Updated August 13, 2020
Actions taken so far:
Gov. Whitmer has issued a number of executive orders and directives in response to the COVID-19 crisis—orders that are needed to protect Michigan residents from the coronavirus, but come at an economic cost in terms of lost state revenue.
At the federal level, the CARES Act reserved $150 billion for payments to states and local governments. The State of Michigan received about $3.1 billion in federal funds under the bill, with funds earmarked specifically for necessary expenditures incurred during this public health emergency. Also, local units of government representing more than 500,000 people received about $793.8 million in federal relief.
In July, the Michigan legislature passed and the governor signed a supplemental budget bill allocating $880 million in COVID-19 aid. Of that, $851 million came from federal sources through the Michigan Coronavirus Relief Fund (CRF).
Additionally, to balance the 2019-20 budget:(1) the governor issued an executive order cutting a total of $620 million in state General Funds dollars; (2) a School Aid Fund supplemental budget was approved that included $712 million in federal relief funds and $350 million from the state’s rainy day fund, along with other funding shifts; (3) passed a General Fund supplemental budget that reduced state General Fund spending by nearly $539 million, including the swapping of federal relief funds for state funds, budget cuts, caseload changes and the repurposing of unspent dollars.
Of the state’s $1.2 billion rainy day fund, the legislature appropriated $350 million to supplement School Aid Fund revenues. The remaining $836 million is a potential source of one-time revenue to help address increasing need and falling revenues during the coronavirus crisis.
The 2020-21 budget situation is not much better than that of the current year budget. The projected deficit for the 2020-21 budget is currently pegged at $3 billion ($1.9 billion General Fund and $1.1 billion School Aid Fund deficits). Legislators are working to have a budget in front of the governor by early September, and state leaders must have a budget in place by October 1, without a current guarantee of sufficient federal assistance.
Talks regarding additional COVID-19 relief for states and localities have stalled at the national level. The House voted for significant increases in state aid with less restrictions than funding from the CARES Act. Meanwhile, the Senate has refused to take up the HEROES act passed by the House, instead advocating for a much smaller relief package that does not include additional funding for states.
- Utilize the state’s rainy day fund to supplement revenues in the 2020-21 budget. The rainy day fund was designed to automatically trigger a 25% withdrawal during an economic downturn. The legislature should use these funds to supplement spending on programs and services that help economically vulnerable people in Michigan.
- Advocate for more federal relief to states. Congress needs to provide more relief to states. The state’s ability to balance the 2021 budget will hinge on the willingness of Congress to provide continuing relief to states, including an additional and larger increase in the federal share of Medicaid costs. Michigan and other states need federal relief that is tied to economic conditions, not the calendar, and allows states to use the funds to cover revenue losses created by COVID-related shutdowns. The League is advocating for additional federal assistance through the HEROES Act that was passed by the U.S. House of Representatives in May.
- Reform our tax system. While tax reform was not a practical solution for increasing revenues during the few months left in Michigan to balance the 2020 budget, it is a viable and needed long-term fix. For 2021 and beyond, Michigan lawmakers have the opportunity to make overdue changes to Michigan’s tax system to guarantee that there are adequate state funds to weather downturns, ensure the state has an ongoing and robust rainy day fund, and generate sufficient revenues to invest in the state’s people and infrastructure—including state policies and programs that eliminate inequities based on race and ethnicity. Michigan revenues have eroded over time in the face of increased costs through inflation, in part because the state’s tax system is not progressive or based on the ability to pay. In the 2019 budget year, the state’s General Fund was estimated to be nearly 30% below 2000 levels when adjusted for inflation, while the School Aid Fund was 2.2% below 2000 levels. The League has developed a set of recommendations for improving Michigan’s tax system to make it more fair and progressive.
Why Michigan must act now:
Without additional federal assistance, the looming budget deficit and short timeframe to negotiate the budget means that the upcoming budget deal will surely include major cuts to state programs and services that Michiganders rely on. Economists predict that employment rates will not recover for a significant amount of time, even after the COVID-19 pandemic slows. This means that there will be increased demand for state-funded services like food assistance, Medicaid, and unemployment insurance.
The COVID-19 crisis has also exposed weaknesses in our current tax system that make the state unprepared for economic downturns. To ensure that Michigan can recover quickly from this crisis and be insulated from crises in the future, state lawmakers should consider a progressive overhaul of our tax system to ensure economic equity and robust revenues in the future.