CorNet Michigan Chapter
January 14, 2010
Mark P. Haas
Chief Deputy Treasurer
Michigan Department of Treasury

Treasury Responsibilities
 Tax Administration
 Tax and Debt Collection
 Financial Management
 Local Government Services
 Financing Higher Education
 Investing All State Funds
1

Treasury Customers
Colleges and Universities
Hospitals
Public Schools
Local Government Units
Public Retirees
Higher Ed Students
Michigan Taxpayers
2

Treasury’s Commitment
 Maintain the State’s financial integrity.
 Fair and consistent administration of tax laws.
 Provide efficient and effective professional services.
 Provide access to financial resources for higher education, K-12, local government, and hospitals.
3

2010 Treasury Budget
All Funds $1,548,257.3 / General Fund (GF) $135,597.7
($s in millions)
Revenue Sharing
Grants
Debt Service
PILT
Operations
Pass Through Funds
Revenue Sharing $1,133.7
Grants $103.8
Debt Service
Payments in Lieu of Taxes
$82.2
$14.4
_________
$1,334.1
Operations Funding
Revenue Generation $120.6
Student Financial $37.5
Investments $16.7
Local Government $17.4
Customer Service $12.1
State Banking $7.1
Revenue Forecasting $1.5
Bond Finance $1.3
________
$214.2
4

Overview
 How bad was the recession?
 Is it over?
 What about Michigan?
 Real estate turn around?
 How does the State budget look?
 What does Michigan need to do?
5

6

Current Recession Longest
Since Great Depression
Number of Months from Peak to Trough
U.S. Recessions
13
8
11
10
8
10
11
16
6
16
8 8
10
19
1937-
1938
1945 1948-
1949
1953-
1954
1957-
1958
1960-
1961
1969-
1970
1973-
1975
1980 1981-
1982
1990-
1991
2001 Avg.
Post
War
2007
Thru
Jun
09
Source: NBER, Assumes recession ends beginning of 3 rd quarter 2009 7

Current Recession GDP Decline
Steepest on Record
Percent Change, Economy Peak to Trough
0.7%
-0.5%
-0.2%
-1.6%
-2.5%
-3.1%
-3.2%
-2.2%
-2.6%
-1.4%
-1.7%
-3.7%
1948-
1949
1953-
1954
1957-
1958
1960-
1961
1969-
1970
1973-
1975
1980 1981-
1982
1990-
1991
2001 Avg.
Post
War
2007
To
09Q2
Source: Bureau of Economic Analysis, U.S. Department of Commerce.
Data not avail for 1937-38 and 1945 recessions.
8

U.S. Employment Decline
Third Steepest
Percent Change, Economy Peak to Trough
-5.0%
-3.1%
-4.0%
-2.3%
-1.2%
-1.6%
-1.1%
-3.1%
-1.1%-1.2%
-2.9%
-4.9%
-7.9%
1945 1948-
1949
1953-
1954
1957-
1958
1960-
1961
1969-
1970
1973-
1975
1980 1981-
1982
1990-
1991
2001 Avg.
Post
War
2007
Thru
Oct
09
Source: Bureau of Economic Analysis, U.S. Department of Commerce. Data not avail for 1937-38 recession.
9

Net Worth Drops
19 Percent From Peak
Net Worth Outstanding, Households and Nonprofit Organizations
(billions)
$70,000
$66,007
2007Q2
$60,000
$50,000
$40,000
$53,423
2009Q3
$30,000
$20,000
$10,000
$0
19
52
Q
1
19
54
Q
3
19
57
Q
1
19
59
Q
3
19
62
Q
1
19
64
Q
3
19
67
Q
1
19
69
Q
3
19
72
Q
1
19
74
Q
3
19
77
Q
1
19
79
Q
3
19
82
Q
1
19
84
Q
3
19
87
Q
1
19
89
Q
3
19
92
Q
1
19
94
Q
3
19
97
Q
1
19
99
Q
3
20
02
Q
1
20
04
Q
3
20
07
Q
1
20
09
Q
3
Source: freelunch.com (Federal Reserve Bank Flow of Funds).
10

