How We Got Here

Nearly all responsible participants and observers recognize that Michigan has a "structural" problem with its budget, which is a fancy way of saying that state policies predispose state government to spend more than it takes in.

For the past eight years, the difference has been made up with various stopgaps.

  • The first recourse when revenue growth failed to keep up with desired spending was to spend-down surpluses that had accumulated during the high-growth 1990s. That expansion ended in 2001. Over the next two years, more than $1 billion that had accumulated in the state's budget stabilization fund (known as the "rainy day fund"), was drained to avoid reductions in state spending.[1]

  • Less-forthright "fund raids" tapped money set aside for special purposes in order to subsidize general spending. In one instance, money was diverted from a gas tax surcharge that had been levied to clean up leaking underground fuel tanks.[2]

  • Nibble-around-the-edge tax increases helped support spending in mid-decade. In 2004, property owners were nicked by a sudden advance in the collection date of county property taxes.[3] Smokers also saw a 75 cents-per-pack cigarette tax hike, and some hospitals and health care providers — and inevitably, their paying customers — paid a new "bed tax" that indirectly extracted more Medicaid money from the federal government, but reduced the net revenue of health care providers with fewer Medicaid patients.[4]

  • "Watering the soup" of state programs has been a common feature of this failure to address the underlying imbalance — ad hoc cuts made not with any consistent vision of "right-sizing" state government, but rather with a misguided desire to retain all existing programs regardless of whether they are still justified. In this vein, state revenue-sharing to local governments declined from around $1.5 billion annually at the start of the decade to about $1.1 billion in the past several years.[5] Spending on universities and community colleges was around $2.2 billion in 2001, fell to around $1.9 billion in 2004 and then hovered around $2.0 billion thereafter.[6] While spending on Medicaid and related health programs for the poor has skyrocketed from $8.2 billion in 2000 to nearly $13 billion this year, health care providers perennially complain that their reimbursement rates are well below market rates and haven't kept up with inflation. Reportedly, increasing numbers refuse to take Medicaid patients.[7] The state's public school officials likewise complain that their budgets have not kept up with costs, which have been inflated by rapidly rising expenses of unfunded school employee retiree health benefits.[8]

In early 2007, the state budget "hit the wall." All these stop-gaps either had been exhausted or no longer sufficed. Revenues for the year did not match appropriated spending. A temporary budget deal in the spring employed a questionable trifecta of reducing employee pension fund contributions, pushing higher education disbursements into the following budget year through an unusual accounting arrangement,[9] and borrowing more than $400 million against future tobacco lawsuit settlement revenues — arguably a stealth form of deficit financing banned by the Michigan Constitution's balanced budget requirement.[*] When these expedients weren't enough, the governor and the Legislature imposed a $1.4 billion increase in personal income and business taxes.[†]

Clearly, policymakers have gone to considerable lengths to avoid a fundamental restructuring of state spending. Given that context, it was with a measure of relief that Mackinac Center policy analysts heard Gov. Granholm propose in February eight policy ideas, or variations on them, previously advanced by the Center. As noted above, the proposals are quite modest, but they represent progress.

What follows is a brief description of the governor's recommendations and a recap of what Center analysts have said about them over the years.

[*] The state borrowed $407 million against future revenues from the 1998 tobacco lawsuit settlement that occurred between most states and four major tobacco companies. Michigan's share of the revenue is approximately $300 million per year through 2025. House Bill 4850, Public Act 18 of 2007, pledged a portion of that future revenue stream to borrow $407 million; the House Fiscal Agency estimated annual debt service payments of between $40 million to $46 million for 20 years. (See "MichiganVotes: 2007 House Bill 4850 (Borrow to Pay for Current Spending)," Mackinac Center for Public Policy, (accessed May 28, 2009).) The Michigan Constitution's balanced budget requirement appears in Article 5, Section 18: "Proposed expenditures from any fund shall not exceed the estimated revenue thereof." (See "Article V, Section 18: State Constitution (Excerpt): Constitution of Michigan of 1963," Michigan Legislature, (accessed May 28, 2009).)

[†] At the time, Mackinac Center analysts predicted that the dynamic disincentive effects of higher taxes would further weaken Michigan's ailing economy. (See, for instance, Jack McHugh and Lawrence W. Reed, "Replacing Michigan's New Taxes With Budget Reductions: Curing $1.358 Billion in Overspending With 55 Specific Recommendations," (Mackinac Center for Public Policy, 2007),, (accessed May 28, 2009).) While larger forces are clearly responsible for the rise in the state's unemployment rate from 7.2 percent at the time to more than 12 percent now, the tax increase has likely contributed to the rate of job losses here being almost double the national job loss rate since U.S. employment peaked in December 2007.