A reader responded to James Hohman’s “What can $5.7 billion get you in Michigan” in Michigan Capital Confidential, calling it “dishonest” to suggest that bringing the fringe benefits of all government workers in line with private sector averages would make a big difference in the state budget. The reason he provided is that only 53,000 of around 400,000 (non-federal) public employees in Michigan work for the state, with the rest working in schools, colleges, universities and local governments.

This reader is mistaken, however. While it’s true that those 53,000 state employees consume “only” around $708 million of the $5.7 billion “benefits bonus,” all those other entities are “creatures of the state,” and there are many ways that cutting expenses in each can help state budgets.

The richest opportunities are in public schools, which account for around $2.45 billion of those above-average benefits. The state school aid budget is $12.86 billion this year, so reform in this area could yield almost a dollar-for-dollar savings to state taxpayers.

The Legislature appropriated $1.57 billion to universities this year, and $295 million to community colleges. Together, these institutions provide $844 million of the benefits bonus. Strings easily could be attached to those budgets, making payment conditional on reform.

Local governments will receive $1.05 billion in state revenue sharing this year, of which $633 million is constitutionally mandated. That leaves $421 million to which conditions can be attached, and these governments account for $1.43 billion of the benefits bonus. If cutting the non-mandatory revenue sharing was all the Legislature did, taxpayers would rightly complain that they were just shifting the cost burden from one level to another.

However, if the Legislature accompanied this with repeal of the Michigan Public Employment Relations Act, suddenly all those locals could tell the government employee unions largely responsible for the “bonus” to take a hike. In other words, when dealing with their unions, local governments would have to option to simply offer what they feel is prudent instead of being forced to negotiate with entities that can be unreasonable, strident, and often politically mischievous. With that unlevel-playing field corrected, these public employers could get on track to undoing most of the $1.43 billion in above-average benefits.

In fact, some of those $5.7 billion in benefits are in the form of underfunded pension promises that probably have to be made up, and so the potential savings cannot be fully realized for a long time. For the most part, however, huge cost reductions in this area are attainable within two or three years if the right reforms are put in place. And most of the savings will accrue to the state government and its taxpayers.

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Addendum: Government Spending More “Fungible” than Citizens Led to Believe

Lansing insiders often speak as if there are iron walls between all these state, school, university and local government spending accounts, with legal restrictions that prevent state lawmakers from shifting savings in one area, like public schools, to another, like the general fund that pays for other state programs.

With very few exceptions, this is highly misleading: almost all the revenue is “fungible,” or able to be transferred from one account to another with just a simple majority vote in the House and Senate. Proof is seen whenever lawmakers avoid politically difficult reforms by passing some spending gimmick that requires a fund-source shift.

An example is the current community colleges budget, where the money was taken from the school aid fund as part of some gamesmanship related to federal “stimulus” spending restrictions. Years of politicians’ “you can’t use school aid fund money for anything but K-12” quickly went under the bus of squeezing a few hundred million out of the feds. In similar ways, most of the $5.7 million in savings realized by normalizing government employee benefits could accrue to state taxpayers.