How to Save $2.2 Billion

Spring 2009 Version

(Editor's note: This is an updated version of a list of cost-savings first proposed by Senior Legislative Analyst Jack McHugh in July 2006. These recommendations combine reductions from current budgets and speculative savings that assume certain policy reforms. It is intended as a plausible illustration of what is possible, not as a precise roadmap.)

When it comes to government spending restraint and Michigan's political class, it's a case of "everybody wants to go to heaven — but not today." Therefore, we see lots of evasive recommendations for "consolidation," unspecified "across-the-board" cuts, slashing the "waste, fraud and abuse line item," etc., but few substantive, big-ticket savings proposals.

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It's not really all that hard to cut state government spending — if you're willing to think outside the box and if you reject, "But that's not the way we've done it in the past!" You also have to be willing to anger certain special interests (including government employees and their unions) who benefit from the status quo.

If you are willing to do those things, then here's a list of ways to achieve $2.24 billion in savings. Some of these may take a few years to fully implement, but the total also exceeds the expected deficit for next year, and doesn't use a dime of so-called "stimulus" money. Some of these savings figures involve "dynamic" estimates of economies that ripple through the system when competition is injected into government operations, changing the incentives on managers and employees; others come from providing government employee fringe benefits comparable to (generous) private sector plans, or from eliminating non-core functions.

  • Change the higher education funding mechanism to a standard "per-pupil foundation grant" in which the money is attached to the students, rather than each university getting an amount determined by legislative maneuvering. As colleges were forced to compete for students, they would "sharpen their pencils," rein in costs and eliminate the kinds of inefficiencies highlighted in recent audit reports. If the effect was that costs fell by just 5 percent, the savings would be: $70 million.
  • Eliminate the cash subsidies that this year will transfer $88 million of Michigan taxpayers' wealth to Hollywood film producers, and $131 million next year. These are a political development program, not an economic development program. We'll split the difference between current and next year's costs and conservatively project savings of: $100 million.
  • Shift state police road patrols to less expensive county sheriff deputies. With benefits and related expenses it costs more than $100,000 per year to employ a state trooper; most sheriff deputies cost much less to employ. Effect on public safety: Zero. Savings: $65 million.
  • Require school employees to pay 25 percent of the amount school employers now pay for their health insurance benefits. This could save: $650 million.
  • Eliminate the Michigan State University cooperative extension service and agriculture experiment station to save: $64 million.
  • The original version of this list recommended halting the so-called "21st Century Jobs Fund" before it borrowed and spent $400 million. It's too late for that now: All but $33 million was spent before the 2006 election, and taxpayers will be repaying the debt for decades. At the very least, the bleeding can be stanched — current law requires $75 million to be diverted each year for this boondoggle. Skip it and save: $75 million.
  • According to a Rio Grande Foundation report, if 5 percent of prisoners are placed in privately managed prisons, the state saves 14 percent on overall prison spending because government-managed prisons have an incentive to "sharpen their pencils." Savings: $154 million.
  • Eliminate "History and Arts" subsidies, and cut state library subsidies in half: $35 million.
  • In 1999 the Citizens Research Council noted that "a number of changes have occurred over the past decade that have reduced the need for intermediate school districts." Let's help the ISDs catch up by reducing their operations grants: $32 million.
  • Cut so-called "20j" payments to affluent schools in half. This extra money is a political response to the fact that under Proposal A certain wealthy school districts benefit less from per-pupil state foundation grant increases than other districts. (They still benefit, though.) Savings: $26 million.
  • Cut transit funding in half. By eliminating protectionist regulations that restrict alternatives, empty buses driven by public employee union members can be replaced by private sector innovations like jitneys, commercial van pools, "call-and-ride" services, car-sharing and more. This will improve service for transit users at a much lower cost: $112 million.
  • Repeal the "prevailing wage" law that requires above-market rate wages be paid on school construction projects: $150 million.
  • Schools can realize huge savings by privatizing non-core functions like transportation, food service and custodial. Many have already done so: The Mackinac Center's most recent survey of school privatization shows that 42.2 percent of school districts already have a competitive contract in place for one of these functions. Some idea of the magnitude of these savings can be seen in the experience of one district that saved the equivalent of $177 per student by contracting out for its custodial needs. Statewide, similar savings would add up to $300 million annually. In the short term, it would not be unreasonable to expect: $100 million.
  • Reduce the Merit Award Scholarships by 50 percent. Shockingly, the governor and Legislature have greatly increased these non-need based college scholarships to the point where gradual payments to the high school graduating class could amount to more than $400 million. When families face economic hard times, the first thing they do is cut luxuries. This is a luxury Michigan can no longer afford. $200 million.
  • The state spends almost $17 billion on Medicaid and welfare, more than $7 billion of which is from state taxes and fees. Medicaid in particular is a command-and-control monstrosity rife with perverse incentives. Reforming it in ways that give recipients an incentive to economize and take better care of themselves could save hundreds of millions of dollars, while actually giving recipients greater freedom and choice. If just 3 percent of the expense in these two programs could be reduced in this way, the state would save: $210 million.
  • Thousands of private-sector workers have given back painful wage and benefit concessions to save their jobs. The average state employee receives salary and benefits worth nearly $75,000, compared to approximately $58,000 in the private sector. Comparisons of specific job classifications produce similar comparisons. State workers should be grateful for their much greater job security and benefits, and more than willing to assume some of the burden through concessions. $200 million.

Total: $2.24 billion.

There is a theme that runs through opposition to every one of these common sense reforms: "That's not the way we've done it in the past."

That's not good enough anymore: Michigan has already passed the tipping point of going from relative decline in population and income to absolute decline. Without major reforms there's nothing to prevent the entire state from going the way of Detroit, with a declining population and an economy that is unable to support a government establishment that often behaves as if they think residents exist to serve the government — not the other way around.

None of the items above would be "devastating" to the state, to "vulnerable populations" or even to any particular interest group. Most people would not even notice that these changes had taken place. The alternative, a major tax hike, will only drive more people out of Michigan and hasten the impoverishment of a formerly rich state economy that in this decade has become a poor one.


Jack McHugh is senior legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.


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