Proposed Michigan budget spends down billions in surplus and federal relief

Michigan Gov. Gretchen Whitmer’s release of a record $74.1 billion budget that would boost reserves, raise education and infrastructure spending, and fund tax relief moves the legislative debate over how to spend billions in tax surpluses and federal relief into high gear.

The package would raise spending levels from the current $70 billion budget and includes a $14.3 billion general fund and $16.6 billion school fund.

The budget provides a $51.8 million deposit into reserves that would bring the balance to nearly $1.5 billion hitting a 5% target of general and school fund spending. It also raises local revenue sharing by $49.8 million, or 5%.

The new spending draws from $7 billion in surplus revenues from higher-than-expected tax collections in fiscal 2021 and 2022 and revenues expected through 2023 along with remaining American Rescue Plan Act relief and federal infrastructure aid. The state would also spend some of the surplus in the current fiscal year through budget revisions.

While spending would balloon, the administration stressed much of it would go toward one-time funding measures allowing the state to maintain structural balance in 2023 and in future years as tax growth is projected to level out.

"This budget is structurally sound,” Budget Director Christopher Harkins told lawmakers Wednesday as he unveiled the proposal before a joint session of the House and Senate Appropriations Committees. "It's important to know that one-time fund balances are being used for one-time spending."

“With the added revenues available to us and the strong support we have received from the federal government, this is a unique opportunity to transform our state for years to come,” Harkins said.

The proposed budget for fiscal 2023 , which begins Oct. 1, would roll back over four years the state’s retirement tax and raises the state’s earned income tax credit — proposals Whitmer first unveiled during her state-of-the-state address last month. The former carries a $500 million annual price tag and the tax credit would cost $262 million in fiscal 2023.

“The budget I put forward today delivers on those tax cuts and makes strong investments in the kitchen-table issues that make a real difference in people’s lives,” Whitmer, a Democrat, said Wednesday.

Republicans, who hold a legislative majority, offered a mixed assessment offering positive comments on tax relief and some areas of spending, while pressing for more expansive tax cuts. They attacked the overall size of the plan, warning that more should be set aside or debt paid down.

“Our budget is in a solid position today because of this record of responsible spending. Now is not the time to throw away the principles of fiscal responsibility,” Sen. Jim Stamas, R-Midland, who serves as chairman of the Senate Appropriations Committee, said in a statement. “This election-year budget proposal features a lot of areas of general agreement … but we need more information on her plans."

State Rep. Thomas Albert, R-Lowell, who serves as chairman of the House Appropriations Committee, called the package a “spending spree” and said the House Republican version of the budget would focus more on tax relief and one-time spending.

Education funding would see a big bump in the proposed budget, including a 5% permanent increase of $580 million through the per-pupil funding formula with other increases for special education, mental health and other programs and services.

The school budget offers $1.5 billion in one-time funds, which would go to teachers and support staff over four years for remaining in their current jobs.

The state would also establish a $1.5 billion school infrastructure modernization fund, doled out in $170 million increments in the coming years to offset the local fiscal impact of “significant infrastructure projects.”

Higher education would see a 5% permanent increase in aid and a 5% one-time increase. The 5% equals $76.3 million for universities and $16.2 million for community colleges.

On the economic front, the budget provides a one-time $500 million infusion of dollars into a strategic outreach and reserve fund to attract “transformational projects that keep Michigan at the forefront of manufacturing” and another $500 million for payments to frontline workers.

Another $230 million would fund projects sought by higher education institutions and other partners in health science and medical education, and the electrification of vehicles and mobility with an additional $200 million going to a Michigan Regional Empowerment Program for local economic grants.

On infrastructure, the budget allocates from the federal government’s new infrastructure program $578 million for roads, bridges, railways, airports, and local and intercity transit.

The budget provides $480 million in state funds for road and bridge construction and $150 million to support projects considered economically critical, that carry high traffic volumes, increase the useful life of key local roads, or will be completed in conjunction with bridge replacement projects.

The budget directs $325 million to build a psychiatric hospital.

The state would provide $250 million to expand broadband access and send an additional $500 million for water infrastructure projects, such as lead service line replacements.

Michigan’s revenue estimating conference last month lifted projections for the current fiscal year that runs through Sept. 30 by $1.72 billion to $28.53 billion compared to the previous estimating conference in May. The group raised fiscal 2023 estimates by $1.4 billion to $29.14 billion, adding to surpluses being carried over.

In addition to the higher revenues expected in the current and next fiscal year, the state still has about $5.3 billion available discretionary funds to allocate from its share of the American Rescue Plan Act and another $1.8 billion related to programmatic spending. The state additionally is receiving $563 million for roads and bridges from the federal government’s infrastructure package.

ARPA relief dollars can’t fund tax cuts, according to guidance from the U.S. Treasury.

Rosier revenue projections last May that marked a sharp turnaround from dire revenue loss predictions earlier in the pandemic helped ease tensions between Whitmer and GOP leaders as they agreed to a budget framework in the spring. Michigan entered fiscal 2022 in October with a $70 billion budget. The budget made a $500 million deposit into the rainy day fund that restores a $350 million draw early in the pandemic, bringing the balance to $1.38 billion.

The state’s brighter economic prospects drew two rating outlook boosts in June 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.