2004 Addendum — More Savings and Revenue Ideas

May 2004

Few items have received as much attention in Lansing during the last 18 months than the state of Michigan’s budget. Faced with a yawning gap between revenues and proposed state expenditures last year, Governor Granholm sealed a budget deal that addressed the Fiscal Year (FY) 2004 deficit without a general hike in taxes. Unfortunately, the state is facing another billion-plus dollar deficit in FY 2005 and there is serious talk about substantial tax hikes to maintain high spending. Such tax increases are not necessary. There is plenty of room to cut the state budget again or raise revenues through "one-time" sales of state assets. A few ideas follow.

Auction Racino Licenses

At the same time state lawmakers grapple with a $1.3 billion budget deficit, they are planning to give away assets that could be sold instead for as much as $1.6 billion.

Legislation to expand gambling in Michigan (HB 4610) would effectively give away licenses to for-profit operators of newly allowed "racinos," which are video lottery terminals at horse racing tracks. Similar gambling licenses have sold elsewhere for hundreds of millions of dollars.

Selling racino licenses could wipe out the expected 2005 budget deficit without raising any taxes, with about $300 million left over for the rainy day fund or other spending. Experience in Michigan and elsewhere shows that private investors are willing to pay for the right to operate gambling machines.

Under the legislation, racinos could be permitted at Michigan’s seven existing and four or more proposed racetracks. An additional racino at the state fairgrounds could be permitted as well.

Jeff Hooke, a Maryland-based investment banker and author of several studies on the value of gambling licenses, reports that in 2000 a Michigan Indian tribe paid $265 million for a 40 percent interest in a Detroit casino license. Last March, the state of Illinois auctioned a casino license for more than $500 million. The Mackinac Center and Hooke estimate that licenses to run video lottery terminals at 12 Michigan tracks could be worth as much as $1.6 billion if auctioned off to the highest bidders. Their figure factors in the effect of future gambling taxes paid by the operators.

William Thompson, University of Las Vegas, Nevada is professor of Public Administration and author of the "Gambling in America: An Encyclopedia of History, Issues, and Society" and "Legalized Gambling: A Reference Handbook" has said that not auctioning off licenses "would be foolish of Michigan."

Gambling is no substitute for genuine economic development. But if the state insists on being in the gambling business, it shouldn’t give away assets for free, especially when job-destroying tax increases are on the table.

Although it would be tempting to auction the licenses off and use the sale revenue as a one-time solution for this year’s budget deficit, such a move may not be the best option. The Mackinac Center for Public Policy recommends using "one-time" revenue increases — from the sale of state assets, for instance — to change the basic structure of Michigan’s budget. For instance, lawmakers could use proceeds of any asset sale to pay down Michigan’s General Obligation Debt, which currently exceeds $1 billion. The advantage in eliminating debt is that it will save the state money each year. Paying it off would save Michigan approximately $78 million in annual principal and interest payments through 2021 (assuming a 3.5 percent interest rate as Treasury does). [1]

Securitize Tobacco Settlement Money

Securitization of tobacco settlement revenue is an option worth exploring. In order to cope with their own deficits other states have "securitized" the stream of revenue that they had expected to receive from the national tobacco settlement. In other words, states sold the right to future tobacco settlement payments. Michigan may wish to do the same. The tobacco settlement requires annual payments to states in perpetuity, but estimates of the settlement’s total value often assume income for the years 1998 through 2025. Through those years, Michigan’s total settlement is worth $8.5 billion. Securitizing even a portion of this total revenue could result in billions of revenue generated in one-lump sum payment, or several payments, to the state.

It is worth nothing that this is not an elegant solution to the state’s fiscal woes. As in most policy discussions officials must examine the costs and benefits. Do the benefits outweigh the costs — including the perceived risks — of selling tobacco settlement money? For the purposes of this study the Center will not estimate the value of securitizing its tobacco settlement revenue. It will instead recommend the idea for further study and a redirection of annual tobacco settlement payments away from its current uses and toward the General Fund. This will increase money available to balance the budget by approximately $300 million. This could necessitate ending programs that the revenue currently funds such as the "Michigan Merit Award Program," and life sciences initiative. For more on the life sciences initiative, see page 75. For purposes of calculating total savings the Mackinac will use the figure $281,992,400, which was the total Tobacco Settlement Appropriations in Fiscal Year 2004.

State Land

The Mackinac Center for Public Policy has also recommended selling off the state fairgrounds and the Ralph A. MacMullan Conference Center. We repeat this recommendation in the pages of this study, but find it prudent to cite it here because these properties could also be used to generate a "one-time" source of revenue exceeding $69 million. These revenues too could be used to pay down debt. For more on the sale of these properties, see pages 10 and 82, respectively.

School Aid Fund

The state school aid budget funds Michigan’s Kindergarten through 12th grade education system. The School Aid Fund is comprised of federal, state, and local funds and is expected to have close to $16 billion in funds in FY 2005, $11.2 billion of which comes from state sources. One source of funds is the General Fund/General Purpose budget. Last year, the state appropriated a $327 million subsidy from GF/GP to the School Aid Fund. To Governor Granholm’s credit, her proposed budget reduces this subsidy by $146 million. The legislature should eliminate the subsidy entirely.

School Savings

The legislature could help school districts save money to offset any such cuts by making some fundamental changes to Michigan law. For instance, Mackinac Center for Public Policy analyst Paul Kersey has recommended repeal of Michigan’s Prevailing Wage Law of 1965 — which would translate into savings of more than $400 million dollars every year, $150 million of which would accrue directly to schools.

The prevailing-wage law applies whenever state funds are used on the construction, renovation or repair of buildings or roads. Under this law, workers must receive the wage typical of those doing similar work in the community. In Michigan this is uniformly taken to mean the higher wages set in local collective bargaining (union) agreements.

As the Mackinac Center for Public Policy reported in the late 1990s, school construction in Michigan is on the order of $1.5 billion annually, or close to $900 per pupil. Because of the Prevailing Wage Act, these costs are substantially greater than they need to be. In a study for the Mackinac Center for Public Policy, Professor Richard Vedder of Ohio University found that the law increased construction costs by at least 10 percent. In 1997, the Ohio Legislature exempted schools from that state’s prevailing wage law — saving schools an average of 10.5 percent in construction costs, according to the nonpartisan Ohio Legislative Budget Office.

If Michigan were to follow Ohio's lead, our schools would save at least $150 million annually — a figure that amounts to roughly $90 for every student in the state.

More Taxes Not Needed

Lawmakers need not raise taxes to pass a balanced budget for Fiscal Year 2005. Many alternative options exist. Legislators could sell off assets for a single-year solution to our overspending woes, or they could take adopt (or adapt) any number of the more than 90 recommendations made throughout the 2nd edition of this budget study and addendum.

If legislators insist on raising taxes, however, then they should be prepared to recommend to Michigan families where to cut their household budgets to keep state spending at its high level. Should families buy less health care? Should they buy fewer diapers and less food for their children? Should they buy fewer books, or stop paying their utility bills? Should they patronize restaurants less often? Should taxpayers work more overtime? These are choices people will face if the state refuses to cut spending or sell certain assets.

The people who pay the bills of government deserve a legislature that will scrutinize every aspect of state spending, preserving only those that are truly necessary and cost effective.