VI. Spurring Economic Growth and Development (2 of 2)

59. Expand the scope of privatization.

Michigan has engaged in significant privatization of state and local government duties in the past decade. In many cases, the process was well thought-out and the result was better service at lower costs. In a few cases, the process was hasty or ill-conceived and the results were poor.

The promise that privatization holds when it is the product of careful consideration is as great as ever. Indeed, because of its many successes, privatization is a megatrend across America, including at the local level of government in Michigan. The Legislature and the governor should renew their commitment to exploring this option across a broad array of state activities.

One area that cries out for privatization is corrections-a fast-growing sector of state and local governments. Michigan lags behind more than two dozen other states whose experience with contracting for private operation and management of prisons and county jails is extensive and largely successful. Private management of the state's new juvenile facility in west Michigan is a promising start, and the state should follow this up with a more vigorous approach to cutting its horrendous corrections costs through privatization of other facilities. Moreover, the Legislature should clear the books of all impediments that deny counties the option to privatize jail management.

Another area of privatization that Michigan can take action on involves Social Security. In May 1997, the Oregon Legislature passed a resolution urging Congress to grant waivers to let states opt out of the federal Social Security system and design their own retirement plans for both private-sector and government employees. Since then, Colorado has adopted a similar resolution and at least six other states are considering one. Many economists now believe that the only way to save Social Security before it goes bankrupt early in the 21st century without crippling tax hikes or substantial benefit reductions is to privatize it. Nations such as Chile have already shown that allowing individuals the freedom to invest their own retirement funds is a viable alternative to our present system, and one that can provide far greater payouts to retirees. Accordingly, a Mackinac Center for Public Policy report entitled "Saving Retirement in Michigan" urges the Michigan Legislature to adopt a resolution that asks Congress to either

  • partially privatize the existing Social Security program by allowing workers to shift all or part of their current retirement payroll taxes into privately owned and managed accounts; or

  • grant the state of Michigan a waiver to opt out of the federal Social Security system and design a more beneficial retirement plan for its citizens.

60. Encourage Detroit to privatize to avoid fiscal disaster.

Through legislation, appropriation, and the bully pulpit, Lansing policy-makers have the ability to prod Michigan's largest city to streamline its operations, improve services, and become less dependent upon state assistance. The inauguration of a new mayor this year brings new hope for the beleaguered metropolis, and the state should help see to it that hope gives way to real policy change. The clock is ticking and the time is short for Detroit to do what needs to be done. Consider these facts below. The city of Detroit

  • has lost 7.5 percent of its population since 1990, a sign that life in the city is not as appealing as alternatives;

  • is so far in debt that it owes $1,073 for every man, woman, and child in its environs;

  • owes an additional $2,600 per capita in unfunded health-care liabilities (the cost of funding this liability rose by 13.6 percent in just one year, from 1999 to 2000);

  • will have to spend billions of dollars in the next several years to comply with new federal water and sewer mandates; and

  • has such poor fire department services that it lost approximately $177 million worth of residential property in 2000 alone, an amount equal to 75 percent of the value of residential structures built during the entire decade of the 1990s.

What to tackle first to begin saving money and fixing city services? Here are a few suggestions:

Cobo Conference and Exhibition Center: Since 1980, Cobo has cost the city of Detroit an average of $9.1 million per year to maintain. That comes to $182 million in 20 years. Cobo should be entrusted to the private sector, a move that could earn the city a one-time sales payment of at least $50 million and generate another $1.9 million in property taxes annually. At a minimum, Detroit should contract with a private firm to manage the facility for less cost, as cities including Riverside, Calif., and Denver, Colo., have successfully done with their convention centers.

Department of Public Works: Duties performed by this department could be outsourced in whole or in part. Shaving just 20 percent from the cost of running Detroit's DPW would save Detroit residents more than $28 million annually. In fact, Detroit already knows the kind of savings it can realize in this way: In 1998, the DPW privatized oil changes for police vehicles. Savings figures haven't been announced, but the Mackinac Center calculates that if all 500 police cars get their oil changed 10 times yearly with a private vendor, the cost would come to roughly $165,000. That's an astounding 83.5 percent drop in the cost the city previously incurred to perform this operation.

