditure reductions for the Legislature and various executive departments, and $70 million of revenue from the Merit Award Trust Fund was moved to health plan spending. Other restricted funds were raided to the tune of $168 million, including $70 million from the Refined Petroleum Fund, $35 million from the Convention Facilities Fund (which counties often use to subsidize law enforcement), and $30 million in unallocated funds from the 21st Century Jobs Fund.
Counting on $400 million from “securitizing” tobacco settlement revenue means selling off a portion of the future revenues accruing to the state; lawmakers did this as a last resort, and are hoping other funding becomes available. A further $100 million from the Higher Education Loan Authority is expected to be routed to the General Fund; a House Resolution stated the chamber’s intent to use this money to prevent cuts to education and health care.
The measure passed the House with little debate, with thirty five Republicans joining thirty four Democrats in supporting the amended bill. The Senate acted quickly to seal the deal, passing the measure 26 to 10 (with all 10 no votes cast by Democrats).
Closing the deficit without added taxes, even with the financial gymnastics that process required, seems to have opened the way to at least a temporary increase in the income tax as part of the FY08 budget bill. House Democrats had originally prepared to tie a five-year income tax increase (from the current 3.9% to either 4.4% or 4.6%) to the FY07 budget bill, but removed that condition Friday. [This would return rates temporarily to the levels in force before Proposal A was passed in 1994.] They do intend to make it part of next year’s budget, however, and Senate Republican leaders have said they would not block such a measure if it has the votes to pass (perhaps with just enough support to require Lt. Gov. John Cherry to break a tie and pass it). Republicans are still insisting on some “reforms” as the price of considering tax increases, most likely including a measure (now pending in the Senate) to set up state-wide health insurance pooling for public employees including teachers.