In Lansing, reducing the rate of a projected spending increase is considered a “budget cut.” It is no surprise, then, that when the two chambers of the Michigan Legislature each passed a plan to allocate a slice of future revenue to the road repair budget, some people cried foul. Under the political logic of the state capitol, those plans by definition cut spending for other areas in the state budget — even though the only question for those other areas is likely not “Will they have less money than today,” but rather “How much will they grow?” 

Both the House- and Senate-passed bills have been subjected to this odd criticism.

Gov. Rick Snyder is one of those criticizing, stating, “You should also say where you’re going to cut because I think that’s going to be one of the challenge points.”

He is not alone. Senate Minority Leader Jim Ananich (D-Flint) said of the Senate plan, “You can’t break the rest of the system to pave the roads.”

This characterization sounds odd to taxpayers because even with a shift, the state would gather the same amount of money. The proposals would simply allocate some of the growth of income tax revenue to a different area of the budget. Overall spending levels would not be disturbed by the earmarking.

The talk of “cuts” misrepresents how the state budget works and invariably moves the conversation toward higher taxes. It also presupposes a static state economy in which state government’s revenues do not grow. In reality, that growth should be more than enough to cover the proposed earmarks. To claim otherwise is to assume that the economic growth Michigan has enjoyed since 2010 will soon come to an end.

But in fact, the state is now collecting more income tax revenue year after year. This levy is expected to bring in $1.2 billion more in fiscal year 2017 than last year. The increase is more than either the House-passed or Senate-passed plan recommends for diverting to roads.

Neither plan guarantees that revenues will come in as expected, just that road funding gets priority for portions of it. Policymakers will be able to adjust as new information comes in. Revenue estimates are updated twice yearly and exactly how much revenue will increase is subject to how the economy fares.

Both the House and the Senate plans phase in the income tax earmark, with the House plan devoting $792 million in fiscal year 2019 and the Senate plan devoting $700 million in fiscal year 2018. The Legislature has already earmarked $400 million in non-road tax dollars for roads for the upcoming fiscal year, so the first $400 million of either plan represents essentially no change from current policy. Ignoring this point is one way of overstating the impact of either the House or the Senate plan on the rest of the budget.

If there were looming fiscal crises that demanded all the extra cash that’s expected to arrive into the state treasury, then critics may have a valid argument. But while new challenges may arise, there are also favorable budget trends underway.

For example, the state has fewer prisoners. There are fewer state employees. State economic growth has meant fewer people applying for government assistance, though the Obamacare-driven expansion of Medicaid will mean some increased spending. And while government pension costs are still high due to current and past underfunding, this expense has tapered off recently.

State spending interests would prefer large (or larger) taxes on fuel and vehicle registration rather than reprioritizing existing revenue streams. But they must also know this option is less likely after the resounding defeat of Proposal 1.

Michigan can use more of its projected revenue increases for road repairs and experience few or no cuts in other areas of the budget. Those who refuse to accept this possibility may be less concerned about so-called cuts and more miffed that extra money they hoped to spend on other programs would go to roads instead. They need to be reminded that a reduction in the rate of a program’s increase is not a “cut.”

In the four Michigan budgets approved by a Republican-controlled Legislature under Republican Gov. Rick Snyder, revenues at the Dexter Community Schools have moved in line with many public school districts throughout the state: The Washtenaw County district gets more state dollars now than it did under Gov. Jennifer Granholm’s last budget in 2010-11, even though it now serves fewer students than four years ago.

However, Dexter Community Schools Superintendent Chris Timmis says his district isn’t experiencing any real spending increase. Timmis calls the total of $1.8 million extra the district has collected from the state in those four years a “shell game.”

The reason is the increasing costs of the underfunded school employee retirement system, which has consumed all the extra dollars the district gets.

“Considering this an increase in funding is no different than if the Legislature passed a law sending a $2,000 check to you then mandated you pay an additional $2,000 in taxes, due immediately,” Timmis wrote in an email. “In the end, it was a shell game. Hence, we actually had approximately $700,000 less to operate last year than in 2010-11, with regard to dollars available to educate students and serve our community.”

The rising cost of paying to the Michigan Public School Employees Retirement System (MPSERS) is not a new development for school districts.

Dexter's payments into the pension system escalated from $4.9 million in 2012 to $5.4 million in 2013 and then to $6.1 million in 2014. The district's total revenue from all sources was $46 million last year. The pension burden is not likely to go down soon, given that MPSERS has accumulated $26.5 billion in unfunded liabilities.

Earlier this year, John Rakolta, the CEO of Walbridge construction company, called the current defined-benefit retirement plans a “budget killer.” He participated in the Coalition for the Future of Detroit Schoolchildren, which recommended ways to address the broken finances of the Detroit school district.

“It’s a society killer,” Rakolta said about defined-benefit pensions. “Society can’t afford them anymore. Who gets penalized? Kids. … These kids are being penalized for all the retired teachers. This is on a statewide basis, not just Detroit.”

One proposal to gradually unwind the MPSERS burden is to no longer offer defined-benefit pensions to new employees, and instead give them contributions into a 401(k)-type system. Such a system has been in place for state employees hired since 1997. A 2011 study published by the Mackinac Center showed it has relieved taxpayers of up to $4.3 billion in unfunded liabilities.

School employee unions such as the National Education Association have campaigned against switching new employees to a defined-contribution plan, saying 401(k)-type plans are not as good a deal for teachers. Not all public school officials agree, at least in part.

“Conceptually, a 401k system makes sense,” Timmis said. “Logistically, MPSERS has a structural problem. What is the solution to the current structural problem while shifting to a new system? The math just doesn't work. If you know of a sound financial projection and model that shows how much money would be needed upfront to make the change, please send it my way.”

Timmis is referring to a “transition costs” argument promoted by unions and officials who work in government pension offices, among others. They say that schools will incur these costs by closing the defined-benefit system to new employees. Current government accounting standards, they add, require the system to make up past underfunding at an accelerated pace, which would mean larger pension fund contributions for several years.

James Hohman, the fiscal analyst who co-authored the Mackinac Center study cited above, says this argument is based on a misinterpretation of the accounting standards.

“These costs are completely avoidable,” Hohman said in an email. “New employees should be given a plan where their employers pay for benefits as they are earned. That way we can prevent our current $26.5 billion pension debt from happening again.”