The size of state and local governments, as measured by total government expenditures, generally grows in tandem with population and the economy. The more people who live in a state and the more resources being exchanged in a state economy, the more governments can tax and the more governments can spend. But over the last decade, Michigan broke from this pattern to a certain degree. The cost of government increased, while the resources required to support this larger government failed to keep pace, leaving Michigan stuck in a cost spiral.
Total state and local government spending in Michigan increased by 48 percent from 2000 to 2010, climbing from $65.5 billion to $91.0 billion. Yet little else increased as much in Michigan over this same period:
- The state’s population fell by about 1 percent.
- State gross domestic product increased by only 9 percent.
- Total state personal income grew by 16 percent.
- Payroll employment fell 17 percent, from 4.68 million jobs to 3.86 million.
A summary of these statistics is shown in Graphic 1.
Graphic 1: Government spending, inflation
and private sector resources, 2000-2010
Source: U.S. Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis.
Some traditional government cost-drivers increased over this period. For example, Medicaid enrollment increased 72 percent, and unemployment insurance outlays skyrocketed from $809 million in 2000 to $6.7 billion in 2010.[*] Inflation rose nationally by 27 percent, too.[†] But some important cost-drivers were down:
- Enrollment in K-12 public schools dropped about 6 percent.
- Violent crime fell by 12 percent and property crime by 24 percent.
- State and local government employment shrunk by about 7 percent, declining from about 621,000 jobs to 578,300.
So, what is primarily fueling the increased expense of state and local governments in Michigan? The answer is the rising costs of compensating government employees. Despite the drop in the number of state and local government employees, total compensation for government employees increased 33 percent from 2000 to 2010.[‡] Total payments for wages and salaries increased about 26 percent, but the cost of employment benefits increased about 60 percent.[§] These rising expenditures are a significant contributor to Michigan’s cost spiral.
This study explores the employment benefits commonly offered by the state government and local governments in Michigan, and compares the average level of these benefits to those found in Michigan’s private sector. It also calculates the potential savings of benchmarking average public sector benefits to that of the private sector average in Michigan, and suggests means for policymakers and government officials to do so.
[*] Not all the increase in government expenditures in Michigan from 2000 to 2010 can be explained by the aforementioned significant increase in transfer payments such as unemployment insurance. Total government spending still increased by 31 percent over this period even when not counting spending on unemployment insurance and other transfer payments such as payments on social services and income maintenance. This suggests that employment costs in areas such as education, public safety, environment and housing, government administration, transportation, liquor activities, and other spending categories drove up the cost of Michigan government. "State and Local Government Finances by Level of Government and by State: 1999-2000," (U.S. Census Bureau), http://goo.gl/DPD2br (accessed Sept. 18, 2013); "State and Local Government Finances by Level of Government and by State: 2009-2010," (U.S. Census Bureau), http://goo.gl/Ow7Qd (accessed Sept. 18, 2013). "State of Michigan Comprehensive Annual Financial Report: Operating Indicators by Function," (Michigan Department of Management and Budget, 2009), http://goo.gl/omcQN (accessed Sept. 18, 2013); "State of Michigan Comprehensive Annual Financial Report: Operating Indicators by Function," (Michigan Department of Management and Budget, 2013), 261, http://goo.gl/9lP6N (accessed Sept. 18, 2013).
[†] The Bureau of Labor Statistics also compiles a regional price index for the Detroit-Flint-Ann Arbor area, the only regional tabulation available for a Michigan area. This index increased 21 percent from 2000 to 2010. "Consumer Price Index for All Urban Consumers," (U.S. Bureau of Labor Statistics), http://www.bls.gov/cpi/ (accessed Sept. 18, 2013).
[‡] The use of the Bureau of Economic Analysis’s compensation measures may undercount the total level of compensation due to accounting for the costs of pension and other post-employment benefits. Author’s calculations based on "Bureau of Economic Analysis Regional Economic Accounts: State Annual Personal Income and Employment," (U.S. Bureau of Economic Analysis, 2013), http://bea.gov/regional (accessed Sept. 18, 2013).
[§] The BEA’s definition includes only employer payments for employer benefits administered outside of payroll. Author’s calculations based on "Bureau of Economic Analysis Regional Economic Accounts: State Annual Personal Income and Employment," (U.S. Bureau of Economic Analysis, 2013), http://bea.gov/regional (accessed Sept. 18, 2013).