One for the Record Books
Calendar 2009 Estimate
April
2008
Forecast
15.2
Light Vehicle Sales (millions)
Housing Starts (million units) 1.131
US Unemployment Rate 5.8%
US Payroll Employment (% chg) 0.4%
US Personal Income (% chg) 3.6%
Jan 2010
Forecast
10.3
0.558
9.3%
-3.7%
-1.4%
Comments
Lowest Since 1970
Lowest Back to 1959
Highest Since 1983
Lowest Back to 1940
Lowest Since 1938
Source: Estimates Compare April 2008 and January 2010 Global Insight Forecasts 11

12

Leading Indicators Point to
National Recovery
Weekly Leading Index, Smoothed Annual Growth Rate
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
1/
5/
20
07
4/
5/
20
07
7/
5/
20
07
10
/5
/2
00
7
1/
5/
20
08
4/
5/
20
08
7/
5/
20
08
10
/5
/2
00
8
1/
5/
20
09
4/
5/
20
09
7/
5/
20
09
10
/5
/2
00
9
Source: Economic Cycle Research Institute.
01/01/10
24.2%
13

Recovery Observed in 3rd
Quarter 2009
Real GDP Growth
2.7%
1.4%
3.5%
6.9%
3.0%
Growth
3.2%
1.6%
3.6%
0.1%
-1.3%
-1.1%
5.4%
3.5%
3.0%
4.1%
3.1%
2.1%
1.7%
1.5%
0.1%
3.0%
3.6%
3.2%
2.1%
1.2%
1.5%
-0.7%
-2.7%
2.2%
-1.0%
5.1%
2.5%
2.0%
2009Q3
-5.4%
-6.4%
2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1
Figures are annualized percent change from preceding quarter in 2005 chained dollars.
Source: Bureau of Economic Analysis. Forecast quarters in red are the December 2009 Global Insight forecast.
14

U.S. Has Lost 7.2 Million Jobs
Since December 2007
215
120
4
(72)
(122)
(160)
(85)
(128)
(175)
(321)
(380)
(303) (304)
(463)
(519)
(597)
(681)
(741)
Nov 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09
Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor 15

1400
1200
1000
800
1600
Stock Market Up 68 Percent
From March 9 th Low
S&P 500 Closing Level
1565
10/09/07
1136
01/12/10
677
03/09/09
600
1/
2/
20
01
7/
2/
20
01
1/
2/
20
02
7/
2/
20
02
1/
2/
20
03
7/
2/
20
03
1/
2/
20
04
7/
2/
20
04
1/
2/
20
05
7/
2/
20
05
1/
2/
20
06
7/
2/
20
06
1/
2/
20
07
7/
2/
20
07
1/
2/
20
08
7/
2/
20
08
1/
2/
20
09
7/
2/
20
09
Source: freelunch.com, reuters.com
16

Blue Chip Economists’
Take on the Recovery
 Consensus predicts real GDP will grow slightly exceeding its trend rate (2.8% to 3.1%) over the next five quarters.
 Although with growth better than predicted six months ago, the projected rate of growth still falls well short of that typically seen after steep recessions.
 Labor markets are expected to improve, but modestly, keeping the unemployment rate from falling back below
10% on a sustained basis until the final quarter of this year.
Source: December 2009 Blue Chip Indicators.
17

GDP Generally Strong in Year After Recession
Recession
Trough
1949Q4
1954Q2
1958Q2
1961Q1
1970Q4
1975Q1
1980Q3
1982Q4
1991Q1
2001Q4
2009Q2
Peak to
Trough
Change
-1.6%
-2.5%
-3.1%
-0.5%
-0.2%
-3.2%
-2.2%
-2.6%
-1.4%
0.7%
-3.7%
Y-O-Y
GDP Growth
4 Qtrs
Later
13.4%
7.9%
9.5%
7.5%
4.5%
6.2%
4.4%
7.7%
2.6%
1.9%
??
Source: BEA and Dept. of Treasury calculations. Peaks and trough are as designated by NBER for economy .
18

