Any citizen should be able to examine annual budgets to determine where his or her money is being spent.
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
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
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
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
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
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
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
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'
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
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.