Midwest state budgets take shape with eye to pandemic recovery

Midwest budgets are taking shape as revenue stress from the COVID-19 pandemic eases, even before potential federal relief is counted.

Minnesota Gov. Tim Walz sent his two-year spending plan to lawmakers in January, Wisconsin Gov. Tony Evers is presenting his two-year budget in a speech Tuesday evening, and Illinois Gov. J.B. Pritzker unveils his fiscal 2022 spending plan Wednesday. The Indiana, Michigan and Ohio governors laid out their budget plans over the last month.

So far, most Midwest governors are laying out plans that don’t incorporate new federal relief proposed by the Biden Administration in its $1.9 trillion American Rescue Plan that would direct $350 billion in direct aid to state and local governments. Unlike the CARES Act relief Congress passed in March, the new funding would compensate for lost tax revenue.

Under allocation provisions unveiled late last week by the House Committee on Oversight and Reform, Illinois would receive $7.5 billion with another $5.7 billion going to local governments. Indiana would receive $3.1 billion with another $2.8 billion going to local governments.

Michigan would see $5.7 billion with another $4.4 billion going to local governments. Minnesota would receive $2.6 billion with another $2.1 billion going to local governments; Ohio would receive $5.7 billion with another $5.4 billion going to local governments; and Wisconsin would see $3.2 billion with another $2.5 billion going to local governments.

“We know it could mean a significant amount of additional funding for Michigan, so we would need to work quickly to analyze the package and determine how to implement for Michigan,” said budget office spokesman Kurt Weiss.

All have revised their revenue estimates upward in recent months but worries over an economic recovery and potential setbacks still loom large.

“On the downside, the risks to the forecast are more numerous. Just as in the optimistic scenario, the main downside risks are centered on vaccine deployment, the number of COVID19 cases and hospitalizations, and containment measures,” Kimberly Murnieks, director of Ohio’s Office of Budget and Management, told lawmakers.

Michigan Gov. Gretchen Whitmer is proposing a $67.1 billion budget for the fiscal year that begins Oct. 1 including a $11.4 billion general fund and $14.7 billion school aid fund. It’s up about 7% from the current fiscal year.

The budget is separate from a $5.6 billion supplemental spending plan Whitmer sent to lawmakers Jan. 20 but she portrays the two as linked through the support each provides to aid in a pandemic recovery.

“The budget plan I released today along with the MI COVID Recovery plan I announced last month makes the investments we need to jumpstart our economy,” Whitmer said.

The budget proposal would raise K-12 funding by $203 million. It provides several one-time infusions of funding with $250 million earmarked to implement research-based best practices to support student academic recovery, $200 million to provide stability for schools that have lost enrollment for fiscal 2022 and $120 million for summer school.

Universities and community colleges would see a one-time 2% increase with $30.5 million going to universities and $6.5 million to community colleges as well as one-time funding of $57.3 million for universities and $12.7 million for community colleges.

The budget would put $300 million in spending toward bridge repairs and $290 million to clean water grants. It would provide $70 million to help stabilize local municipalities that rely heavily on income taxes hit by the pandemic and provide $370 million for childcare expansion.

The budget would make a $175 million deposit into the state’s budget stabilization fund to replenish half of what was withdrawn to help cover the fiscal 2020 revenue gap due to the pandemic’s tax hits and pays off $80 million in Michigan II Fund debt.

“This budget recommendation places an emphasis on maintaining that fiscal responsibility by using one-time funding for one-time purposes and planning for our future,” state Budget Director David Massaron said in a presentation.

Republicans who control the legislative and have butted heads with the Democratic governor on some policy and fiscal measures including closures to slow the spread the spread of the pandemic have yet to take up Whitmer’s $5.6 billion proposal and some raised concerned over the level of new budget spending.

“I am very concerned about the significant growth in spending and how we will pay for it in the long term when we run out of the one-time federal funding,” Sen. Jim Stamas, R-Midland, who serves as Senate Appropriations Chair, said in a statement.

