FY 2002 Budget Lays Groundwork for Next Michigan

Contact: Kelly Chesney (517) 373-7560

State Budget Director Mary A. Lannoye today presented Governor John Engler's fiscal year 2002 Executive Budget recommendation to a joint session of the House and Senate Appropriations Committees. The budget continues the prudent fiscal policies that have restored Michigan's financial health over the last decade, funding the essential, eliminating the unnecessary, and maximizing the return on every dollar spent.

"Our challenge is to build the Next Michigan. This budget for the Next Michigan continues a decade-long tradition of sound fiscal leadership, builds upon an outstanding record of tax relief, strengthens our commitment to education, helps families achieve independence and increases support to local units of government. Our continuing prudence will preserve our progress and protect our priorities," Governor Engler said.

This year's spending plan maintains record investments in K-12 education, community colleges and universities, health care, transportation and the environment. It fully funds revenue sharing for local units of government and directs state agencies to reinvigorate their efforts to identify economies and efficiencies within their individual budgets.

The fiscal year 2002 budget recommendation totals $38.2 billion, a $1.2 billion or 3.3 percent increase, from the current year appropriations. This $38 billion total includes $9.8 billion in general fund spending, $11.5 billion earmarked for the School Aid Fund, $1.7 billion in revenue sharing for local governments, $3.1 billion in transportation spending, and recognizes $10.1 billion in federal revenues.

More than $14.8 billion, or 39 percent, of the state's overall budget is devoted to education. Last year, the Legislature enacted a multi-year School Aid budget from fiscal year 2000 through fiscal year 2003. As a result, despite the reduction in revenues, the K-12 public education system will receive a 2002 spending increase of nearly $600 million, or 5.4 percent. This increase is staggering in comparison to the modest general fund increase of only $43 million. Further, just under $300 million is focused on early intervention initiatives for children from birth through the early elementary grades to prepare students for academic success. Total state and local funding for schools is estimated to exceed $14.2 billion in fiscal year 2002, an increase of approximately 80 percent since 1990.

Revenue estimates from the January Consensus Conference indicate that current year revenues are $121 million below the enacted budget. In most years, this would force drastic mid-year reductions. Fortunately, the $121 million shortfall can be covered by utilizing the fiscal year 2000 general fund surplus, currently estimated at $179 million. However, there is also a need for a current year supplemental.

The most significant general fund supplemental need is a minimum $25 million to address a federal penalty in the child support enforcement program. Other spending needs include $17 million for disaster relief assistance associated with the recent flooding and snow disasters, $10 million to further expand government e-commerce services to citizens and businesses, and $5 million to match federal welfare-to-work funds.

The projected decline in fiscal year 2001 revenues indicates that state agencies need to look inward for economies and efficiencies to generate modest budgetary savings. The belt tightening began late last week when Governor Engler announced a more restrictive hiring freeze for Executive branch agencies. In addition, the proposed supplemental reduces the general fund appropriations in Executive branch agencies by one half of one percent, effective April 1, 2001, saving $12.2 million. An equivalent percentage reduction is built into the agency budgets for the entire 2002 fiscal year.

The Consensus Revenue Conference estimated fiscal year 2002 general fund revenues at $9.78 billion, an increase of only $43 million (0.4 percent) over the current year's enacted budget. The $43 million increase in 2002 compares to an average annual increase in general fund spending, over the last five years, of $330 million.

The budget includes 2 percent inflationary adjustments for health care providers, university and community college operations, human service clients and providers, and state employee salaries. Combined, these inflationary adjustments total $124.3 million.

The budget also factors in unavoidable cost increases associated with Medicaid pharmaceuticals, Medicaid price and utilization factors, debt obligations related to the School Bond Loan fund and the state building authority, employee and retiree health care, and state match obligations for federal grants.

