New House “Jobs” Bill Would Allow State of Michigan to Invest in Private Equity Funds and Businesses

House Bill 5047 would end state’s 154-year practice of steering clear of nonpension-related equity investments

For Immediate Release

Contacts:

Patrick J. Wright, Senior Legal Analyst
Phone: (517) 518-0339

Michael D. LaFaive, Director of Fiscal Policy
Phone: (989) 430-8669

MIDLAND — Policy analysts at the Mackinac Center for Public Policy today warned that a bill passed by the Michigan House last week would result in direct state investments in private equities and businesses by using a little-noticed provision in a 2002 ballot initiative to violate the spirit of a long-standing constitutional prohibition on such investment. House Bill 5047 is part of a larger package of bills that would securitize $1 billion in tobacco settlement revenues to finance state-directed "economic development."

"In the 2002 primary election, the voters passed a multi-amendment proposal to the state constitution that allowed, among other things, any state ‘permanent fund’ to hold equities," observed Mackinac Center Senior Legal Analyst Patrick J. Wright. "But it is unlikely that a majority of the voters believed they were effectively ending a century-and-a-half prohibition against the state owning nonpension-related investment equities. The ‘permanent funds’ mentioned on the ballotwere the natural resources trust fund, the state park endowment fund and the veteran's trust fund — not a wide-ranging ‘jobs program’ that simply slapped a ‘permanent fund’ label on its investment portfolio."

Mackinac Center Fiscal Policy Director Michael D. LaFaive observed, "The use of the ‘permanent fund’ language in the bill may give it a gloss of constitutionality. But ironically, the original prohibition on such investments came from the 1851 Constitution, which was passed by the people of Michigan in response to the dramatic failure of state investments in the ‘economic development’ activities of that time.

"This type of capital investment is not for the faint of heart," LaFaive noted. "For instance, consider the Michigan Economic Development Corporation, whose establishment as a ‘quasi-private corporation’ has allowed the state to do some de facto investing. The state Auditor General reported in June 2005 that through September 2004, the MEDC’s investments were worth $9.2 million less than the cost incurred to buy them.

"In fact," LaFaive added, "the vast majority of professional stock fund managers fail to outperform well-known indexes, such as the Wilshire 5000. What makes state officials or their designees think they can do any better picking industries, technologies or actual stocks?"

Wright and LaFaive note that the Michigan Senate still has the opportunity to review the bill’s constitutionality and dubious policies.

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