Reinventing Michigan:Investing in our Future

SAAABAApril 18, 2012

Presented by: Phillip Jeffery

Chief Deputy Director, DTMB

Today’s roadmap

• Summary of Accomplishments• Where we are Today• FY 2013 Budget Principles• FY 2013 Strategic Investments• Questions

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FY 2012 Accomplishments

• Structurally Balanced Budget – $1.5 B perpetual deficit eliminated

• New predictable & stable tax system that is simple, fair & efficient

• Made first deposit of $255 M into the Budget Stabilization Fund since 2004

Fiscal Order Restored

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FY 2012 AccomplishmentsFiscal Order Restored

• Added $280 M to fully fund actuarial required contributions for post retirement benefits

• OPEB legislation caps long-term post retirement healthcare liabilities• Immediately reduces states $14.7 B unfunded liability

by over $5 B • Protects current employees • Incentives for new employees to save for post

retirement healthcare needs – 2% match for 401K

Addressed Long-term Liabilities

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Improving EconomyWhere we are today

Change in Michigan Private Sector Employment(Thousands)

77.7

-116.3-78.4 -69.8

-11.2 -3.7

-54.4 -49.1

-100.0

-286.6

0.2

76.9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Bureau of Labor Statistics.

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Improving EconomyWhere we are today

0%

4%

8%

12%

16%

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

8.3% Jan 12

8.8% Feb 12

Source: Bureau of Labor Statistics.

14.1%Aug 09 – Rank 50th

10.1%Oct 09

Michigan

U.S.

• 8.8% unemployment lowest since September 2008

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Improving Economy

• Reverse trend of people moving out of Michigan

Where we are today

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Improving EconomyWhere we are today

• Revenue growth strongest in over 10 years

7.5%

3.0%

-8.2%-6.3%-5.6%

1.0%3.3%

-0.5%

0.6%

12.5%

-21.3%

-7.9%

14.8%

2.5%0.0%

2.2%

Source: FY12, FY13 & FY14: January 2012 Consensus estimates.

GF-GP RevenuesYear-Over-Year Percent Change

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FY 2013 Budget Principles

• Maintain Structural Balance• Separate ongoing & one-time money• No one-time money in the base budget• Protect education & stabilize state agency budgets• Invest in critical infrastructure, economic

development & public safety needs• Meet the needs of the most vulnerable among us by

investing in important safety net programs• Save for the future

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Total FY 2013 Budget Recommendation

Health & Human Services

Public Safety $2.5B

Total $48.2B

Government Services

Jobs $5.2B

Environment $836M

Education $14.7B

Budget Stabilization $130M

$21.7B

$2.6B

• $195 M gross ($120 M general fund) – continue providing assistance to Michigan businesses• $100 M – business attraction & economic gardening

– moved to ongoing funding• $25 M ongoing – Pure Michigan• $25 M ongoing – innovation & entrepreneurship• $15 M ongoing – support long-term unemployed • $5 M ongoing – arts & cultural grants

2013 Strategic InvestmentsJob # 1 is Jobs – MEDC

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2013 Strategic Investments

• Creating Talent in a P-20 System • Early childhood – $12.5 M FY 12• K-12 – 2.5% ongoing increase – 1% total

increase• Protected per pupil foundation

allowance – $8.7 B• $200 M for performance & innovation

• Best practices – $120 M• Student growth – $70 M• Consolidation Grants – $10 M

• Long term liabilities – $179 M

Education – K-12

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• Increased funding for higher education institutions by 3% ($36.2 M general fund) tied to new formula based on 4 criteria:

1. Growth in number of undergraduate degrees2. Undergraduate completions in critical skills areas3. Undergraduate Pell Grant recipients4. Compliance with tuition restraint

• Recommends 9 university capital outlay projects for construction – ($500 M total – $250 M state share)

2013 Strategic InvestmentsEducation – Higher Ed

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• Increased funding for Community Colleges by 3% ($8.5 M) • Distributed based on the

number of certificate & associate degree completions in critical skills areas

• Recommends 9 capital outlay projects for construction ($110 M total – $53 M state share)

