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.