Amid COVID-19 surge, Michigan leaders prepare for $1B-$3B budget hole

As the state of Michigan attempts to lower the human cost of the coronavirus pandemic, leaders are trying to get a grasp on what toll the virus will take on the state’s budget as tax revenue dips and response expenses mount. 

The state is looking at a “wide range of scenarios” that could blow a $1 billion to $3 billion hole in this year’s budget and a $1 billion to $4 billion hole in next year’s, said Kurt Weiss, a spokesman for the State Budget Office. 

The current year budget is a little less than $60 billion while next year’s proposed budget totals $61.9 billion. School aid and general fund monies, funded by state tax dollars, account for roughly $26 billion of next year's budget. Federal money comprises most of the rest.

The extent of the budget shortfall this year and next depends on the severity and duration of the coronavirus pandemic in Michigan as well as what type of federal support is extended to states. 

“Every state in the nation right now is grappling with how this is going to impact the state revenues, and it’s difficult to project or predict the ultimate impact of COVID-19 on our state revenues and the subsequent impact to the state budget,” Weiss said.

Senate Majority Leader Mike Shirkey, R-Clarklake, said he's expecting the virus to have a financial impact in the "$1 billion-plus range." With the state's fiscal year ending at the end of September, Shirkey said making large cuts to the budget this late in the year would be a big task.

In anticipation of the financial impact, Gov. Gretchen Whitmer on Monday instituted a hiring freeze in state government and stopped discretionary spending. 

She also vetoed roughly $80 million in "pork" spending from a supplemental budget, while signing on to the Legislature's $150 million plan to supplement the state's response to the coronavirus pandemic. 

“Now is not the time to sign a bill for supplemental funding for anything other than dollars that can be utilized to help our COVID-19 response,” Whitmer said during a Monday press conference.

Michigan’s sale tax was estimated in January to bring in about $8.6 billion for the budget year while the state's income tax was projected to bring in about $10.6 billion, according to state Treasury data. But revenues from those taxes are expected to dip in the coming months amid mounting unemployment, shuttered businesses and slowing consumer activity. 

On Thursday, the state announced more than 300,000 people filed for unemployment last week — more than 175,000 from the prior week and 5,900% higher than the 5,000 claim weekly average in Michigan. The unemployment claims in both weeks are the highest weekly totals dating back to 2000.

Without much cash on hand or even lacking stores to purchase from because of recent shutdowns, Michigan residents are expected to spend less, further depressing the sales tax revenue. 

With many Michigan residents lacking cash on hand or lacking a store in which to spend it, consumer activity and, by extension, sales tax revenue are expected to decrease.

If the state needs to cut the current year budget, a variety of options exist to do so and the Legislature has a "good working relationship" with the governor to find the best path forward, said state Rep. Shane Hernandez, the Port Huron Republican who chairs the House Appropriations Committee. 

“We have to work together to figure out what’s best to do for the people. We have some challenges coming up,” he said. “I don’t know that we have the full scope of it yet.”

Whitmer could sign an executive order axing items from the budget, she could just  choose not to expend the funds appropriated by the Legislature or lawmakers could negotiate a negative supplemental, Hernandez said. 

Sen. Curtis Hertel, D-East Lansing, the top Democrat on the Senate Appropriation Committee, said the state may have to use its Rainy Day Fund, which has about $1.2 billion in it.

"If this isn’t rain, I’m not sure what a monsoon looks like," Hertel said.

Lawmakers are working with the governor to understand the “full scope” of the virus’ impact on the state budget and what type of relief a federal stimulus will offer. Federal funding will be “critical” in managing the expected revenue decline, Weiss said. 

“Right now, the language in the most recent stimulus package doesn’t allow states the ability to utilize funding for existing items in the budget that could be impacted by lost revenue,” Weiss said. “Discussions are ongoing in D.C. and we are hopeful that Congress can come together so Michigan and every other state across the country can account for the impacts to our existing budgets.”

The state has a regularly scheduled revenue estimating conference in May that oftentimes is used as a guide to adjust the current and future budget to match actual revenue. 

That conference will not be moved up despite the pandemic, Weiss said, because the state believes the additional time will allow officials to get a better grasp on the actual cost of the coronavirus. 

“We know there will be an impact,” Weiss said. “What we don’t know is how large it will be or whether federal dollars will be allowed for the replacement of any lost revenue.”

The budget negotiations come about six months after the Legislature and governor were in a battle of wills over the state budget and the possibility of a 45-cent gas tax increase to pay for road repair and maintenance. 

The GOP-led Legislature bucked the drastic tax increase and instead putting aside $400 million in General Fund money for more road repairs by shuffling work funds and cutting information technology and administrative expenditures from several departments, including Corrections, Education as well as Technology, Management and Budget. 

Whitmer responded by vetoing $947 million from the Legislature's approved final budget and transferring $645 million within departments. 

It took two months for the Legislature and governor to reach consensus on supplemental appropriations that restored some of the funding. 

eleblanc@detroitnews.com