Belle Isle: How long will Detroiters permit their crown jewel to be neglected by poor city services? The city should hand over the entire 985-acre island park to a nonprofit corporation, just as was done successfully with the Detroit Institute of Arts. Some mayoral candidates have, to their credit, considered this "nonprofitization" idea, which could relieve the city of its annual Belle Isle appropriation, the latest of which topped $5.5 million.

People Mover: The most recent subsidy for this sparsely used transportation service was $11.4 million, a substantial sum that could be better directed to other needs if Detroit simply unplugged this boondoggle.

Public Lighting: There is no reason for the city to run its own power plant. Investor-owned utilities are more than capable of serving Detroit's needs, and for less. Utilities usually sell for 1.5 to 2.5 times their equity (that is, assets minus liabilities). If this were the case for Detroit's power company, a sale could fetch millions and relieve Detroit of management headaches, including appropriation of an annual subsidy, which is expected to top $10 million in the 2001-02 fiscal year.

Detroit is full of talented and caring people who want to trim the suffocating municipal bureaucracy so they can unleash their creative entrepreneurial powers to build better lives for themselves, their families, and their communities. Citizens all over the state understand that Michigan's overall prosperity can be greatly strengthened by making Detroit a world-class city once again. The Legislature should focus its attention on getting that job done, not through greater subsidies that only insulate the city from its leaders' poor policies, but by encouraging new directions that emphasize privatization and modernization.

For further information, please see

61. Pursue regulatory reform and include sunset provisions in new regulations.

More than 2,000 rules and regulations within state government-rules and regulations imposed upon the private sector-have been abolished under the Engler administration. The Mackinac Center recommends continued progress in this direction through the careful scrutiny of all existing regulations and requiring whenever possible that all new state regulations be subject to automatic "sunset" after two years to allow for a meaningful assessment of their real-life costs and benefits.

62. Continue welfare reform with a strong emphasis on work incentives.

In Michigan last year, welfare caseloads hit a 27-year low with the number of people on welfare falling below 100,000. While caseloads in the nation as a whole plunged 39 percent from 1993 to 1998, Michigan's plummeted 49 percent. A greater-than-ever percentage of Michigan welfare recipients is working at least part-time, though achieving that has been expensive. Midland County, for instance, received almost one half-million dollars from the state for child care and a bus system intended to increase the incentives for work. The Michigan Economic Development Corporation has even spent thousands of dollars to pay old traffic tickets for welfare recipients.

One important lesson from the many reforms in Wisconsin, Michigan, and elsewhere is that programs emphasizing work placement over training are having better results. The problem is that too few reform initiatives place finding a job as the highest priority, or they do not do enough to discourage the bad behavior and costly lifestyles that keep people in the welfare quagmire.

Michigan should continue its generally positive path to welfare reform by encouraging reforms at both state and local levels that set time limits, promote marriage, and responsibility, require drug testing, impose tough work requirements, establish a "family cap" to discourage recipients from having additional children while on welfare, target benefits to those most in need, and encourage efficiency and privatization.

63. Reduce state spending.

In fiscal year 1990, actual state spending from state sources (excluding federal revenue) was $12.8 billion.49 K-12 school aid was $2.99 billion.50 Excluding school aid, the bottom line was $9.95 billion.

In fiscal year 2000, state spending from state sources (excluding federal revenue) was $23.4 billion.51 Excluding $10.1 billion in net K-12 school aid funding, which was greatly increased when Proposal A transferred a significant portion of school funding from local property taxes to state revenues, the state spent some $13.6 billion in fiscal year 2000.52

Between 1990 and 2000, the cost of living rose 31.7 percent.53 The state population rose 6.9 percent.54 If these figures are applied to 1990 spending levels, the result is an estimate of what the 2000 budget would have been had spending stayed constant. The amount is $13.8 billion. This means that, in current dollars, the actual $13.6 billion fiscal year 2000 spending total is some $181 million lower than the 1990 level.

On the surface this looks pretty good. Dig a bit deeper, though, and it appears that an opportunity was lost to make substantive cuts in the size of government. In 1990, Michigan was still recovering from a devastating retrenchment in the auto industry. The state unemployment rate was 8 percent. By 2000, this had fallen to 3.6 percent, well below the national average for the first time in decades.55 Welfare caseloads dropped from more than 200,000 to less than 100,000.56 Serious crime incidents fell from 549,344 to 401,398.57

Some contend that these improvements were the result of higher state spending: Higher prison spending may mean fewer crimes because career criminals are not free to target citizens while in jail. Lowering welfare caseloads may require more state spending on employment assistance. That's debatable, and in any event taxpayers understandably expected a dividend in the form of substantially lower state spending as economic growth accelerated. Instead, scores of inefficient and outmoded programs were left on "autopilot" as state leaders were unwilling to take on the contentious debates that cuts would entail.

