LANSING – While there are hints a national recession may be drawing to a close, uncertainty surrounding what the recovery will be like and whether the domestic auto industry will rebound cast a gloomy picture for state revenues as members of the Revenue Estimating Conference downgraded the budget outlook by $1.7 billion for the fiscal year beginning October 1. The news sent the Granholm administration immediately looking for 8 percent more to chop out of the governor’s proposed budget.

The revenue estimates came with a giant asterisk attached to them as Chrysler is in the early stages of bankruptcy and merger with Italian automaker Fiat and it is growing more likely General Motors will enter into bankruptcy by the end of the month. Economists called what is happening to the domestic auto industry “unprecedented,” making it considerably harder to draw certain conclusions.

All three conference members – State Treasurer Robert Kleine, House Fiscal Agency Director Mitch Bean and Senate Fiscal Agency Gary Olson – said that if the outlook for Chrysler or General Motors darkens over the summer they will convene another Revenue Estimating Conference to lower funding projections further.

Kleine opened the meeting Friday by reflecting on Olson’s comments in January that the forecast was at its worst.

“It didn’t take long to break that record,” he said, adding at least this time it seems Michigan is not alone in its budget woes and in many cases other states are facing more dire circumstances.

Heading into the conference, the two fiscal agencies and Treasury had a range of gloomy revenue scenarios from Treasury’s optimistic $1.39 billion shortfall to the SFA’s pessimistic $2.1 billion gap.

“Normally we’re much closer but I don’t ever think there has been so much uncertainty (with the auto sector),” Kleine said.

General fund revenues are down 21 percent for the year, which Kleine said was staggering given that when GF revenues have fallen over the past 50 years it’s been by about 5 percent. The tax increases of 2007 have provided some relief to the budget, Kleine said, only in the fact that the numbers could be worse.

In the end though, the three members settled on a budget shortfall of $1.7 billion, with the general fund gap totaling $984.8 million and the School Aid Fund gap at $732.8 million. General funds are expected to total $6.95 billion in the coming fiscal year, while School Aid Fund total is $10.56 billion.

To see how far the state has fallen, total GF and School Aid Fund revenues were $20.8 billion in fiscal year 2007-08. The revenues for the 2009-2010 fiscal year are estimated at $17.5 billion, a staggering $3.3 billion difference in three year’s time.

And a memo released from SFA said adjusting for pupil and revenue declines will actually mean the minimum per-pupil foundation allowance will total $7,034, which is a 3.6 percent or $282 per-pupil cut, from the current fiscal year. The state is expected to see 1.59 million students walk through school doors next year, which is 27,244 fewer than the current school year.

With the state expected to be $9 billion below its constitutional revenue limit in 2010, Olson said it’s increasingly clear the state’s revenue system “is getting so out of whack with our economy. It’s disturbing to me we are falling so far behind.” The revenue limit is tied to personal income levels.

He said the situation will lead lawmakers to question “what we tax and what we don’t tax.”

2008-09 FISCAL YEAR BALANCE: SFA released another memo later in the day outlining the state will likely end the current fiscal year with a $345.4 million balance of unused federal stimulus dollars in the general fund, even with a pending supplemental totaling $295.2 million that includes adjustments to caseloads for the departments of Community Health and Human Services and adding parole services for the Department of Corrections. Although the Legislature and governor adopted nearly $300 million in cuts to the current budget recently, most of this year’s deficit is being dealt with through stimulus dollars.

The School Aid Fund should have an $873.4 million balance of federal stimulus funds, according to the memo.

2009-10 OPTIONS: For the coming year, Michigan should have $1.3 billion of stimulus at its disposal to cover the general fund shortfall. That includes carrying the $345 million forward into next year and using $949 million of additional stimulus dollars available to the state in the new fiscal year.

But the memo, and Olson, warned that using more federal stimulus dollars in 2010 will lead to even more significant shortfalls in 2011 when the state is expected to receive just $239 million in stimulus dollars.

Olson said it would be more prudent for lawmakers and the administration to make budget cuts over those two years and spread the stimulus dollars out as well in more equal amounts.

Similarly, the state has $1.3 billion of stimulus funds at its disposal to use in the School Aid Fund over the next two years, but SFA projected a shortfall in that fund in 2010 of $98.5 million if the governor’s $59 per-pupil cut and reductions to intermediate school districts are restored.

Budget Director Bob Emerson told reporters the state will need to use all of its federal stimulus dollars to balance the budget and even then it could be short.

EXPLAINING THE REVENUE LOSS: In making the revenue estimates, the agencies and Treasury outlined how tax collections have rapidly declined over the year with the sales tax falling off 8.5 percent in three months of 2009 ending in April, compared to a 3.3 percent decline in the last three month of 2008.

The state’s earned income tax credit also will lower revenues by $315 million in 2010, while the film credit is expected to decrease revenues by $131 million.

The inflation adjusted 2009 general fund decline is the largest one-year percentage drop since 1961.

The agencies estimated on average 94,900 jobs will be lost in the automotive sector between 2008 and 2010. The consensus noted that if there are 20,000 layoffs above that figure then total revenues will fall another $500-$600 million.

Unemployment is expected to rise in 2010 to 15.3 percent, with 3.6 million people working. That compares to 4.27 million people in the state workforce in 2007 when the unemployment rate was 7.1 percent.

Light vehicle sales in the United States are expected to total 11.1 million units in 2010, which would be a 15.6 percent increase. Import shares of that market are expected to be 30 percent.

Personal income is also expected to drop next year, according to the consensus.

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