Ending the last budget year with a $353.1 million surplus was good news for the state, but most of that money will be needed to keep the current budget from going into the red.

Slower economic growth and less revenue from tax increases passed late in 2007 were pushing the state toward a shortfall of at least $200 million, but the surplus will help keep the budget balanced – at least in the current year. The outlook for 2008-09 isn’t so good.

“It looks like we’re OK, and the reason we’re OK is because of the big surplus we’re carrying over from ’07,” said Jay Wortley, senior economist with the nonpartisan Senate Fiscal Agency. “But it doesn’t help us in ’09.”

Some of the surplus came from belt-tightening by state government departments, all of which spent less money than they’d been given for the fiscal year that ended Sept. 30. That saved $136 million, according to a report released Wednesday by the Office of the State Budget.

Higher-than-expected revenue from the state income tax and the

now-defunct Single Business Tax accounted for the other roughly $200 million, Wortley said, as did the fact that some bills the state thought it would have to pay in the last budget year ended up being paid in this one.

“Some years you win, some years you lose. This year, we won,” he said.

Wortley expects the state to end the current budget year with $76 million left unrestricted in the general fund and $59 million in the school aid fund. Without the surplus, the state could have been forced into another round of midyear cuts and adjustments.

State budget spokeswoman Leslee Fritz said the state will get around $120 million less than expected this budget year because a new surcharge on the state business tax won’t bring in as much as a sales tax on services that lawmakers passed and then repealed.

Although the $353.1 million carry-over was not out of line with past surpluses, the amount surprised many, since part way through the 2006-07 budget year the state faced a shortfall of more than $1 billion.

Lawmakers and Gov. Jennifer Granholm dealt with the deficit by delaying payments to state universities and community colleges,

dipping into funds set aside for job training and substance abuse treatment and selling off part of the state’s future tobacco settlement. Taxes were not raised to fill the hole.

Those one-time fixes weren’t available for the budget year that started Oct. 1. Faced with a $1.75 billion shortfall, lawmakers and Granholm increased revenue by $1.3 billion by raising the state income tax on Oct. 1 and placing a surcharge on the new Michigan Business Tax that took effect Jan. 1. They also trimmed or restricted spending by more than $400 million.

Some House Republicans say the surplus shows the government wasn’t as desperate for new revenue as it claimed during last year’s budget negotiations.

“Normally finishing financially in the black is a job well done, but I can’t look at it that way when the wallets of hardworking families of Michigan were just squeezed because the state said it needed more money or else,” GOP Rep. Kevin Elsenheimer of Kewadin said in a release last week.

House Fiscal Agency director Mitchell Bean said Friday that it was unclear until the books were formally closed how much the surplus would be. He agrees with Wortley that the surplus will be needed this year to make up for shrinking revenues caused by Michigan’s sluggish economy.

“We’re thrilled to have a little bit of money to make it through ’08,” he said. “Hopefully we’ll have a little extra to start ’09 with, because we’ve got some spending pressures in ’09.”

When state budget officials in early February present Granholm’s budget proposal for the fiscal year starting Oct. 1, they’ll have to contend with a new earned income tax credit for low-income workers, less money from Detroit casinos because their tax payments drop with the opening of their permanent facilities, higher debt payments and a still-stagnant state economy that’s expected to continue to drag down tax revenues.

Welfare caseloads could rise in the next budget year as jobs become harder to find, and health care and retirement costs will go up for state employees even though they’re paying a bigger share of their health care costs and won’t get a pay raise.

State economists will meet Friday to reach a consensus on whether tax revenues are keeping up with estimates made last May and what the forecast should be for the next budget year. It appears those estimates are going to be revised downward.

The House and Senate fiscal agencies disagree on their estimates.

Bean said he expects the state could see a combined $300 million shortfall in the state’s 2008-09 general fund and school aid fund once revenues are compared to expected spending.

The Senate Fiscal Agency is less pessimistic, saying the state will face a $34 million shortfall in the general fund and a $305 million surplus in the school aid fund.

But Craig Thiel of the nonprofit Citizens Research Council of Michigan expects it to be much worse. He thinks the gap between revenue and expenses could hit $500 million in the next budget year. He notes that the SFA estimates are based on holding the line on spending, but said “it’s probably unreasonable to assume that the pressures won’t be

greater” to spend more.

Granholm has said any budget gaps will have to be dealt with by cutting spending, since she won’t support another tax increase. But she also isn’t likely to support moves by the Michigan Manufacturers Association to get rid of the business tax surcharge, which would add $500 million to the shortfall estimates.

Wortley said Michigan won’t escape its budget woes until the economy grows stronger, something he doesn’t expect to happen this year or next. That means lawmakers and the Granholm administration will face another year of tough decisions.

“There’s problems that are looming out there,” he said.

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