The figures quoted above compare just 1990 to 2000. The year-to-year numbers reveal important details. Earlier in the decade, real spending came down smartly, but that trend reversed in 1997. Using a baseline of 1997 spending levels, real spending rose $157 million in 1998, $539 million in 1999, and $565 million in 2000. That's a grand total of $1.261 billion in spending growth during the economic boom years of the late 1990s-just when the demand for government services should have fallen the most. Instead, Lansing saw higher revenue as an excuse for a spending binge, among other things passing massive pork-laden supplemental spending bills in 1999 and 2000 ($412 million and $612 million).58

As a result, state and local governments are still collecting $102.80 for every $1,000 of personal income, down only slightly from $106.10 in 1989.59 The state tax burden as a percentage of personal income rose from 7.2 to 8.6 percent in the 1990s.60 (This is overstated by the 1994 Proposal A shift from local to state school funding, but has also edged up since then.) According to the latest statistics from the Tax Foundation, Michigan's overall tax burden is still higher than the national average: 34 states take less from their citizens.

The lesson is that no opportunity should be missed to cut spending, especially in good times. Michigan's economy and state government both would be in better shape to meet today's budget challenges had this been done. In the future, state budget leaders need to redirect their "kinder and gentler" concerns to taxpayers in general, not the special interests that accrete around every spending program.

64. Reform the budget process to make state spending transparent.

The amount of detailed information about actual spending plans contained in executive budget bills has sunk to an unprecedented low level. The budgets are a shell of their former selves. It's so bad that even most of the legislators who vote for them have little idea of what programs they are authorizing.

Here is a minor example: The fiscal year 2002 Consumer and Industry Services (CIS) budget contained a $10 million line item (later cut to $5.5 million) entitled "nursing home quality incentive grants," with no further explanation. In fact, the grants were designed to reward nursing homes that complied with certain state recommendations by buying the homes air conditioners or other amenities. While some may view this as outside the proper role of government, it hardly needs to be hidden for political reasons. But the average taxpayer would be challenged to discover how this money was spent.

This is a comparatively transparent example. It was a discrete line item, and "boilerplate" language elsewhere in the budget requires grant criteria to be posted on the Internet. One can find the actual grant application on the CIS website with the details. In contrast, it can be impossible to unravel funding for routine department operations.

Take the CIS "Executive Direction" line. $5.6 million was appropriated for 64.5 "unclassified" (non-civil service) "full time equivalent" (FTE) staff positions. What do these "64.5" people do? The budget document is silent, and there is no standardized annual report from CIS or any other state department showing where the money goes.

If asked, the House and Senate Fiscal Agencies can provide line item summary booklets giving a rough breakdown. These reveal that this item includes compensation to various state commission board members, among other things. But elsewhere even this source is silent, such as the 227 FTEs in the Michigan State Housing Development Authority (MSHDA) line item for "housing and rental assistance programs." This item encompasses several programs of varying effectiveness and efficiency, yet no breakdown is available describing the actual allocation of resources.

The rest of the CIS's $569.8 million budget is similar. Occasionally, the Legislature demands specifics, usually for political or ideological reasons that only incidentally shed light on expenditures. For example, Democrats demanded that of the 99 FTEs involved in occupational safety and health (appropriation: $9.1 million), 30 be general industry safety inspectors, 20 be construction industry safety inspectors, and 26 be industrial hygienists. This level of detail (including the functions of the other 23 FTEs) should be standard for every line item. Programs like the nursing home incentive grants should include a brief description of the item right on its line. (Note: The CIS budget is no better or worse than others; it was selected as a typical budget for illustration purposes.)