Government
Federal Outlays and Receipts
(last obs. September 2009)
3500
Outlays
3000
Outlays are far outpacing receipts.
2500
2000
1500
1000
500
Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04
Receipts
Jan-07
Source: US Treasury; Encima Global 19

Government
U.S. Federal Government
Debt Outstanding
(last obs. 2009, projected by CBO 2010 to 2019)
20
Rise in national debt (marketable debt held by the public) is likely to be much higher than current estimates.
More likely
15
10 current law
5 debt held by public
0
21916 23377 24838 26299 27760 29221 30682 32143 33604 35065 36526 37987 39448 40912 42376
Source: Department of Treasury; CBO; Encima Global 20

Government
Federal Government Debt as % of GDP
(last obs. 2009, forecast 2010 to 2019)
80
70
Debt to GDP ratio heading toward
80% even with optimistic GDP growth assumptions.
OMB forecast of
President's FY2010 budget
60
50
40
CBO baseline
30
20
1950 1960 1970 1980 1990 2000 2010
21
Source: OMB; CBO; Encima Global

Government
Social Security and
Medicare/Medicaid Spending
12
10
8
6
4
2
0
1960
Medicare and Medicaid outlays much bigger than Social Security’s.
Medicare & Medicaid expenditures
1970
Social Security expenditures
1980 1990 2000 2010
2025
2015
CBO projections
2020 2030 2040 2050
Source: CBO; Encima Global 22

Prices and Markets
Volatility in Headline CPI
(-1.3 year-over-year for last obs. September 2009, projected to December 2009)
0
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Source: Bureau of Labor Statistics; Encima Global
23

24

Michigan Employment Never
Recovered in Past Expansion
8%
4%
0%
-4%
-8%
-12%
-16%
-20%
Jun
00
Jun
01
Jun
02
Jun
03
Jun
04
Jun
05
Jun
06
Jun
07
Jun
08
Note: Peak is calculated from Michigan’s June 2000 Peak.
Jun
09
U.S.
Indiana
Ohio
Michigan
Source: Bureau of Labor Statistics 25

Worst Michigan
Employment Drop on Record
Ten Year Change
50%
40%
30%
20%
10%
0%
-10%
Nov 1999 – Nov 2009
-20% -16.5%
Ja n-
66
Ja n-
68
Ja n-
70
Ja n-
72
Ja n-
74
Ja n-
76
Ja n-
78
Ja n-
80
Ja n-
82
Ja n-
84
Ja n-
86
Ja n-
88
Ja n-
90
Ja n-
92
Ja n-
94
Ja n-
96
Ja n-
98
Ja n-
00
Ja n-
02
Ja n-
04
Ja n-
06
Ja n-
08
Source: Bureau of Labor Statistics. Non-seasonally adjusted data.
26

Michigan Loses Nearly 1 Million Jobs
88.0
Michigan Wage and Salary Employment Y-O-Y Change
(In Thousands)
-112.7
-76.7
-71.0
-17.0
-9.2
-63.2
-58.7
-109.2
-85.0
-34.0
-283.0
91-
00
Avg.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Forecast
Note: Bureau of Labor Statistics. 2009-2011 estimates are from the January 2010 Consensus forecast.
27

Michigan Unemployment Rate
To Rise Sharply
Michigan November Rate was 14.7%
14.1%
15.7% 15.3%
3.7%
5.2%
6.2%
7.1% 7.1% 6.8% 6.9% 7.1%
8.4%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Forecast
Source: Bureau of Labor Statistics and January 2010 Consensus Forecast 28

Michigan Personal Income
Falling Relative to U.S.
Michigan per Capita Income as a Percent of U.S. Per Capita Income
1.25
1.2
1.15
1.1
1.05
1
0.95
0.9
0.85
93%
122%
87%
19
29
19
33
19
37
19
41
19
45
19
49
19
53
19
57
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97
20
01
20
05
Source: Department of Treasury calculations from Bureau of Economic Analysis data.
29

