Michigan’s finances: stronger reserves, an unresolved audit warning and obligations beyond the budget

A new budget, with an old accounting disagreement still open

Research through October 6, 2026. Audited state baseline: year ended September 30, 2025. FY2026 collections and FY2027 appropriations have separate dates below.

Governor Gretchen Whitmer signed Michigan’s FY2027 budget on July 21, 2026. The new spending year began October 1. Schools, roads and health services now depend on carrying out that plan while the state closes the books on the year just ended. [1]

One issue carried into the new year unresolved. The Michigan Office of the Auditor General had qualified its April 3, 2026 opinions on the FY2025 General Fund and governmental activities, estimating that $716.5 million owed through corporate-tax credit forwards was missing from recorded liabilities. The other financial-statement opinion units received unmodified opinions. [2]

That combination makes Michigan worth looking at from several angles: the money available for a difficult year, the commitments already attached to it, and the reliability of the accounting used to describe both. This is research into published records, not an independent professional audit or an assurance review.

Why the auditor qualified the accounts

The dispute starts with businesses paying estimated corporate income taxes. When a return shows an overpayment, a taxpayer can request a refund or carry the credit into a later tax year. The auditor says the carried-forward portion still owed should be estimated and recorded as a liability. The Michigan Department of Treasury and Michigan State Budget Office say a dependable estimate cannot be made. [2]

The auditor’s $716.5 million estimate concerns accumulated advance payments, rather than a finding that this much cash disappeared during FY2025. Its accompanying control report classified the issue as a material weakness and identified four other significant deficiencies. [2]

The July 8, 2026 corrective-action plan makes the disagreement unusually clear: Treasury and the budget office reject this finding and say they do not intend further action on it. For other findings, the plan describes revised tax-accrual checks, account reconciliations and agency procedures, with several June or July 2026 targets. One tax-estimation improvement has a December 2030 target while additional data accumulate. Those are management’s plans and reported actions; they do not establish independently verified completion. [15]

The audited baseline: substantial resources, substantial claims on them

FY2025 figures use different governmental-fund and primary-government accounting measures. The audit qualification above remains relevant. [3]

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What the balances can and cannot do

A fund balance is the accounting remainder after a fund’s obligations and adjustments. Cash is a different measure. Some money must remain in a trust, some can be spent only on a particular service, and some has already been set aside for work that has not yet been completed. A road is an asset, but it cannot pay a nurse’s wages next month. Conversely, a negative unrestricted accounting balance does not mean every long-term obligation falls due at once.

Rainy-day money is useful precisely because it can absorb a shock. Its presence inside a larger fund balance means adding the reserve to that balance again would count the same resource twice. Retirement trust assets likewise belong to their benefit purposes. These distinctions matter more than finding the single biggest number in a financial report.

The rainy-day fund has recovered from earlier lean years

The Michigan Senate Fiscal Agency’s history puts the Budget Stabilization Fund at $829.1 million in FY2020 and $2.157 billion in FY2025. Its estimated FY2026 and FY2027 balances are $2.252 billion and $2.351 billion. The later figures are projections, not audited closing balances. [4]

The reserve operates under rules tied to economic conditions and legislative appropriations. The fiscal agency describes a normal downturn mechanism allowing an appropriation of up to a quarter of available balances when triggered, alongside other withdrawal provisions. A reserve can therefore be real and useful without being a standing authorization to spend its entire balance immediately. [4]

School Aid’s separate countercyclical reserve held $524.4 million, included within School Aid balances at September 2025. [3]

A more recent observation appears in the August monthly financial report, issued September 30, 2026: $2.237 billion of rainy-day fund balance and common-cash equity. The report labels the balance committed and warns that its year-to-date activity excludes closing adjustments. [5]

Revised revenue figures show a split between funds

The Senate Fiscal Agency’s revised August 2026 report puts year-to-date General Fund collections $150.6 million below the path implied by the May forecast, while School Aid collections were $818.2 million above. The revision accounts for year-end transfers and hold-harmless adjustments omitted from the September 14 original, including General Fund reimbursements to School Aid and corporate-tax transfers to transportation funds. August’s monthly total remains about $3.0 billion, up 0.5% from a year earlier, with withholding and sales-and-use taxes above the month’s forecast. [6]

That report also shows why a falling tax category need not mean the same thing as a weakening tax base. August sales-tax receipts fell 6.5% from a year earlier, partly reflecting the motor-fuel sales-tax exemption that began in 2026. For most taxes, the fiscal agency’s year-to-date series starts in November to approximate accrual timing; its full-year forecast also includes accruals. It should not be spliced into a different October-start cash series without reconciling the definitions. [6]

The budget office’s August report still projected FY2026 closing balances of $661.6 million for General Fund/General Purpose and $1.019 billion for the School Aid Fund. Those are budget-basis forecasts after adjustments, transfers and planned spending, rather than September audited results. The same report says road-funding changes affect the timing and destination of tax collections. [5]

