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Grim Forecast

As expected, the state is looking at a likely $2.2 billion to $2.6 billion deficit in the current fiscal year, the House and Senate fiscal agencies said in Thursday forecasts, due to plummeting revenues in wake of widespread ordered closures designed to curb the spread of COVID-19.

The Senate Fiscal Agency on Thursday estimated a $1.4 billion deficit in the General Fund and a $1.2 billion deficit in the School Aid Fund for the 2019-20 fiscal year. The House Fiscal Agency estimated a $1 billion deficit in the General Fund and a $1.2 billion deficit in the School Aid Fund.

The forecast comes ahead of the Consensus Revenue Estimating Conference scheduled for tomorrow, where HFA, the SFA and the Department of Treasury will set estimates for the current and upcoming fiscal years.

“The HFA economic forecast released in January 2020 projected continued, albeit weakening, growth through the end of 2022. In other words, absent some unpredictable external shock, the economy was expected to continue growing slowly, thereby extending the longest expansion in U.S. history,” HFA said in its forecast. “Of course, the coronavirus pandemic became that shock, and it dramatically altered the trajectories of the U.S. and Michigan economies. Stay at-home restrictions, suspension of in-person education at all levels, and closures of nonessential businesses became the new norm and significantly suppressed economic activity.”

HFA said it is forecasting the General Fund to be $9.19 billion in 2019-20 before moving to $9.57 billion in the 2020-21 fiscal year. This represents a $1.9 billion reduction in the current fiscal year from the 2018-19 fiscal year.

For the School Aid Fund, the agency said it would be $12.63 billion in 2019-20 before increasing 4.6 percent in the 2020-21 fiscal year. This means a $926.7 million reduction in the current year from the 2018-19 fiscal year.

The Senate Fiscal Agency said the state is experiencing an economic recession in the current fiscal year. SFA said General Fund will total $8.7 billion and School Aid Fund net revenue will total an estimated $12.6 billion, for a combined $21.3 billion, a 13.6 percent decrease from 2018-19. Compared to the January 2020 consensus estimates, the General Fund estimate is $2.3 billion lower and the School Aid estimate is $1.3 billion lower.

In the 2020-21 fiscal year, as the economy begins to recover from the 2020 recession, net General Fund and School Aid Fund revenue will total an estimated $22.2 billion, a 4.1 percent increase from the revised 2019-20 estimate but $3.3 billion below the January 2020 consensus estimate, SFA said.

SFA also said in Michigan, both job growth and personal income growth are expected to remain below the national averages – despite outperforming the national averages in both 2010 and 2011 – and below the historical state average.

“After having increased 2.5 percent in 2019, inflation-adjusted personal income is projected to decrease 1.6 percent in 2020, and then grow 1.3 percent in 2021 and 2.6 percent in 2022,” SFA said. “Payroll employment increased 0.3 percent during 2019, but is expected to decline 11.7 percent in 2020, before growing 6.1 percent in 2021 and 1.1 percent in 2022.”

Additionally, SFA noted nationally, light vehicle sales are expected to decrease from 17 million units in 2019 to 12.4 million units in 2020, before rising to 15.5 million units in 2021 and 16.2 million units in 2022. The Michigan unemployment rate, which averaged 4.1 percent during 2019, is forecasted to average 13.5 percent in 2020 before decreasing to 9.9 percent in 2021 and 8.7 percent in 2022, the Senate agency said.

HFA noted the trajectory of and response to COVID-19 is the primary source of risk for the forecast moving forward as Michigan and other states move toward relaxing mitigation measures.

“While it is likely that preparedness will be much improved as we move into the fall, the impact on the economy is unknown and will depend on new case rates and treatment capacity,” HFA said. “In short, improved measures to track, trace, and/or treat the disease would go a long way to provide disease mitigation and an acceleration of the economic recovery.”

One factor helping the General Fund is the year-end balance from the 2018-19 fiscal year of $917 million (there was a $195 million balance in the School Aid Fund).

As a result, the HFA projects a $1 billion deficit in the General Fund at the end of the 2019-20 fiscal year and a $1.2 billion deficit in the School Aid Fund. The SFA’s more pessimistic numbers mean projected year-end deficits of $1.4 billion in the General Fund and $1.2 billion in the School Aid Fund.

Gongwer News

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