2013 Strategic InvestmentsEducation – Community Colleges

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• Additional $43.1 M in general fund – 16% increase• Regional Policing Plan for mobile policing• Staffing in Forensic Sciences – reduce processing

time for forensic tests for criminal investigations – $3.1 M

• Replace critical equipment – $2.7 M• Two Trooper recruit schools – graduate 180

troopers – $15 M

2013 Strategic InvestmentsPublic Safety – Michigan State Police

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• $257 M ($87 M general fund) for caseload & utilization growth

• $34 M ($10 M general fund) – provide autism coverage for children eligible for Medicaid or the MiChild program

• $25 M ($8.4 M general fund) – Healthy Kids Dental program phased-in expansion

• $7.5 M ($3.4 M general fund) to expand MI Choice waiver

• $6 M general fund for health & wellness initiatives

2013 Strategic InvestmentsSafety Net – Community Health

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• $11.3 M ($6.3 M general fund) – increase basic rate for foster parents by $3 per day

• $60 M in restricted funds for home heating assistance for the vulnerable

2013 Strategic InvestmentsSafety Net – Human Services

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• Agriculture – $1.5 M – food safety• Judiciary – $1 M – Mental Health Courts• Natural Resources

• $5 M – Summer Youth Program – teens in Flint, Detroit, Pontiac & Saginaw

• Dam Safety Program – $2.5 M

2013 Strategic InvestmentsOther Government

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• $119 M – one-time general fund appropriation ($3.3 B gross funding)• Allows state to maximize

matching federal aid• Allows time for the

legislature to develop long-term road & transit funding solution

2013 Strategic InvestmentsInfrastructure – Transportation

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• $10 M increase for environmental clean-ups – restricted refined petroleum fund

• $5 M additional general fund – state match to obtain federal grant dollars for drinking water revolving fund

2013 Strategic InvestmentsInfrastructure – Environmental Resources

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• No longer deferring maintenance costs for state facilities

• Preserves critical physical assets – prisons, hospitals & office buildings• State Building Maintenance –

$25 M total• Armory Maintenance – $4.8 M

total• Restacking $7 M

2013 Strategic InvestmentsInfrastructure – Maintenance

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Restacking GoalBetter utilize space assets used by state agencies1. Maximize state-owned space – filling vacant space

resulting from State’s retirement incentive & attrition2. Increase the capacity of state-owned & leased facilities

– align the size of each workstation to private industry standards

3. Enhance use of workspace through technology & shared workstations – examine the space and business needs of each worker during workspace design

4. Improve agency efficiency through co-location within and across departments

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Proposed Restacking PlanStandardization

• Review the balance of individual vs. common space

• Move toward industry standards • Reduce number of standard sizes• Review the functional need for

floor-to-ceiling offices• Phase in as agencies move to cause minimum disruption

& expense• Overall goal – 225 sq. ft. per employee space utilization

(including common areas)23

Proposed Restacking PlanBenefits of Standardization• Standards based on private industry practices would:

• Utilize shared meeting spaces & more innovative design concepts

• Significantly reduce time & labor cost by minimizing reconfiguration between tenants

• Increase building capacity by as much as 30%• Potential overall reduction of 1.5 M sq. ft. of office

space

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Restacking PlanNext Steps

• Budget request submitted for $7 M for first building:• First priority - Constitution Hall - due to significant

vacancy• Continue working with

partner agencies to establish correct standards & determine individual space needs

• Beginning space planning to meet agency requirements

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Restacking PlanNext Steps

• Savings will result from “Domino Affect”• Work to place agencies together for efficiency in

operations• Reduce lease space once agency placement is

strategically decided• ROI will begin between 12 – 18 months - depending on

agency placement• Payback in 3 – 5 years

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• $50 M – ongoing funding to address highest need areas based on a formal risk assessment

• Technology is the backbone for more efficient & effective government services• Long term savings• Improved efficiency • Improved customer services • Increased usage rate

2013 Strategic InvestmentsInfrastructure – Information Technology

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• ICT consolidated IT services into one agency• Maximizes IT operations & enables innovation

• Economic climate forced Michigan to re-evaluate everything• IT initiatives focus on increased efficiency & financial

sustainability for services & operations• Mobile devices & social media redefined citizens

expectations when interacting with government• Engaged Gartner for IT Assessment to identify areas of

improvement, untapped opportunities & others means to become more efficient & effective