There are many possible explanations for why detailed budget information is lacking. Like any good manager, department heads want maximum flexibility without excessive micromanagement by the "board" (or Legislature, in this case). Such tensions are understandable, though with taxpayer dollars at stake, disclosure must win out. The other explanations are less excusable. Government loves secrecy. Politicians and bureaucrats know that large portions of the $36 billion in revenue from all sources they spend each year might not pass public scrutiny. Having been embarrassed by past revelations of outrageous "pork," they now keep everything close to the vest. In addition, some contend that an experienced governor is taking advantage of inexperienced term-limited legislators to "roll up" broad spending categories into single line items. The average citizen can't decipher the budget; neither, apparently, can the average legislator.

The budget process should be reformed to require detailed line item breakdowns. Any citizen should be able to examine annual budgets to determine where his or her money is being spent.

65. Require standardized annual state department performance reports.

Transparent budgeting is only the first step in needed state budget reform. In addition to future cash flow projections, private corporations issue annual reports explaining in detail how they did or did not accomplish goals in the past year. These reports reveal which profit centers are making or losing money, allowing rational decisions to be made. Similar reports should be required for government, which is also in the business of spending money. State government issues lots of press releases, but no standardized documents detailing where the money goes.

Some agencies and departments do make an effort to report their activities, and other reports are required by statute. But there is no consistency in the standards, forms or measurements used. The overall impression is that the public is shown only what bureaucrats and politicians want them to see, rather than a balanced view.

Therefore, standardized, detailed annual department reports should be required describing how the money from each line item was actually spent. These should match inputs of tax dollars with specific outputs for each program. Outputs should be measurable in concrete terms-not hidden behind clouds of fluffy prose. This means the criteria for judging success must be explicitly defined. Requiring annual departmental reports will allow decision makers and citizens to compare each program's performance over time with the intentions of the authorizing legislation. Without this information, it is impossible to make rational choices about any program.

66. Require state "rent-to-own" office space deals to follow the regular capital outlay process.

In 1999, a mini-scandal erupted when it was revealed that the House of Representatives had spent $10 million on a no-bid contract to provide furniture for a new House office building, including $1,000 leather chairs for legislators. While this outrageous deal was politically sensational and the media had great fun with it, little was said about the much bigger problem represented by the procurement of the new $200 million building itself, which was obtained without any regular legislative accountability or oversight.

One would search the legislative journals in vain for a roll call vote approving this $200 million commitment of taxpayer money. That's because the regular capital outlay process required for executive department construction projects under the Management and Budget Act is less rigorous for "rent-to-own" deals and does not apply to the legislative or judicial branch.

The House office building project was one of several acquired in rent-to-own deals in 1999, which also included a $300 million Department of Environmental Quality building in Lansing. In 2000, the trend continued with a $240 million contract on the former General Motors Corp. building in Detroit. These projects circumvent the normal full review process for building projects in which the legislative Joint Capital Outlay subcommittee approves each step of construction planning and cost authorization. In contrast, leases come to the committee ready-made, for a simple up or down vote.

Officials in the present administration contend that quick up-or-down votes on rent-to-down deals allows projects to be completed more quickly and avoids additional costs resulting from delays caused by the regular capital outlay process. But aside from the fact that full accountability should not be optional when spending taxpayer dollars, these contentions are not plausible for two reasons. First, the law establishing the capital outlay approval and oversight process was rationalized and streamlined in early 1999, eliminating many of the bottlenecks.61 Second, despite protestations to the contrary by the administration, it's hard not to conclude that the taxpayer is getting a lousy deal. If the state owned the buildings, it would not pay property tax to local governments, and finance costs would be at a lower tax-free municipal bond rate. Plus, the profits generated by the real estate developer would not be included in the price.

The rent-to-own process is a potential breeding ground for corruption and influence peddling. That is why the law requires a regular capital outlay process with full legislative oversight and accountability at each step. Legislation should be passed immediately requiring that legislative and judiciary buildings, and executive branch rent-to-own projects, get full review under the regular capital outlay process.

67. Reform the Michigan Catastrophic Claims Association (MCCA).

The Michigan Catastrophic Claims Association was established to allow all insurance companies to have reasonable access to reinsurance to pay for their large losses under Michigan's no-fault law, which requires insurers to pay lifetime, unlimited medical costs for persons injured in automobile accidents. The MCCA was created in 1978 after many insurers reported difficulties in finding a reinsurer who would provide this sort of unlimited coverage. MCCA reimburses insurers for no-fault losses in excess of $250,000. Funds for this reimbursement come from premiums assessed upon all insurers writing automobile insurance in the state. The MCCA makes an annual calculation of the anticipated losses for the ensuing calendar year, then divides those losses by the anticipated number of "car years." Every insurer is assessed this amount (which is known as a "pure premium," the amount per vehicle needed in order to pay anticipated losses) for every car it insures during that year.

