Commentary

Michigan's Budget Problems Bigger Than You Think

Early indications are that our new governor is acting boldly and wisely in his attempt to right size Michigan’s fiscal ship. That’s good news, and he should be applauded, in part due to the fact that he will need the moral support. Why? The budget is in worse shape than even he and members of the media have probably fathomed. I’m not the first budget analyst to notice this, but I may be the first to say it out loud.

With the year’s first state revenue estimating conference scheduled for Jan. 14, it is time to flesh out a few important issues.

First, it could be argued that the widely reported and official state deficit estimate for the fiscal 2012 General Fund/General Purpose budget is understated by at least $200 million. This is a function of fiscal analysts treating estimated year-end fiscal 2011 budget equity as actual revenue in their estimates for fiscal 2012. In other words, officials assume that there will be at least $200 million in equity left at the end of this fiscal year. This means that they are effectively reducing the General Fund equity to $0 for 2012 and reporting a $1.85 billion deficit.

The elimination of equity means that there is no margin for error should revenues come in lower than expected. The $200 million figure is about eight days worth of operating expenses for the state. Healthy government balance sheets should show equity equal to about 60 days of operating expenses. Just breaking even means our true deficit is nearly $2.05 billion, not $1.85 billion. The reader can review a Senate Fiscal Agency 2012 summation here (pages 39-41).

Second, this shortfall is for fiscal year 2012 only. Gov. Rick Snyder said he wants to implement two-year budget cycles, a fiscally responsible move. Things could get worse in 2013 for a number of reasons, not the least of which is increasing public employee costs and claims against the Treasury for refundable Michigan Economic Growth Authority tax credits and other incentives.

Third, the state’s Comprehensive Annual Financial Report through fiscal 2009 shows that the state’s Information Technology fund is in deficit to the tune of $164 million (page 177). This doesn’t show up in the state’s official estimate of the 2012 deficit. If the IT fund is still in deficit and has to be closed with charges to other departments, that will raise the deficit that the governor and Legislature need to close.

The state of Michigan is going to need a very austere budget to solve these understated fiscal policy problems. One solution Mackinac Center analysts have recommended — and that the new governor has echoed — is to normalize non-salary public employee compensation so it is more in line with that offered private sector employees. The savings would be enough to balance the budget, eliminate the Michigan Business Tax, spend $1 billion on road improvements and still have $1 billion left over.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

Commentary

Motor City Finance: Then and Now

Ten years ago this month the Mackinac Center mailed a special, 28-page, full-color, Detroit-specific edition of Michigan Privatization Report to editors across Michigan. We had recently completed a comprehensive review of the city’s budget, and were deeply concerned by what it revealed.

To mark this anniversary, we’re going to post a series of blogs comparing Detroit’s fiscal status — then and now — and some of the privatization opportunities available to the Motor City.

Back in 2000, we noted that the city’s discretionary revenue for the year — the amount not already committed to particular uses like interest payments or retirement benefits — was a meager $71 million, down from $102 million the previous year. The decline raised red flags about the city’s ability to cope with sudden declines in tax revenue.

Detroit’s latest “Comprehensive Annual Financial Report” for the fiscal year ending June 30, 2010, contained an ominous warning from its auditors: “(T)he City has an accumulated unreserved undesignated deficit in the General Fund of $155.7 million as of June 30, 2010, which has contributed to the City’s dependence on borrowing for cash flow purposes.” In other words, the city’s financial position hasn’t just deteriorated since 1999, it’s actually turned negative.

Worse, these figures understate the magnitude of that deficit, because Detroit borrowed $249.8 million last year to cover its operations. This means it is possible that Detroit could soon experience “payless paydays” for employees or vendors, because it has little financial room to maneuver.

The solution to Detroit’s problems may involve the appointment of an emergency financial manager. Under current state law, however, this official lacks the authority to make the necessary changes. Absent a statutory change, it may be that only a federal bankruptcy judge would have the power to impose reform and give “haircuts” to the city’s biggest tax-eaters — unionized  public employees and retirees.

If the current statute is amended to bulk up this official’s power, imagine the improvements that could be instituted by someone with the talent and courage of current Detroit Public Schools Emergency Financial Manager Robert Bobb. Consider, for example, if Bobb had the power to set aside existing collective bargaining agreements with municipal employee unions, and trim the health benefits of retirees (who all qualify for Medicare at age 65 anyway). In addition, imagine the money that could be saved by privatization and other cost-cutting measures — the opportunities are almost without limit.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.