Michigan’s IT Background

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IT Assessment Goals:1. Improve customer service2. Implement sustainable & innovative governance model3. Reduce cost of procuring, implementing, operating, upgrading

& replacing ICT infrastructure products, applications & services

4. Increase attraction, retention & development of workforce5. Enable cost savings & better government through shared

solutions & cross-boundary partnerships6. Implement best-practice ICT solutions & technologies

Michigan’s IT Background

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• IT in Michigan has been substantially underfunded compared to peer organizations• Michigan spends 1% of

operating expenses on IT• Peer organizations spend

an average of 3% of operating expenses on IT

IT Spend % of Operations

0%

Peer Average (3%)State of Michigan (1%)Median 50%

1%

2%

3%

4%

5%

Summary of FindingsMichigan Spends a Lower Percentage of Operational

Expenses on IT than Peer Organizations

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• Michigan spends approximately $12,084 per employee

• Peer organizations spend an average of $15,751 per employee.

• With 47,918 employees* - Michigan under spends peer organizations by approximately $175M in aggregate

IT Spend per Company Employee

0%Peer Average ($15,751)

State of Michigan ($12,084)Median 50%

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

$22,000

Summary of FindingsMichigan Spends Less Than Peers on an IT Spending per

Company Employee Basis

*Source: Michigan Civil Service Commission HWF2, 2011 31

• Michigan’s spending on capital expenses 11% • Peer organization's spending on capital expenses 35%• Organizations with a higher capital spending may…

• Be investing heavily in strategic IT infrastructure• Have reached a planned point of investment in their

infrastructure life cycle• Not have been managing asset investments well (i.e.,

“catching up”)• Simply have a more aggressive capitalization policy

• Michigan is far below peer averages, which suggests the inverse of the scenarios listed above

Summary of FindingsMichigan Spends the Majority of IT

Funds on Operational Expenses

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• High -“run” spending may indicate a limited strategic role for IT

• High -“grow” & “transform” spending might indicate IT has a stronger strategic role where the focus should be on ROI

• The graph illustrates peer averages for IT budget distribution from a run/grow/transformation perspective

• Michigan’s proportion of operational expenses, data suggests that current spending patterns limit growth & transformative efforts

Summary of FindingsEmphasis on Spending to Run the Business Limits Growth & Transformative Objectives

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Prospective View Assumptions:•IT spending increases by $50 M per year•90% of additional spending is allocated to capital projects or capital expense items•Percentage operating expenses could be reduced if -

• Existing expense items are converted to capital expense items

• Overall application maintenance costs are reduced

Prospective View of IT Spending(IT Expenditures % of Total)

Current View of IT Spending(IT Expenditures % of Total)

Measuring SuccessProspective Spending Model for Transformation

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• Deposit $130 M into the Budget Stabilization Fund

• Brings total at the end of FY 2013 to $388 M

• Total OPEB payment is $744 M gross – $367 M general fund

2013 Strategic InvestmentsSave for the Future

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People are taking noteJuly 2011:

Fitch Ratings announced revisions to Michigan’s Rating Outlook for all bonds from Stable to Positive due to:•Continued evidence of a return to structural balanced budget•Continued progress toward re-building reserve funds•Continued employment recovery

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People are taking noteNovember 2011:

Bloomberg Economic Evaluation of States (BEES)ranked Michigan 2nd best forecast for economic health in nation based on 6 key indicators:

1. Tax revenue2. Personal income3. Employment4. Home prices5. Mortgage foreclosures6. Stock performance of in-state companies

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People are taking noteFebruary 2012:

Tax Foundation upgraded Michigan’s State Business Tax Climate Index from 49th to 7th in the nation. Tax Foundation measures this based on which states have the most neutral, simple & business-friendly tax structures.

According to Tax Foundation, it is clear the 2011 tax reforms are a “major improvement for Michigan’s business tax system.”

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People are taking noteFebruary 2012:

Moody's Investors Service commented in it’s Weekly Credit Outlook that Governor Rick Snyder’s FY 2013 budget proposal is a “credit positive” for local governments & “a key turning point” for Michigan.

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Thank you

Any Questions?

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