Obviously, the $43 million increase in revenues is not enough to pay for all of these spending obligations. Savings in other areas of the budget will offset these spending increases, including an already enacted $180 million reduction in the general fund contribution to the School Aid Fund, a $30 million fund shift related to federal maintenance of effort obligations, $12 million Medicaid pharmacy savings, $10 million due to the delayed opening of the Belamy Creek Prison, and $26 million in agency budgetary reductions.

Highlights of the fiscal year 2002 budget include:

Higher Education

The fiscal year 2002 budget continues the Governor's commitment to ensuring that Michigan's higher education system is accessible and affordable. Since fiscal year 1990, annual funding for our higher education system including financial aid and scholarship programs, has increased by $877 million, to nearly $2.3 billion. This represents a 62 percent increase - well above the 41 percent increase in inflation over the same period of time.

This year's budget builds upon that commitment, providing a 2 percent overall increase in operating support for our state's universities and community colleges. The $1.6 billion appropriation in operational funding includes an increase of $31.8 million for Michigan's 15 public universities. The Governor recommends that this increase be distributed as follows:

  • A 1.5 percent across-the-board increase for all universities; and,
  • An $8 million increase (0.5 percent) to address per pupil funding inequities between universities, based on the funding floors established in prior year budget bills.

The Governor continues to support repeal of the tuition tax credit. The tax credit has had little, if any, impact on tuition restraint. The Governor supports an additional 1.5 percent increase for university operations, contingent upon repeal of the tax credit. This additional funding will bring the across-the-board increase for universities to 3 percent.

The $8 million increase for funding floors will first be used to bring all universities up to a minimum of $4,500 per student. The remaining funding is allocated on a per-student basis to other eligible universities. The across-the-board increases, when combined with the $8 million, bring Grand Valley State University, Central Michigan University, Oakland University, and Saginaw Valley State University up to their respective funding floors.

The fiscal year 2002 budget for Michigan's 28 community colleges is increased $6.2 million, for a total of over $320 million. Consistent with past practice, half of the increase is distributed as an across-the-board adjustment to all community colleges, and the remainder is distributed utilizing the Gast-Mathieu funding formula. Funding for community colleges would also be increased an additional 1.5 percent, contingent upon repeal of the tuition tax credit.

Support for Low Income Families

The Governor's fiscal year 2002 budget continues his support for low-income families in many ways. Day care spending is recommended at a record $517 million, up 56 percent in only four years, to support low-income families who have entered the labor market.

In addition, the School Aid budget increases funding for full-day school readiness programs to $25 million, so that more low-income working families can take advantage of this important educational program. Spending on the Work First program is maintained at $140.5 million. Funding for the Focus: HOPE program, which provides employment and training services in the metropolitan Detroit area, is boosted to $6 million. The State Emergency Relief program is increased by $1.2 million to provide services for low-income families who lack the savings to cover emergency needs.

For those individuals and families who are unable to work, the Governor recommends a 2 percent grant increase. State funding for the School Breakfast program is increased by $1.2 million to insure that 165,000 low-income children can benefit from this important nutrition program. Finally, this budget provides medical coverage to 93,000 Michigan uninsured, low-income individuals and families through the State Medical Program or through county-based partnerships with the state.

Child Support

The Governor's budget increases child support funding by $37 million to implement a statewide system that will meet the federal requirements.

Services for Children & Youth

The Governor's budget increases foster care payment rates by 2 percent to ensure that foster families have sufficient resources for the daily care of these children. In recognition of the increase in adoptions for these hard-to-place children, the adoption subsidy program is boosted by over $20 million. This includes money for a 2 percent rate increase, elevating total spending to $180 million.

Early intervention can help prevent young persons from becoming delinquents. To that end, the ChalleNGe program, operated by the Michigan National Guard since 1999, has shown early success in working with high school drop-outs. The proposed budget increases this program by $300,000.

Funding for the Children's Waiver program, which serves disabled children who would otherwise need institutional placement, has been increased by over $2 million. Payment rates for the Children's Special Health Care program have been increased by 2 percent.

