News Story

Claims of State Fiscal Collapse Exaggerated

No, the sky isn’t falling on Michigan state government

Gov. Gretchen Whitmer and her top budget officials are warning that the COVID-19 pandemic and related lockdown have created an unprecedented financial crisis for state government.

They warn that more than $6 billion in planned spending over the next two years could evaporate, absent a massive federal bailout.

Those claims are exaggerated, says James Hohman, the director of fiscal policy at the Mackinac Center for Public Policy in Midland.

A review of state budget reports suggests the current downturn is expected to be both shorter and shallower than Michigan’s not-so-distant past experience during the Great Recession of 2008-09, Hohman said.

In the wake of the financial crisis that touched off the recession, tax revenue accruing to the state’s two principal funds (the General Fund and the School Aid Fund) declined by 15.6% over two years, he said.

By contrast, newly revised projections from state forecasters show a decline of 12% in the current year, followed by a 3.5% increase in the 2020-21 fiscal year.

“The decline is less severe than in the Great Recession. The recovery is anticipated to occur sooner,” Hohman said, “The state of Michigan has survived with bigger revenue losses in the past.”

Whitmer said last week that Michigan is facing an unprecedented budget crisis that “threatens everything from public education for our kids, to public safety” and health care, the Detroit Free Press reported.

Budget Director Chris Kolb described the current state fiscal crisis brought on by the pandemic and government-ordered shutdown of most economic activity as “an unprecedented challenge unlike anything we’ve seen in our lifetime,” according to The Detroit News.

Whitmer and Kolb are resisting calls from Republican leaders in the state Legislature for a proposal to address the projected $3.2 billion shortfall in the current budget year, which ends Sept. 30.

Instead, they are seeking a bailout from Congress to “preserve essential services and resources in Michigan.”

Hohman said the apocalyptic claims are undermined by several differences between the COVID-19 crisis and the 2008-09 financial collapse.

The first, he said, is that the state’s overall fiscal health improved significantly over the intervening decade. In 2008, after years of a flatline economy, Michigan had virtually no budget reserves; in 2020, the state’s Budget Stabilization Fund holds an excess of $1 billion. Secondly, Congress has already appropriated more than $3 billion to Michigan to address pandemic-related issues, Hohman said.

That money is largely earmarked for direct anti-virus action, such as public health spending, he said.

But, with COVID-19 placing a lower-than-anticipated strain on the health care system, much of the money could be redirected to replace tax revenue deficits created by the economic consequences of the statewide lockdown policy.

“Simply stated, there won’t be $6 billion in program cuts,” Hohman said.

The state’s fiscal situation is dire, but “all of these things should mitigate the sky-is-falling scenarios that we’re hearing,” he said.

Asked for comment on Hohman’s analysis, Kurt Weiss, a spokesman for the state budget department, said “We are not going to respond.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.