The newspapers are full of frightful headlines
reporting yet another "$1 billion state budget deficit." Gov. Jennifer Granholm
has included proposed (but unlikely) federal cuts in order to claim that the gap
is $1.2 billion, and to push for $400 million in tax hikes. But a closer look
at the numbers reveals a different story.
According to the Senate Fiscal
Agency’s January projections, Michigan will finish this year with $16 million in
its combined General Fund/School Aid Fund checkbook. In 2005, the Agency
estimates that phased-in tax cuts will slice $44.6 million from this year’s
General Fund revenue. However, School Aid Fund revenue will increase by $348
So where’s the "$1 billion
deficit"? Headlines make it appear that the state will take in a billion
dollars less next year. It might be more accurate to say that legislators want
to spend a billion more than they know they will have. It’s like someone who
earns $30,000 declaring a $10,000 "deficit" because he wants to spend $40,000.
Not that there aren’t real budget
challenges. The actual 2005 General Fund "deficit" figure is $894 million, not
$1 billion. This assumes the slightly lower revenues cited above, the loss of
additional "one-time" revenue sources, and a spending freeze at 2004 levels. It
also assumes a $298 million "hit" to make up reduced federal Medicaid money.
OK so far. But the number also
includes a $154 million "rainy day fund" deposit, and $160 million for state
employee pay raises. The first item is required under a 2002 cigarette tax hike
statute. It can be changed with a vote of the Legislature and the signature of
The pay raises can also be
changed, but this will require intestinal fortitude and tough negotiating by the
governor. She should not hesitate — Michigan state employees historically have
been very well paid compared to private sector and other state government
workers, according to an Office of the State Employer survey. Private sector
workers often make concessions in hard times. Taxpayers should expect no less
from public servants.
Without these two items the
General Fund "deficit" falls to $580 million.
In the School Aid Fund, the picture becomes positively rosy. At current
spending levels, 2005 will end with a $252.6 million surplus. The schools will
be quick to note that they took a $55 per-pupil cut this year. But 338 school districts have a total of $1.84 billion in
their own rainy day funds, and Intermediate School Districts sit on another $112
million. Both figures are far above the 15 percent reserve considered prudent.
Plus, schools could put employee health insurance out for bids and save
$400 million, while still providing "Cadillac" health plans instead of the
"Rolls Royce" coverage most now enjoy.
Subtract the $252.6 million school
surplus from the $580 million real General Fund deficit, and the real
2005 deficit is less than a third of the publicly touted $1 billion figure —
just $327.4 million. This can
be easily cut without robbing any widows or orphans.
How? Gov. Granholm herself has proposed cuts. Her plan to save $65 million by
reducing Merit Scholarship Awards was defeated, and her proposed $27 million cut
from the MSU agriculture extension program was stillborn. Rep. Judy Emmons,
R-Ionia, sought to save an income tax rate cut by slicing $25 million from adult
education for prisoners, $16 million from mass transit, and $10 million from the
Detroit Medical Center. These cuts weren’t adopted, but they could be.
But better still, Mackinac Center Director of Fiscal Policy Michael
LaFaive has specified $1 billion that could be saved by returning many
government functions back to civil society institutions from whence they came. Much of the $90 million in annual casino taxes are squandered on
corporate welfare. Arts funding should be left to the private sector, saving
$11.8 million. Potential prison sentence and parole reforms could save a
bundle. Also, Senate Appropriations Committee Chair Shirley Johnson, R-Royal
Oak, plans to "unroll" the contents of individual budget line items, which will
help separate wants from genuine needs.
These overall budget numbers are
good news for Michigan. There is still plenty of fat to trim, and the monstrous
deficit numbers are an illusion. We are closing the much-feared "structural
imbalance" in state government. The challenges are political, not fiscal. It
is time to resume changing Michigan’s reputation as a relatively high tax state
to one that attracts business and jobs with lower taxes.
Jack McHugh is legislative policy analyst for the Mackinac
Center for Public Policy, a research and educational institute headquartered in