Despite changing the funding source to avoid having to amend the Michigan Constitution, the plan that would become the 21st Century Jobs Fund still runs up against a different constitutional requirement. The plan allows state experts to invest in targeted businesses and industries. Article IX, Section 19 of Michigan’s Constitution, however, prohibits the state from directly investing in a private enterprise. It states, “The state shall not subscribe to, nor be interested in the stock of any company, association or corporation,” except to provide retirement benefits (pensions) for public employees, endowments for charitable or educational purposes, and for “permanent funds.”
This language dates back to Michigan’s second constitution, which was approved in 1850 and made effective in 1851. According to historian Burt Folsom of Hillsdale College, this prohibition was created in response to the failed attempts at state-funded economic development, led by Michigan’s first governor, Stevens T. Mason. Under Gov. Mason, the state borrowed heavily to finance internal improvements, which included investing directly in railroad and canal building projects. The new constitution banning this activity was supported by a significant portion of early Michigan residents.
In addition to its particular history in Michigan, state ownership of businesses and enterprises is controversial, because the state can possibly take control over the direction and leadership of the enterprise it invests in. Thus, the business could be under pressure to meet political ends rather than economic ones. It was unclear whether the state would exercise controlling influence in any of the businesses it would invest in through the proposed 21st Century Jobs Fund program, but it was also unclear how the state would handle having a controlling influence if one did materialize.
In order to avoid this constitutional restriction on investing in private companies, the Legislature created a new “permanent fund” with the monies generated by securitizing tobacco settlement revenue. The legal requirements of a “permanent fund” are unclear, as stressed by Attorney General Mike Cox in an opinion at the time:
The judiciary has not had the opportunity to interpret what ‘permanent fund’ means. Likewise, the Legislature has not provided a definition of the constitutional term ‘permanent fund’ since the time that term was added to art 9, § 19 in 2002. It would, therefore, be premature to express a legal opinion concerning features necessary to qualify a fund as a permanent fund.
Nevertheless, the opinion stated that the 21st Century Jobs Fund had some of the features of the other permanent funds and that the Legislature was “entitled to a presumption of constitutionality” in determining that the fund was a permanent fund.
While the program has not been challenged on this front and continues to operate, there remains questions about exactly what constitutes a “permanent fund.” Outside of holding stakes in companies, the 21st Century Jobs Fund program is not inherently different from a number of the activities already performed by the state, and it performs functions that can be supported by the state’s general fund. Indeed, the 21st Century Jobs Fund currently supports the state’s Pure Michigan advertising campaign, which has been supported by the state’s general fund in the past.[*] It appears the sole reason the 21st Century Jobs Fund operates as a permanent fund is so that it can make direct investments and hold stock in companies, something that is unconstitutional for other types of state funds.
A meaningful and distinct definition of a permanent fund is important, because it is meant to limit the types of state-funded investments in and ownership of private enterprises. The act of investing in selected private businesses appears to be unconstitutional. Only by using the mechanism of a permanent fund is this program thought of as legal, even though it is essentially operating in the same way that it would have under the originally proposed scheme, which policymakers, including former attorney general and governor at the time, Jennifer Granholm, thought to be unconstitutional. A generous interpretation of what makes a permanent fund declaws the constitution’s prohibition on the state from investing in private companies.
[*] For an example of joint funding from both the 21st Century Jobs Fund and the state’s general fund, see: Elizabeth Pratt and Maria Tyszkiewicz, “State Notes: Michigan Travel Promotion and Business Marketing Programs” (Michigan Senate Fiscal Agency, 2008), https://perma.cc/7D3L-FM2V.