The May 15 consensus forecast put combined General Fund and School Aid revenue at $33.58 billion for FY2026 and $33.82 billion for FY2027. These are selected-fund revenue forecasts; federal grants and other restricted resources make the all-source spending budget much larger. [7]

The FY2027 budget depends heavily on federal money

The enacted funding schedule, updated July 27, 2026, totals $73.952 billion after eliminating interdepartmental transfers. It includes $25.642 billion federal, $14.111 billion General Fund, $33.655 billion state-restricted and $544 million local/private financing. Health and human services accounts for $30.691 billion of adjusted spending, including $21.047 billion of federal support. [8]

That puts federal funding at about 35% of the enacted total and roughly 69% of the health-and-human-services allocation, calculated from the schedule. Changes in federal eligibility, matching rates or administrative obligations can therefore alter the state’s financing choices even when Michigan’s own receipts improve. Appropriations describe authorized spending and expected financing, not a completed year of revenue collection. [8]

The budget office’s comparable overview puts FY2026 adjusted gross appropriations at about $76.6 billion, against FY2027’s $74.0 billion. The lower headline does not, by itself, measure a like-for-like service cut: the mix of programs, one-time money and funding sources also matters. [18]

A September 21 announcement added another long-lived commitment to the picture. The governor’s office described $1.3 billion in capital project authorizations for 27 higher-education institutions, with a $524.4 million state share, and legislation aligning building-authority rent appropriations with completed projects and long-term financing. Project authorization, future rent and bonds outstanding are separate stages of the same financing process. [9]

Three different debt numbers answer three different questions

The fiscal agency’s debt inventory shows $591.4 million of state general-obligation debt at September 30, 2025, down from $1.184 billion in FY2021. But its much broader state-and-authority total was $26.311 billion. This includes borrowing associated with housing, transportation and financing authorities, whose repayment sources and legal structures differ. [10]

Within that broader inventory, Michigan Finance Authority debt was $13.616 billion and Michigan State Building Authority debt $2.898 billion. The latter is not general-obligation debt, although the fiscal agency notes that debt service is often funded from General Fund revenue. Its table excludes certain short-term constitutional notes and Michigan Strategic Fund activity. These boundaries explain why the table cannot simply replace, or be added to, the primary-government bond figure above. [10]

The practical question is who must pay each obligation and from which money. An issuer’s name, a state affiliation and a state promise to repay are not interchangeable. Combining all these numbers into one “debt bill” would obscure those differences and duplicate obligations already reported elsewhere.

School borrowing creates a real state backstop

Michigan’s School Bond Qualification and Loan Program helps districts finance capital improvements. Qualifying bonds can obtain the state’s credit rating, and eligible districts can borrow from the state to meet debt service after meeting tax-levy and repayment requirements. Treasury reports about $16 billion of qualified principal at December 31, 2025 and roughly $1.2 billion of loans to districts at September 30, 2025. [11]

The detailed year-end school table puts qualified bonds at $15.889 billion within $20.4 billion of total district debt. Nonqualified and limited-tax bonds do not pass through the same state qualification process. Those district liabilities should remain distinct from direct state borrowing. [17]

The ACFR says the state must lend to prevent default on qualified school bonds, using the General Fund if revolving-fund money is insufficient. [3]

There is already state-level financing behind part of the loan program: Treasury’s September 2025 inventory lists approximately $135.2 million of general-obligation school-loan bonds and $300.4 million of revolving-fund bonds. Those are financing balances, not extra district guarantees to add wholesale to every other debt total. [20]

Retirement funding has improved, but the dates and employers matter

The state’s FY2025 pension and principal retiree-health measurements generally date to September 30, 2024. They differ from the newer plan-level numbers below. [3]

The Michigan State Employees’ Retirement System reported a $3.054 billion net pension liability at September 30, 2025, compared with $4.071 billion a year earlier. Pension assets covered 83.20% of the measured liability. Its retiree-health plan had a $1.510 billion net asset and a 126.14% funded ratio. These are whole-plan figures, not a new allocation to substitute into the state’s already-issued accounts. [12]

Those September 2025 liabilities use September 2024 actuarial valuations rolled forward a year. The pension estimate assumes a 6% discount rate: using 5% raises the reported shortfall to $4.752 billion. That sensitivity illustrates how investment assumptions affect the measured burden without predicting an imminent bill. Retiree-health assets remain dedicated to benefits. [12]

The Michigan Public School Employees’ Retirement System is larger and covers a different employer base. At September 30, 2025, it reported $19.893 billion of net pension liability, down from $24.394 billion in 2024, and 79.81% pension funding. Its retiree-health plan reported a $6.254 billion net asset. The pension measure likewise rolls a September 2024 valuation forward to September 2025. [13]

School employers’ obligations, state support and state-employer liabilities need their own accounting map. Adding the school system’s entire shortfall to Michigan’s primary-government pension figure would not establish a properly consolidated state liability. These plan reports also do not provide a census of every Michigan city, county or independent local retirement system. [13]

Other commitments extend beyond bonds

FY2025 governmental claims liabilities include $964.6 million, with $646.2 million of structured settlements inside that amount; pollution obligations were $305.6 million. Transportation commitments were $3.1 billion; outstanding growth-incentive and historic-preservation tax credits totaled $2.5 billion. [3]

Recorded liabilities, conditional promises and signed contracts are different categories. A future payment can be financed from money already committed, future appropriations or another responsible entity. Adding contract face values to recorded liabilities without examining overlap would exaggerate the total; ignoring them would understate future demands. This edition does not estimate the maximum loss from unresolved litigation, guarantees or environmental claims.

