Michigan Lawmakers Approve a Budget; Governor Expected to Use Line-Item Veto

CHICAGO - The Michigan Legislature passed a $7.7 billion general fund budget for fiscal 1992 late Friday that calls for about $190 million more in spending than Gov. John Engler's latest revenue estimates of $7.509 billion.

State officials said the governor, who is expected to officially receive the budget bills by the end of the week, will have two weeks from that time to use his line-item veto powers to bring the budget for the fiscal year that began yesterday into balance - an action that legislative leaders fully expected.

But what and how much the Republican governor will cut is uncertain, officials added.

"The governor is going to have to make a comprehensive review of the total budget," explained Tom Clay, a deputy budget director. "It's absolutely certain there will be line-item vetos."

Meanwhile, legislators are waiting to see what actions the governor will take to trim the $7.7 billion budget that reflects the spending targets they agreed to last month.

"It's the governor's responsibility to [make the cuts]. We have no recommendations," said Steve Serkaian, a spokesman for House Speaker Lewis Dodak, D-Birch Run.

He added that the imbalance was not caused by any particular spending program. "This is a very tight budget and there's not a lot left to spare," he explained. The Legislature would need a two-thirds majority to override any veto.

However, Gov. Engler may not have to cut $190 million. Mr. Clay pointed out that changes in the state's revenue-sharing formula for local governments that were approved by the Legislature could bring the imbalance down to an estimated $165 million.

Nick Khouri, the state's chief deputy treasurer, said the budget met Gov. Engler's goals of not raising taxes, while increasing funding to K-12 schools by 4.7%

"I think the rating agencies and Michigan bondholders should be encouraged by the actions of the Legislature," he said. He added that the fact the budget, once signed into law, will be balanced "shows the relative stability of the Michigan economy and shows that the worst is over for the state both in economic terms and in political terms."

A legislative impasse over how to deal with a $1 billion-plus budget deficit in fiscal 1991 led to the placement of $3.14 billion of the state's debt on Standard & Poor's Corp.'s CreditWatch with negative implications last January.

Once the deficit was solved through the use of budget cuts and nearly $750 million of one-time revenues measures, the agency in July removed the state from CreditWatch and affirmed its AA general obligation rating, albeit with a negative long-term outlook.

Joe O'Keefe, a vice president at Standard & Poor's, said the agency would review the final budget to look for "long-term solutions to budget imbalances."

The agency had projected the state could face a $1.1 billion budget deficit in fiscal 1992 if 9.2% across-the-board cuts made in the fiscal 1991 budget last year were not institutionalized. Mr. Khouri said those cuts were contained in the budget approved by the Legislature.

Meanwhile, Mr. Khouri said state revenues were holding up after dropping earlier this year. Weak revenues and growing Medicaid costs had led Gov. Engler to revise his budget revenue estimates for fiscal 1992 down to $7.5 billion from $8.057 billion last month.

Claire Cohen, executive managing director of Fitch Investors Service, which rates the state's GO debt AA, said while the agency would review the budget, it would also be watching to see how the state's revenues perform through the year.

Mr. Khouri added that changes in some revenue collections and disbursements should improve the state's cash flow position in the new fiscal year. But, he held out the possibility the state may have to turn to short-term borrowing again. Last March, the state issued $500 million of GO notes to shore up its deteriorating cash flow position. Those notes were paid off Monday, Mr. Khouri said.

George Leung, a vice president and managing director of state ratings at Moody's Investors Service, which rates the state's GO debt A1, said a tight cash balance situation would likely force Michigan to borrow externally in the short-term market or internally from other state departments.

According to the Senate Fiscal Agency, the state ended fiscal 1991 with a $22 million general fund balance and is projected to end fiscal 1992 with a balance of only $1.2 million.

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