Forecast of Michigan Real Disposable
Income Growth
(1982 –1984 $), 2009–2011
2%
1%
0%
- 1%
0.2
- 2%
- 3%
2007
RSQE: January 2010
RSQE: January 2010
0.4
2008
1.3
2009
0.7
2010
– 1.9
2011
30

Wage and Personal Income Growth
2001– 2008
U.S.
Michigan
Total personal income
Per capita personal income
37.7%
29.1%
16.6%
16.6%
State rank, Michigan per capita income
2001
20
2008
37
RSQE: January 2010
31

Industry Restructuring
25-Year Recovery Cycle
 1960
 1980
 2000
New England Textile Industry
Pittsburgh Steel Industry
Michigan Auto Industry
32

33

Home Prices Fall Sharply
U.S. Prices Fall After Sharp Run Up
30.00%
20.00%
10.00%
0.00%
-10.00%
U.S. 10 City
-20.00%
Detroit Area
-30.00%
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Oct 09
-15.1%
Source: Case Shiller 10-Metro Area Home Price Index.
34

1.2
1.0
0.8
U.S. Home Sales Turning
Swung by Homebuyers’ Tax Credit
1.4
(Millions of units) (Millions of units)
7.5
7.0
6.5
6.0
0.6
0.4
0.2
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
5.5
5.0
4.5
New Home Sales (Left scale)
Source: Global Insight
Existing Home Sales (Right scale)
35

2500
Record Low U.S. Housing Starts
Down 75% from Peak
Jan 06
2,273
2000
1500
1000
500
0
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Source: New Privately Owned Housing Units Started (thousands), U.S. Dept of Commerce
Nov 09
574
36

Michigan Home Building
Falls Precipitously
New Private Housing Units Authorized in Michigan
Year
2004
2005
2006
2007
2008
2009 YTD
Detroit
PMSA
22,990
17,326
9,592
4,325
2,590
1,223
Grand
Ann Arbor Rapids
2,708
1,676
6,886
5,826
775
565
347
187
4,278
1,866
1,064
721
Lansing
2,206
2,121
1,231
768
383
219
Total
54,721
45,328
29,191
17,767
10,911
6,503
Source: U.S. Department of Commerce. 2009YTD through November. 37

Overall Michigan Property
Value Growth Slowing
Yearly Percent Change
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010est
2011est
Multiplier for
Property
2.8%
2.7%
1.6%
1.9%
3.2%
3.2%
1.5%
2.3%
2.3%
3.3%
3.7%
2.3%
4.4%
-0.3%
2.5%
Source: State Tax Commission and January 2010 Consensus Conference .
Total SEV Taxable Value
Growth Growth
8.2% 5.7%
9.5%
9.9%
9.0%
10.0%
6.1%
6.0%
5.5%
7.1%
9.8%
7.5%
6.3%
5.9%
5.0%
3.8%
-1.3%
-5.4%
NA
NA
6.7%
4.8%
5.7%
5.6%
5.8%
5.2%
1.4%
-0.8%
-8.0%
-4.3%
38

Michigan Real Estate
Transfer Tax Falls
Year-over-Year Change in 6 Month Trailing Average
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
Sep 04
24.0%
Dec 09
-1.2%
-30.00%
-40.00%
Jan-
00
Aug-
00
Mar-
01
Oct-
01
May-
02
Dec-
02
Jul-
03
Feb-
04
Sep-
04
Apr-
05
Nov-
05
Jun-
06
Jan-
07
Aug-
07
Mar-
08
Oct-
08
May-
09
Dec-
09
Source: Michigan Department of Treasury
39

Michigan Building Permits
1963 – 2008 and Forecast 2009 – 2011
80,000
70,000
60,000
50,000
40,000
30,000
20,000
Forecast
10,000
0
'63 '67
'65 '69
'71 '75
'73
'79
'77 '81
'83 '87 '91 '95 '99
'85 '89 '93 '97
'03
'01 '05
'07
'09
'11
40
RSQE: January 2010

Mortgage Delinquency
Rates Double
Source: Economy.com using Mortgage Bankers Association Data 41