S&P Global Ratings last year moved its outlook on Michigan’s AA rating to negative from stable over concerns of the pandemic’s impact. Fitch Ratings rates the state AA with a stable outlook. Moody’s Investors Services rates it Aa1 with a stable outlook.

Gov. Mike DeWine earlier this month unveiled a two-year budget of $85.7 billion for fiscal year 2022 beginning July 1 including a general fund of $35.4 billion. The fiscal 2023 budget would total $85.8 billion including a general fund of $39.3 billion. The all-funds budgets are up by $1.8 billion in fiscal year 2022 from the current year and $65.6 million in fiscal year 2023.

“This budget is conservatively forecast, balanced, and does not raise taxes,” Murnieks told lawmakers in a presentation. “The budget is carefully constructed to allocate one-time resources to one-time expenses and to allocate recurring revenues to ongoing programs.”

While tax revenues took hits, they turned out less dire than originally expected. The forecasted annual growth rates are now 2% for fiscal year 2022 and 3.4% for fiscal year 2023.

A cornerstone of the budget proposal is the $1 billion “Investing in Ohio Initiative” to fund economic growth initiatives. It would earmark $460 million to small businesses to help cover costs and keep their doors open. The other half of funding would fund key infrastructure projects and expand the state’s broadband network.

The budget does not dip into the state’s $2.7 billion rainy day fund. Lawmakers gave the governor authority in March to draw on the state’s reserves to help clear out the fiscal 2020 hole but the governor instead ordered the cuts.

Public education would receive more funding through federal relief approved late last year but the budget leaves intact existing funding formulas but the legislature could move the needle on those levels.

"We do not create plans to spend additional federal funding in our budget until funds are actually passed by the Congress," said Ohio budget spokesman Pete LuPiba.

Ohio structured a deal last June to push out about $355 million of principal due in fiscal 2021, a one-time “scoop and toss” measure to help manage through the pandemic’s impact on state revenues. The state was facing a $2.4 billion gap heading into fiscal 2021.

Ohio did not receive pushback from the rating agencies for scooping and tossing. Fitch Ratings and S&P Global Ratings affirmed the state’s AA-plus ratings and Moody’s Investors Service affirmed its Aa1 rating. All assign stable outlooks.

The legislature, controlled by Republicans, is currently reviewing the plan. DeWine is a Republican.

Gov. Eric Holcomb last month unveiled a fiscal 2022 and 2023 biennial budget with priorities focused on “fiscal discipline” callings for a restoration of reserves and one-time use of $1.13 billion in funds with a goal of maintaining the state’s triple-A ratings and promoting recovery. The budget would spend $17.5 billion in fiscal 2022 and $17.8 billion in fiscal 2023, up 2.8% in the first year and 1.7% in the second year.

About $300 million would go to pay down existing debt including $110 million of bonds for prisons and hospitals and the $192 million of remaining bonds issued for the Interstate 69 highway expansion project. The state entered into a public-private partnership for the project but ended up taking over it after the developer ran into cost disputes and financial woes.

“It’s good for the fiscal situation of the state, but then also creates additional capacity for other priorities down the road,” said Office of Budget Management Director Cris Johnston.

Another $400 million would be funneled to the teachers’ retirement fund to prefund existing obligations in an effort to reach a 100% funded ratio in 2037. The prefunding would achieve $528 million in total savings.

The state’s budget reserves that are made up of a rainy day fund and various general fund and other account balances would be restored to pre-pandemic levels of about $2.3 billion in the current fiscal year and would hold steady through the fiscal 2022 and 2023 budget years. It ended fiscal 2020 at $1.4 billion.

The state suffered a more than 20% drop in tax revenues between March and June but December revised estimates project 2.2% growth in fiscal 2022 and 3% growth in fiscal 2023.

The budget would raises education funding $377 million or 2% in the next fiscal year and then 1% in the second year of the budget package. It restores cuts made earlier in the pandemic to higher education and raises funding by 1% in the first and then second year.

Majority House Republicans unveiled their budget version earlier this month. It closely resembles the Republican governor’s proposal but would raise the cigarette tax to $1.50 from 99.5 cents and taxes electronic cigarette liquids. The Senate is also controlled by the GOP.

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