Deficit = more cuts, taxes?

$1B state shortfall could hurt schools and cities

Charlie Cain and Gary Heinlein / Detroit News Lansing Bureau

LANSING -- Michigan could face more than a $1 billion budget deficit combined over the next two years, triggering additional cutbacks that could again slam public schools, cities and universities.

Gov. Jennifer Granholm said Thursday that when that figure is added to the potential loss of an additional $2 billion caused by the elimination of the Single Business Tax, "We are looking potentially at a $3 billion hole. That's a huge number. The state is facing probably the most significant budget deficit that we have ever faced."

That was the grim, pre-holiday warning delivered by Granholm during a year-end review with reporters.

The Single Business Tax is set to expire next December.

Granholm wouldn't say how she plans to deal with the shortfall, ducking repeated questions about whether she would recommend a tax increase to ward off critical cuts in state services. But she again insisted that lawmakers find a dollar-for-dollar replacement for the business levy.

Sen. Mike Bishop of Rochester, who will head the Republican-controlled Senate, said a tax increase is not on Republicans' radar for now.

"The Senate Republicans will not look to tax increases as our first answer to any budget problem," he said.

"We need to live within our means and if we can't, it is not up to the hard-working citizens of Michigan to bail us out. The last thing we need to do in this single-state recession is to make Michigan less competitive with other states."

Granholm would need at least a few Republican votes to get a tax passed.

The governor expects to have a better handle on the size of the deficit, and how to deal with it, after state budget experts huddle on Jan. 18 to determine how much revenue the state will have to spend.

"We're going to cut (the budget), I'm certain," she said.

"But we also need to balance what the citizens want and the citizens do want an investment in education, in higher education, in health care for vulnerable citizens."

Granholm will make her 2007-08 budget recommendations in early February.

But it's already clear that state tax collections aren't meeting the demands of the current year budget, which took effect Oct. 1 and lasts through September. Estimates have pegged the shortfall at $500 million.

Early indications from the House and Senate fiscal agencies -- the Legislature's budget experts -- are that spending demands for the fiscal year that starts next Oct. 1 and runs through most of 2008 could exceed demands by $700 million. That would add up to a shortfall of $1.2 billion.

Tom Clay, a tax expert at the nonpartisan Michigan Citizens Research Council, said the gap could be even worse because increases in spending on such things as the prison system and health care for the poor and public employees are outpacing state revenues.

"The economy generally just isn't performing the way it was expected to perform," he said.

State's bills pile up

Additional problems:

· The state owes its employees $140 million for negotiated salary increases, as well as health care coverage.

· Medicaid costs are projected to increase by $190 million.

· The state is committed to a $75 million annual allotment for Granholm's 21st Century Jobs Fund, designed to attract businesses offering high-tech jobs.

Clay said revenues in the Michigan School Aid fund could be at least $350 million short. With the school year already about half gone, absorbing any cuts is going to be very difficult for public schools.

Asked if she might have to order a reduction in school aid next month, Granholm said: "It depends on what the level of crisis is."

The state spends about $13 billion a year on schools, and $9.2 billion through the general fund, its main checkbook.

The base level of support for public schools is now at a record $7,085 per student. Granholm and lawmakers were forced to cut the minimum grant twice -- for a combined $148 per student -- early in her first term. Granholm says she is reluctant to recommend a new round of cuts, especially with the importance of a well-educated work force for the jobs of tomorrow.

However she said she couldn't guarantee that schools would be spared.

Justin King, executive director of the Michigan Association of School Boards, said further cuts in K-12 funding could push some districts into bankruptcy. He said the number of districts nearing financial calamity has soared this year, from 50 to at least 80 and perhaps as many as 100 districts.

"Somewhere along the line, we have to recognize that there needs to be a stable and consistent form or funding for schools, otherwise all we are doing is jerking our kids around," he said.

King said mid-year cuts could mean teacher layoffs -- instead of having two classes of 26 students studying American history, there could be a single, 52-student class "which isn't the world's best learning atmosphere."

Despite possible higher education cuts, Oakland Community College Trustee Janice Simmons remained optimistic.

"(Granholm) is very much pro-education, so I don't think any cuts will be that dramatic," she said, adding that the college has been budgeting conservatively in anticipation of education funding cuts in the past several years. "We try to plan for that because of the economy in Michigan."

Revenue sharing at risk

Revenue sharing to local units of government could also be whacked. State aid to cities, townships and counties has been slashed by $430 million during the last four years.

Many communities count on revenue sharing for basic public services.

Livonia Mayor Jack Engebretson said additional reductions in state support would harm his city of 100,000 residents. He said earlier state cuts forced a reduction in library hours and slowed the city's efforts to replace 90 employees, including police officers and firefighters, who retired or took other jobs.

"We have been a little slower in replacing the ash trees in the right-of-way," he said.