Michigan budget pumps several billion into public pensions

BY SourceMedia | MUNICIPAL | 07/06/22 03:56 PM EDT By Yvette Shields

Michigan?s approved fiscal 2023 budget boosts the rainy day fund to a new peak and sends $2.6 billion to public pension plans, but tougher discussions lie ahead over the fate of billions in remaining revenues left on the table.

Officials differ over what type of tax relief to provide with a portion of those billions.

Lawmakers signed off Friday on a $76 billion budget package that includes a $15.2 billion general fund and $17.5 billion school aid fund after House and Senate Republican leadersstruck an agreement with Gov. Gretchen Whitmer, a Democrat, who vowed to soon sign the package.

Spending is up from the original $70 billion fiscal 2022 budget due to receipt of federal COVID-19 pandemic relief and surplus tax collections. ?This is our fourth bipartisan, fiscally responsible budget that does not raise taxes by a dime and pays down our debt,? said Whitmer, who is seeking a second term in the November general election. The fiscal year begins Oct. 1.

The budget sends $180 million to the state?s Budget Stabilization Fund, bringing it a new peak of $1.6 billion.

On pensions, $1.4 billion would go toward the Michigan Public School Employees' Retirement System, with another $100 million earmarked for the Michigan State Police pension fund and $300 million for public university pensions.

Local municipal funds would receive $750 million through grants capped at $170 million with only the city of Flint expected to receive the maximum allocation. The infusion of pension aid is projected to bring plans managed by local city, county, township, village and other local government entities up to at least a 60% funded ratio. Local governments will need to show that their financial projections are based on actuarial metrics in applying for the grants.

Local governments will see an additional fiscal benefit from a 5% ongoing and 1% one-time increase in the state?s revenue sharing program.

?The budget approved by the Legislature makes significant investment in the people of Michigan and the places they call home,? Michigan Municipal League Board President Barb Ziarko, a Sterling Heights City Council member, said in a statement. ?We look forward to working with the governor and legislative leaders in the coming months to identify additional investments that support people and the places they live, work, and play.?

On the education front, the budget raises by $610 million the per-pupil school aid allotment to $450 per student, the highest ever for the state while providing hundreds of millions more for other education-related programs.

The budget also earmarks $475 million for the creation of a school infrastructure and consolidation fund to help districts build or refurbish classrooms, labs, and libraries, and aid in the voluntary consolidation of school districts.

Community colleges will receive a 5% increase in operational funding while public universities will see a 2% to 5% or $55 million increase in operating aid.

The budget also provides $325 million to finance a new state psychiatric facility complex; $250 million to finance construction of a state public health and environmental laboratory; and $230 million for two education infrastructure projects to promote collaborative approaches among higher education institutions and other partners in cancer research and medical education.

The Department of Transportation budget was raised to $6 billion from $5.4 billion.

Much of the new spending is directed toward one-time items to avoid creating a structural gap, according to Budget Director Chris Harkins. Legislation approved by lawmakers Friday also allocates an additional $2.5 billion of spending in the current fiscal year.

?Our budget prioritizes school funding, road repairs, healthcare access, job training, and even sets aside billions for tax relief,? said House Speaker Jason Wentworth, R-Farwell.

To meet the June 30 deadline, state leaders settled on the budget package after agreeing to put off more contentious talks over how to spend roughly $7 billion in remaining revenues ? with tax relief taking center stage.

Whitmer is pressing for a temporary suspension of the state sales tax on gasoline, issuing a one-time $500 tax rebate, raising the earned income tax credit, and scaling back the tax on retirement income. Republicans back a plan to reduce the individual income tax, create a child tax credit, and raise the earned-income tax credit.

As Whitmer and lawmakers hashed out a budget package, they had more to work with following the state?s May revenue estimating conference that raised revenue projections for the current fiscal year by $3 billion with an additional $2 billion expected in fiscal 2023.

The state now expects to collect $14.18 billion in general fund revenues and $17.34 billion in its school aid fund, up $1.73 billion and $1.26 billion, respectively, from the last estimates adopted in January. The state anticipates the totals will shrink in fiscal 2023, which begins Oct. 1, with $13.97 billion of general funds now expected and $17.20 billion in school aid. While the numbers will drop from fiscal 2022, the projections are still are up by $1.08 billion and $950 million, respectively, from January projections.

Estimates for fiscal 2024 were raised by $910 million for the general fund and $890 million in the school fund. The new forecast raises revenues through 2024 by $6.8 billion but officials cautioned against overspending as threats to the state?s fiscal momentum loom from the potential for an economic downturn, rising inflation, and the future path of COVID-19.

Officials at the time cautioned that some of the revenue growth is one-time in nature and that must guide spending decisions or the state risks developing a structural imbalance. ?It remains imperative that we continue to budget responsibly and with an eye toward the future,? said Harkins.

Lawmakers previously agreed in a bipartisan vote on legislation dubbed the Building Michigan Together Plan, signed by Whitmer in March, that spends $5 billion on transportation, water, and high-speed internet infrastructure projects across the state as well as making a deposit into the state?s unemployment trust fund. The package relied on $3.9 billion of ARPA relief and $945.4 million from the federal Infrastructure Investment and Jobs Act funds and $591.6 million in state funds.

The state?s brighter economic prospects drew two rating outlook boosts in June 2021 when Fitch Ratings lifted the outlook on its AA rating to positive from stable and S&P Global Ratings raised the outlook on its AA rating to stable from negative. Moody?s Investors Service rates Michigan Aa1 with a stable outlook.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.