Published in Finance

Report: Michigan’s reliance on federal funding limits state spending options

BY Wednesday, April 29, 2020 10:59am

Michigan has gradually grown more reliant on federal funding to support state operations, creating “limited discretion over budgetary choices” as it’s forced to make cuts during the coronavirus pandemic, according to analysts.

The nonpartisan Citizens Research Council of Michigan Inc. released a report today detailing Michigan’s increasing reliance on federal funding in the state budget over the past 30 years. 

State discretionary dollars — which can be used for non-legally bound spending on programs and agencies — have shrunk from 40 percent of the budget to less than 20 percent. State funding used to match federal dollars exacerbates the issue.

“Slow growth in state revenue, and an increase in demand for (and availability of funding from) federally funded programs has altered the structure of state finances,” according to the report. “As a result, state officials have little discretion over major portions of the budget.”

The report adds that constraints on discretionary funds “could pose a challenge for state finances if recent economic trends continue.”

Since fiscal year 1992, the state’s general fund budget grew from $19.3 billion to $58 billion, although a greater percentage is now funded by the federal government that “limits flexibility” in state spending, according to the report. As a result: “Federal laws and rules determine how that money can be spent.”

Michigan weathered two recessions in the early and late 2000s, contributing to the state’s increased reliance on federal funding. During the Great Recession, Michigan received $6.5 billion in federal funds to stabilize state budgets and avoid cuts to education, health care and other publicly funded programs.

Still, the report notes that several factors have contributed to the new makeup of the state budget, including a slowly growing population and declining personal income relative to the national average.

While all states have seen increased budget support from the federal government, Michigan’s percentage of spending from federal sources grew at a higher rate before declining slightly after the Great Recession.

As a result of these trends and slow growth in own-source revenue, Michigan’s purchasing power is “well below the national average,” according to the report.

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