Health care & Medicaid

To maximize the effectiveness of Michigan's Medicaid program, this budget increases state funding and recommends cost containment measures allowing Medicaid dollars to go farther in providing services for those who need them most.

Rate Increases for Providers

In order to insure that providers can maintain quality services for Medicaid recipients, despite the tight revenue picture, the Governor recommends a 2 percent rate increase for health care providers. Discretionary provider rate increases in the last several years have greatly outpaced the rate of inflation. The cumulative three-year cost of optional Medicaid rate increases total more than $1 billion, $450 million general fund.

Mental Health Services

There are a number of mental health related policy changes contained in the fiscal year 2002 recommendation. Medicaid capitation payments erroneously made for individuals not eligible for Medicaid have been removed from the mental health budget. However, to protect mental health services for persons with low incomes, this $34.7 million savings has been reinvested in a three percent rate increase for Community Mental Health Services Programs. Also included in the recommendation is a change in the payment policy to ensure that mental health programs are reimbursed for the actual cost of providing services to retroactively eligible clients.

Building on the success of mental health programs in controlling inpatient hospital costs, the fiscal year 2002 recommendation includes $68.6 million, $29.9 million general fund, for the management and administration of psychotropic drugs. As the prescribers of psychotropic medications, mental health programs are in the best position to manage this important health benefit.

Elder Prescription Insurance Coverage (EPIC)

EPIC will begin October 1, 2001. This new program will replace the Michigan Emergency Pharmaceutical Program for Seniors (MEPPS) as well as the Senior Citizen Prescription Drug Tax Credit program. EPIC is funded at $50 million in fiscal year 2002, $30 million more than the combined funding of MEPPS and the tax credit program. EPIC will provide prescription drug benefits to persons 65 years or older with household incomes at or below 200 percent of poverty.

Public Safety

The fiscal year 2002 recommendation for the Department of Corrections reflects a general fund increase of 3.4 percent, the smallest increase in four years. An important component of public safety is the swift solution of crimes, and science is providing more tools to help in that effort. To that end, the fiscal year 2002 budget for the Michigan State Police adds $1 million for the purchase of new lab equipment and for additional scientists and lab technicians to process DNA samples.

Revenue Sharing

Michigan's revenue sharing program provides unrestricted financial support to over 1,800 units of government, allowing communities to determine how best to fund local services. The Governor's budget for fiscal year 2002 includes $1.65 billion for revenue sharing payments to local communities. This represents an $85 million or 5.4 percent increase from the current year.


The department's fiscal year 2002 road and bridge program will invest over $1.5 billion in the state trunkline system, making it the fifth year in a row that the Michigan transportation program has exceeded the billion dollar mark. One of the Governor's top transportation priorities is the construction of a new 1,000-foot lock at Sault Ste. Marie. A proposed fiscal year 2001 supplemental includes $4.7 million and statutory language for the creation of a reserve or sinking fund, called the Soo Locks Fund. Principal and interest earnings over the next 50 years will be used to provide payments for Michigan's portion of the non-federal share of the project. The United States Army Corps of Engineers, which owns and operates the Soo Locks facility, is expected to begin preliminary work on the new lock in 2001.

Michigan's Rich Heritage

Protecting and improving the environment for present and future generations continues to be a top priority of Governor Engler. The fiscal year 2002 recommendation includes $22 million for cleanup activities to protect public health and the environment. Included in a fiscal year 2001 supplemental recommendation is the final round of local CMI recreation grants, totaling $12.2 million. Through a collaborative effort of the departments of Agriculture, Natural Resources and Environmental Quality, along with interested private organizations and federal support, in the next 15 years, over $175.5 million will be invested in Michigan's environment, removing targeted lands from agricultural production and providing environmental and wildlife benefits. The fiscal year 2002 recommendation includes an increase of $2.6 million in federal land and water conservation fund grants.