Retiree Obligations, Lack of Cash Hampers Michigan's Fiscal Condition

Mercatus Center report ranks state's fiscal solvency 35th

By Jacob Weaver | June 4, 2016

Retiree obligations and cash solvency for short-term expenses are hampering Michigan's fiscal condition, according to a new report.

The Mercatus Center at George Mason University recently published its “Ranking the States by Fiscal Condition” report. According to the report's fiscal guidelines, Michigan ranks 35th, down one spot from the previous year.

The report, authored by Senior Research Fellow Eileen Norcross and research assistant Olivia Gonzalez, reviewed each state's annual audited financial report for the 2014 fiscal year, breaking the numbers into five categories:

Cash solvency — the ability of a state to pay its short-term obligations.
Budget solvency — a state’s ability to cover fiscal year spending with current revenues.
Long-run solvency — the ability of a state to pay its long-term obligations.
Service-level solvency — the ratio of taxes, revenues, and spending as compared to personal income.
Trust-fund solvency — the total debt of each state, including its unfunded liabilities.

In this year's ranking, Michigan declined in terms of budget solvency because the state budget increased faster than revenue projections. Michigan advanced in three categories during the fiscal year: Long-run solvency moved up one spot from 25th to 24th; service-level solvency advanced three spots from 33rd to 30th; and trust-fund solvency progressed three spots from 35th to 32nd. The state remained at 34th for cash solvency.

The state falls short of the national average in all five major categories. Most notably, Norcross and Olivia Gonzalez peg Michigan’s unfunded pension liabilities at $123 billion, 42 percent above the national average. These unfunded liabilities, combined with other post-employment benefit plans and state debt, result in future expenses equal to about 38 percent of total state personal income.

"Michigan exhibited average fiscal performance," Norcross said. "On a short-term basis, Michigan has less cash than is needed to cover short-term bills in the event of a recession. Revenues exceeded expenses by one percent, leaving the state with a surplus of $64 per capita."

In the Great Lakes region, Michigan scored ahead of Illinois (47) but behind Ohio (11), Indiana (17) and Wisconsin (29).

This year’s top performers were Alaska, Nebraska, Wyoming, North Dakota, and South Dakota. Occupying the bottom five spots were the states of Connecticut, Massachusetts, New Jersey, Illinois, and Kentucky.

In its executive summary, the report points to underfunded pensions as the largest fiscal burden on each state. Even states that are performing well in fiscal matters must, it says, “take stock of their long-term fiscal health before making future policy decisions."

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.

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Legislature Makes it More Difficult to Use Inexpensive Car Parts

Will Gov. Snyder veto the bill?

By Jarrett Skorup | June 3, 2016

Right now, if a Michigan citizen goes to get a car repaired, it is fairly simple for the owner of the vehicle and a mechanic to decide what kind of parts to use to provide the fix. Unless a bill that has passed the Michigan Legislature is vetoed by Gov. Snyder, that process is about to get a lot more complicated.

There are two main types of auto parts: Those made by original equipment manufacturers (OEM) or those made by other companies (aftermarket). By and large, insurance companies, crash tests and research findings do not find a safety difference between the two — but OEM parts are usually significantly more expensive.

The makers of OEM parts, the large automakers, want a larger share of the auto repair parts market and have convinced a majority of Michigan legislators to make it harder for people to choose aftermarket parts. Despite the fact that there’s been no evidence provided that there is a systemic problem with aftermarket parts, House Bill 4344 has passed the Michigan Legislature and is on its way to the governor.

For the first five years of a car’s warranty, should the bill become law, mechanics could not use aftermarket parts on many components unless directed by the owner of the vehicle in writing. Parts manufacturers say this will harm and perhaps even cripple their industry and are urging a veto.

“The legislation discourages the use of aftermarket and remanufactured components in vehicle repairs, and in doing so will have a negative impact on Michigan companies, sales, and jobs,” Steve Handschuh, president and CEO of the Motor and Equipment Manufacturers Association, wrote to the governor. “In addition, consumers will have fewer repair choices presented to them, resulting in higher prices for parts needed for their vehicle repairs. We urge you to veto this legislation in support of the Michigan aftermarket industry and to preserve consumer choice in recognition of the high-quality and cost-effective repair options for their vehicles.”

Competition between parts manufacturers is good for consumers and repair facilities. It makes parts better, helps keep down the costs for consumers and can even put downward pressure on the cost of auto insurance. Legislators should be encouraging more competition, not less.