Gov. Granholm’s initial idea to fund the 21st Century Jobs Fund was for the state to borrow $2 billion. This money would be backed by the state’s general obligation to repay bonds, pledging its full faith and credit. These bonds would not be secured by a separate funding source, like the Mackinac Bridge Authority bonds that were paid off through toll revenues, but would be paid from general state revenues. At the time, the state’s general fund was funded mostly by unearmarked revenue from the state’s income tax, Single Business Tax and sales and use taxes.[7]

Article IX, Section 15 of the Michigan Constitution, however, restricts the ability of the state to engage in long-term borrowing (longer than one fiscal year). It only allows the state to borrow long term if the debt is approved by two-thirds of both legislative houses and a majority of voters in a general election. The ballot question must specify the purpose of the borrowing, the total amount to be borrowed and the method by which the debt will be repaid.[8]

In light of this constitutional limitation, a joint resolution was introduced in the Michigan Senate after Gov. Granholm’s State of the State speech that would put before voters a proposal to amend the Michigan Constitution. This resolution proposed adding a new section to Article IX of the Constitution that would specifically empower the “Jobs for Michigan Fund” to promote economic growth and create jobs. It also called for the state to borrow a maximum of $2 billion to finance the program, audit the Jobs for Michigan Fund every year and stipulated that this program was not authorized to impose or increase any tax.[9]

Based on the Senate resolution, Michigan voters would be asked to “authorize bonds to finance the creation of new jobs in Michigan and the diversification of Michigan’s economy.” This would be accomplished “by making loans, grants or investments in private businesses and public entities based on recommendations from independent job creation experts.”[10]

The effect of these proposed changes to the Michigan Constitution would do more than just authorize the state to borrow the money needed to fund this economic development program. By specifically naming and authorizing the Jobs for Michigan Fund, the proposed constitutional amendment would provide permanence to the program. It would require an additional constitutional amendment to eliminate this program, should a future Legislature desire to do so.

In the end, this constitutional amendment proved unnecessary because the proposal devised and passed by the Legislature used a different funding mechanism. These bills proposed using a different source of revenue — instead of relying on long-term borrowing, the state would sell its revenue stream from tobacco settlement money for an upfront cash payment.[11] The revenue from these sales would then be used to fund the jobs program. This plan eliminated the need to amend Article IX, Section 15 of the state constitution, since the state would not actually be borrowing money; instead it would be selling off a portion of its future revenues.[*] The amount that the state securitized in the initial year of the program was 13.34 percent of future proceeds from the tobacco settlement payments over the next 20 years.[12]

This also meant that the program would have a larger impact on the state budget. Tobacco settlement revenues have some statutory guidance on how they are to be spent, but are practically unrestricted funds, essentially general taxpayer dollars.[13] By using this settlement money to “securitize” payments for economic development, the state was pledging the use of these unrestricted funds for this purpose. This means that any gains from this program would not pay down the debt (as originally planned), but instead these unrestricted funds would.

In addition to the interest costs required to get more cash up front, using the tobacco settlement money converted an uncertain taxpayer cost to a definitive taxpayer cost. Since the state has wide latitude in how it can spend this tobacco settlement revenue, spending it on this new economic development program means less spending on other government services. These other services may have benefitted taxpayers more broadly than investments in targeted businesses and industries. Funding the program this way also means the Legislature is less able to return money to taxpayers in the form of revenue-neutral tax rate reductions as it was committing to spend these revenues.


[*] Using future tobacco settlement revenues is in a sense long-term borrowing, because the state is borrowing against future revenues. However, the law pertaining to using this revenue declares that it is not in fact borrowing, stating that selling future revenues from the tobacco settlement would “be treated as a true sale and absolute transfer of the state’s tobacco receipts transferred and not as a pledge or other security interest for any borrowing.” MCL § 129.268(6).