Because no one had experience in providing reinsurance for this sort of exposure, earlier premiums were too low. Over time, the MCCA gained experience and has had more success in matching estimated pure premiums with actual losses incurred during the ensuing years. However, the no-fault statute does not allow the MCCA to distinguish between different kinds of vehicles and to recognize that some types might have lower loss payouts that would justify a lower pure premium assessment. Recent studies have shown that this "one-premium-fits-all" approach to MCCA assessments results in excessive charges for some types of vehicles, especially commercial vehicles. Recent MCCA data suggest that assessments for commercial vehicles are over three times the amount necessary to pay losses incurred by those vehicles.

In a three-year period ending in June 1999, the actual per car losses for commercial vehicles were $13.93 per year, as compared to $45.59 for private passenger vehicles and $84.17 for motorcycles. When all classes were combined, the loss per car year was $43.87. These lower losses for commercial vehicles result from the fact that when both no-fault and workers' compensation are available to pay for medical expenses, only workers' compensation pays. In a sense, the current MCCA scheme requires businesses to pay twice for employee injuries: once in their auto insurance policies and then in their workers' compensation policies.

Had these loss ratios been applied to the 2002 MCCA assessment, which is $71.15 per vehicle, the assessment per commercial vehicle would have been only $22.60. This overcharge of almost $50 per vehicle discourages investment by Michigan business and results in hiring of fewer employees by such businesses.

This drag on economic growth can be eliminated by requiring the MCCA, in its calculations, to classify vehicles according to their exposure to loss. The MCCA assessment should be calculated and levied upon four different classes of vehicles: private passenger autos, motorcycles, historic vehicles, and "all other" (that is, commercial and farm vehicles). Charging premiums based upon actual exposure to loss provides accurate information to policyholders about how to allocate their resources between insurance, loss control, and other alternative uses of their capital.

68. Update the regulation of policy forms and rates for most commercial lines of property-casualty insurance.

In 1979 and 1981, the Michigan Legislature recognized that competitive markets provide the best consumer protection with respect to quality of service and lower prices, and amended its laws with respect to private passenger automobile, homeowners, and workers' compensation insurance to allow competition, rather than regulatory fiat, to determine prices. The Legislature repealed insurance laws requiring that rates for these three lines of insurance be approved by the state insurance commissioner. Instead, it substituted a "file and use" system, under which companies could file their rates, and if the commissioner later determined that they violated the statutory requirement that they not be "excessive, inadequate or unfairly discriminatory," the commissioner could then take action. Further, the statute was amended to indicate that a rate could not be considered excessive if the market for the line of insurance was competitive.

The result has been dramatically lower rates for workers' compensation, and rates for private passenger auto and homeowners insurance that are low in comparison to other states when Michigan's generous benefits are considered.

Interestingly enough, the law with respect to other types of insurance, such as commercial auto, property and liability, was not changed, leaving a regulated rate system in effect. Even the National Association of Insurance Commissioners (NAIC), which could hardly be accused of being soft on insurance companies, has recognized that commercial customers need much less government protection than do private individuals and has recommended that rates for all commercial lines of insurance be regulated on a "file and use" basis. The NAIC has made a similar recommendation with respect to regulation of policy forms, that is, they may be filed and then used without prior regulatory approval.

In addition, the NAIC has recommended that all rate and form regulation be abolished for property-casualty insurance for large commercial insurance customers that have sufficient resources to understand their insurance needs and the bargaining power to deal with insurance companies. In other states, a separate category of "exempt commercial policyholders" has been freed from regulatory scrutiny, allowing these large, sophisticated organizations and their insurance companies to freely negotiate prices and coverage without government interference.

The old prior approval systems were designed in the late 1940s, when most insurers belonged to "rating bureaus," which were essentially cartels. Such cartels no longer exist, and now insurers develop prices individually and compete actively against one another. The regulatory modernization recommended by the NAIC and adopted in a number of states recognizes the vast changes in insurance markets that have taken place in the last 50 years. Michigan should not lag behind in updating its regulations.