Federal-program findings add a separate warning

The June 2026 Single Audit summary covered $37.1 billion of FY2025 federal awards. Of 22 major programs, eight received unmodified compliance opinions, 13 qualified opinions and one an adverse opinion. Medicaid and SNAP were qualified; the adverse opinion concerned the Children’s Health Insurance Program. These opinions address compliance with program requirements, separately from the state financial-statement opinions. [14]

Auditors identified $12.466 million of known questioned costs, mostly in Medicaid, and said costs for five programs could not be determined. Questioned costs require resolution; the label does not establish that every dollar was stolen, permanently lost or finally ordered repaid. Conversely, the known total is not a complete ceiling on possible exposure when some amounts remain undetermined. [14]

A companion overview lists 67 findings, 37 repeated, and identifies long-running weaknesses in eligibility documentation and information-system controls. It reports $20.049 billion of Medicaid-cluster awards, including pandemic-related assistance. The persistence of findings makes corrective follow-through part of the fiscal story, beyond the availability of cash. [19]

The audited federal-award expenditure total and the new budget’s federal appropriation total have different periods and scopes. Subtracting one from the other would not reliably measure a funding cut.

What later evidence can resolve

An Auditor General performance audit of corporate income and business taxes was listed as in progress with an estimated late-2026 release. Its stated scope includes processing accuracy, delinquent filers and whether corporate credit-forward liabilities can be measured. That is a potential new source of evidence, not a guarantee of a release date or a predetermined conclusion. [16]

The next meaningful checkpoints are the September collection results, FY2026 closing accounts, updated debt and school-loan disclosures, and documented responses to the financial-report and federal-program findings. New retirement allocations also matter because a more recent whole-plan valuation cannot automatically be substituted into older state financial statements.

Taken together, the records describe stronger reserves, mixed recent revenue signals and restricted resources, important long-term commitments and an unresolved accounting qualification. This review does not establish a current cash crisis or clear all agencies and contingent obligations. Future substantive editions will retain dated revisions, identify the new evidence and distinguish a repaired control from a promised repair.

Sources

1. Governor, FY2027 budget signed July 21, 2026Official releaseBack to text: ↑
2. Auditor General, FY2025 financial-report control findings, May 29, 2026Official source · PDFBack to text: ↑1↑2↑3
3. FY2025 state financial statements, fund balances and liability notesOfficial source · PDFBack to text: ↑1↑2↑3↑4↑5
4. Senate Fiscal Agency, rainy-day fund history and rulesOfficial source · PDFBack to text: ↑1↑2
5. State Budget Office, August 2026 monthly financial report, issued September 30Official source · PDFBack to text: ↑1↑2
6. Senate Fiscal Agency, revised August 2026 revenue report (rolling URL; checked October 6)Official source · PDFBack to text: ↑1↑2
7. Treasury, May 15, 2026 consensus revenue forecastOfficial sourceBack to text: ↑
8. FY2027 enacted budget summary, updated July 27, 2026Official source · PDFBack to text: ↑1↑2
9. Governor, September 21, 2026 capital-outlay legislationOfficial releaseBack to text: ↑
10. Senate Fiscal Agency, state debt composition, updated June 23, 2026Official source · PDFBack to text: ↑1↑2
11. Treasury, 2025 School Bond Qualification and Loan Program reportOfficial sourceBack to text: ↑
12. State Employees’ Retirement System FY2025 financial report, pension and retiree-health notesOfficial source · PDFBack to text: ↑1↑2
13. Public School Employees’ Retirement System FY2025 financial reportOfficial source · PDFBack to text: ↑1↑2
14. Auditor General, FY2025 Single Audit summary, June 2026Official source · PDFBack to text: ↑1↑2
15. State Budget Office, July 8, 2026 corrective-action planOfficial source · PDFBack to text: ↑
16. Auditor General, corporate-tax performance-audit scope and expected timingOfficial sourceBack to text: ↑
17. Treasury, qualified school bonds and district debt at December 31, 2025Official sourceBack to text: ↑
18. State Budget Office, current enacted-budget chartsOfficial sourceBack to text: ↑
19. Auditor General, FY2025 Single Audit findings overviewOfficial source · PDFBack to text: ↑
20. Treasury, school-loan state borrowing and financingOfficial sourceBack to text: ↑