Real Estate Market Rebound
Depends on Interest Rates
8
Actual
6
6.2
4
4.3
3.4
5.9
4.9
Conv. Mortgage
10 Year T-Note
3-Month T-bill
5.6
3.9
3.5
Forecast
5.7
4.1
3.2
2
0
1.3
0.3
0.3
0.1
4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
’07 2008 2009 2010 2011
RSQE: January 2010
42

43

Difficult Economic Times
Reduce Revenue Growth
Cause
 Recession
 Housing Boom/Bust
 Auto Industry/
Restructuring
Effect
Employment Loss and
Income Loss
Credit Crisis and
Consumption Drop
Relative Decline in
Personal Income
44

7.5%
GF-GP Revenues Drop Sharply in FY 2009 and FY 2010
GF-GP Revenues
Year-Over-Year Pct. Change
12.5%
3.0%
1.0%
3.3%
0.6% 1.0%
-0.5%
-8.2%
-6.3% -5.6% -6.3%
-21.3%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
45

State GF-GP Revenue at FY ‘91 Level
Down 19% Since 2000
Billions of Dollars
$12.0
$10.0
$8.0
$6.0
$4.0
$2.0
$0.0
1991
$6.9B
2000
$9.8B
2010
$6.9B
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97
20
01
20
05
20
09
46 Note: GF-GP figures are presented on a Consensus basis. 2009 and 2010 are estimates.

GF-GP and School Aid Revenue
Baseline Growth Rates Before Tax Changes
8.0%
4.0%
0.0%
-4.0%
1.1%
-2.7%
2.9%
6.5%
8.3%
6.0%
6.1%
5.5%
5.9%
7.9%
6.1%
-1.7%
-1.3%
-0.9%
1.9%
3.8%
1.0%
2.6%
1.1%
-8.0%
-12.0%
1990 1993 1996 1999 2002 2005
0.9%
-4.7%
-10.5%
2008 2011
Average Agency
Forecasts
47

Balancing FY 2011 GF/GP
Will Be Difficult
Consensus Revenue Estimate
Other Resources
Total Estimated Resources
Expenditures: Current Services Estimate
Projected Year End Balance*
Billions
$7.0
$1.0
$8.0
$9.6
($1.6)
* ARRA funding available to offset GF expenditures will decline from $1.2 billion in FY10 to $0.2 billion in FY11.
Source: Michigan Department of Treasury 48

Balancing FY 2011 SAF Budget
Tough on Schools
Beginning Balance
Consensus Revenue Estimate
Fed Aid and GF Grant (assume FY 10 Amt)
ARRA Funds
Total Estimated Resources
Expenditures Current Services Estimate
Projected Year End Balance
FY 2011
(billions)
$0.1
$10.5
$1.6
$0.2
$12.4
$12.8
($0.4)
Source: Michigan Department of Treasury 49

What Does Michigan Need to Do?
 Consolidate government services at both the state and local level.
 Reform the state’s tax structure so that it will grow with the State’s economy and not discourage economic growth.
 Slow the growth of government healthcare and tax expenditures.
 Maintain or increase the investment in education.

Many Units of Government
 Local Governments
 83 Counties
 275 Cities
 258 Villages
 1,240 Townships
 K-12 Schools
 551 Local School Districts
 230 Charter Schools
 57 Intermediate School Districts
 Colleges and Universities
 15 Public Universities
 29 Community Colleges
51

Three Types of State Spending:
Grants, Services, and Tax Breaks
 Grants - $15.3 Billion
 Services - $13.1 Billion
 Federal Funds - $14.9 Billion
 Tax Expenditures - $35.8 Billion
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
 Pensions and Retirement Benefits
52

Tax Breaks / Expenditures
Larger Than Tax Credits
Tax Breaks
Tax
Collections
Source: House Fiscal Agency 53

Conclusion
 U.S. recession worst in decades.
 Michigan has been in a recession since 2001 due to auto sector restructuring and U.S. recession.
 Michigan recovery will require U.S. recovery, stability in the auto sector, and time.
 Michigan real estate market likely at bottom but slow recovery ahead.
54