Fiscal Storm Clouds Grow Darker, More Ominous

As the last day of Fiscal Year 2009 draws to a close, legislators are struggling to enact a new Michigan state budget for FY 2010. This afternoon Gov. Jennifer Granholm sent out notices of impending layoffs should a deal not be reached.

After using one-time federal “stimulus” money, the state still needs around $1.3 billion in program reductions and/or new revenues (higher taxes, more fees) to close the budget gap.

Yet even if another midnight deal is reached and state government opens for business as usual tomorrow, the current challenge probably pales in comparison to the fiscal storm on the near horizon. In FY 2011 the state may face another $1 billion overspending crisis, which means either more cuts and reforms or another large tax hike. Moreover, this will need to occur during an election year, which will make budget politicking all the more intense.

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It gets worse.

The stimulus money passed down from the federal government this year will run out sometime in 2010, which will tax the state’s liquidity - its cash and easily convertible assets. Simply put, there are no savings to fall back on, so any new revenue shortfalls will force the immediate adoption of either cost-saving reforms or another massive, job-killing tax hike like the one imposed in 2007. Michigan unemployment has more than doubled since a $1.4 billion tax increase was approved Oct. 1, 2007, to solve the Legislature's overspending crisis for FY 2008.

State officials must begin a methodical, long-term planning effort that properly addresses fiscal issues in a way that does not chase more people and job providers from the state. That could mean biennial budgets, reforming state and public school employee health care benefits, or devolving State Police road patrols down to county sheriffs, just to name three.

The policy permutations are endless, but the key is to start solving FY 2011’s budget problems the moment the 2010 budget is complete. There’s a storm coming and everyone will be better off if we started building our shelter now.