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Michigan at fiscal crossroads after an unexpected surplus

Over most of the past decade, budget deliberations in Michigan have taken on a glum and familiar monotony: What do we cut now?

But the state that experienced an economic downturn earlier, deeper and longer than most of the rest of the country has made an unlikely discovery as its officials closed out its latest financial books: Michigan has a $457 million surplus.

Even more surprising: Revenues, which had sunk or had been mostly flat for all but one year since 2000, have grown. Not a lot, but grown.

Michigan is the most unlikely example of a phenomenon that was unimaginable in most states in recent years. Though nearly all states are required by law to balance their budgets, most have been able to do so only through rounds of painful spending cuts to make up for deep shortfalls in revenue.

Now, however, as a majority of states have begun collecting tax revenues that are on par with or even above expectations, they face some measure of Michigan’s situation — trying to sort out whether the worst is really over, whether it is safe to start spending again, or whether a rainy day fund may be the prudent course.

"Revenues are definitely improving, but it’s just unsure where it’s going to head from here," said Todd Haggerty, an analyst with the National Conference of State Legislatures, who noted that although revenues in many states have not returned to pre-recession levels, 17 states exceeded their expected personal income tax collections in the first quarter of the current budget year, and 18 states got more in sales tax than they had anticipated.

Even the federal government has seen an encouraging boost in revenues. After declining sharply (17 percent) in the 2009 fiscal year and rising only 3 percent in 2010, federal revenues rose 6 percent in 2011, according to the Congressional Budget Office.

In Michigan, a state that has cut so much so often that in the words of a former state budget director, "we were so far down that the floor looked like up to us," nearly everyone is now clamoring desperately for a piece of the extra cash. As Gov. Rick Snyder, a first-term Republican, prepared to propose a new budget on Thursday, he and his budget team were hearing from seemingly every imaginable department, agency and interest group.

The attorney general wants 1,000 new police officers after 3,200 were cut around the state over the last decade. Schools leaders say they need to offset cutbacks that have left teachers laid off and schools closed. Child advocates want money for early education for toddlers from poor families; construction workers want money for Michigan’s crumbling roads; and on and on.

For years in Michigan, the only certainty seemed to be a vanishing state budget. The auto manufacturing industry, so central to the state’s existence, was believed to be fading, then collapsing. At various times, Michigan officials had to offset more than $10 billion in expected shortfalls — closing prisons, eliminating state departments and cutting funds to libraries, day care programs, crime laboratories, zoos and more.

By 2010, Robert L. Emerson, the budget director under Gov. Jennifer M. Granholm, a two-term Democrat who preceded Snyder, said he found himself working with general fund revenues that had dropped to levels last seen in the early 1990s (the 1960s, when adjusted for inflation).

While the state had closed the books in the black in some previous years, too, its surpluses on paper were often instantly overtaken by larger projected deficits for the year ahead. Lately, though, signs have shifted. Manufacturing jobs, often declared dead by frustrated workers, have picked up. U.S. automakers have increased production, saying sales are up, and General Motors, only a few years after a federal rescue and bankruptcy, recaptured in 2011 a crown some thought was merely a dusty memory — that of the world’s largest automaker.

In part, as a result, the unemployment rate in Michigan, which reached 14.1 percent in 2009 and had regularly been among the worst several states in the nation, has lately been among states showing the most significant and continuing rates of improvement, though at 9.3 percent in December it is still above the national average.

By the close of the state’s 2011 budget year, in September, Michigan had collected $8.8 billion in general fund revenues — more than $1 billion less the amount collected in, say, 2000, but noticeably up from the $7.6 billion in Michigan’s coffers in 2010, thanks to growth in state income and sales tax revenues. Officials are now projecting $632 million more in revenues over the next two years than they had been expecting.

"After a decade of declining revenues, it’s pretty doggone good news," John E. Nixon, Snyder’s state budget director, said in an interview. "Things have turned."

The state’s economic growth comes even as its largest city, Detroit, is in financial turmoil. While city officials are scrambling to avoid running out of money later this year, a state review team is expected to decide soon whether the city requires an outside financial manager to take control. While Detroit’s circumstances are somewhat unusual, cities, generally, may revive at a slower rate than states, since they depend largely on property taxes, still stalled in many places.

Nixon attributed the improved state budget outlook to the state’s broader economic uptick, but also, in part, to tax and policy changes Snyder has pressed for. The state replaced a business tax with a corporate income tax that is expected to save businesses $1.5 billion a year, though that change did not take effect until January.

To make up lost dollars, lawmakers agreed to tax public workers’ pensions, reduce the state’s Earned Income Tax Credit for the working poor, and remove or reduce other tax exemptions and deductions — moves Snyder’s critics point to as evidence that even if Michigan’s businesses start feeling better, its ordinary families may feel worse.

"A lot of people want us to backfill the cuts we made last year, and we’re not doing that," Nixon said. "We’re not going to have a record recovery here — we’re going to have a long, drawn-out recovery."

The prospect of now building up some savings cushion came as unwelcome news to people like Peter Spadafore, of the Michigan Association of School Boards, who said the schools, drastically cut last year, were in desperate need. "If you’re talking about putting it in a rainy day fund, it’s raining," he said.

But others seemed reluctant to start thinking about buying things again. Not yet.

"Now is not the time to start throwing more money at program areas that haven’t necessarily gone through the real reform that they need to," said Tricia Kinley, an official from the Michigan Chamber of Commerce. "While our members have a confidence and renewed optimism, we’ve also seen a decade of real turmoil in our state."

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