The State Budget and Civil Society

(Editor’s Note: Fiscal Policy Director Michael LaFaive delivered this speech to “We the People of Mid-Michigan” on Dec. 16, 2014. Portions of this speech were taken from the Mackinac Center’s previously published works.)

Thank you. It is a great pleasure to be here today and to speak to “We the People of Mid-Michigan” again.

Late one night in downtown Lansing, a mugger wearing a ski mask jumped into the path of a well-dressed man and stuck a gun in his ribs.

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“Give me your money,” he demanded.

Indignant, the affluent man replied, “You can’t do this – I’m a state representative!”

“In that case,” replied the robber, “Give me MY money!”

While the calendar New Year is almost upon us, Fiscal Year 2015 has been in full swing for nearly three full months. This budget exceeds $52 billion and — if present trends continue — will be smaller than the one Lansing’s elves are building in their spending workshops today for 2016. The budget has increased more than 30 percent over the past decade, from $40 billion in the 2005 fiscal year.

My colleagues and I have long said that ultimately, the state budget is about people and how “we the people” ultimately organize society. The Mackinac Center has published three full budget studies and scrutinized state spending in smaller documents, too. We do this because we believe that someone or some institution must question publicly whether or not a particular program or activity should be performed by the state or by individuals and private associations in peaceful contact with each other.

The growing economy and resulting growth in state revenues have not necessarily dominated the conversation in Lansing, but it has been touched upon in important ways. Despite unmistakable revenue growth to the state treasury some Lansing politicians are working to raise taxes again — this time on motorists — and to the tune of $1 billion.

There are alternatives, some of which have been championed by other Lansing politicians (most notably in the state House) and still others by groups like the Mackinac Center for Public Policy.

Over the next 35 minutes I’m going to give you a brief overview of the state budget and some of its features; discuss the importance of cutting it down and how to do just that; and linger over extremely topical subjects like gas taxes, gas revenues, road repairs and (hopefully) future spending and tax relief. After all, governments can only spend what they ultimately take from you and me.

The budget for Fiscal Year 2015 began getting prepped as far back as the spring of 2013, according to Michigan Senate Fiscal Agency. This is when the state’s budget office begins prepping instructions for each department, particularly how to go about making a request for a share of total spending.

Once those requests are collected the state’s budget officers meet with the governor. The SFA web site suggests that this meeting takes place in December, so as of tonight the fiscal 2016 budget may be taking shape just across the street from the Capitol building.

In January big budget news starts to roll out of the Capitol because the Senate Fiscal Agency, House Fiscal Agency and State Treasurer create estimates of revenues they expect the state to have on hand for spending in the coming fiscal year. A very public meeting is held about these revenues.

As an aside, I strongly recommend the public watch these and check out the accuracy of forecasts made by the big brains paid to make big forecasts. Doing so will remind you of the old line often attributed to Yogi Berra that “It’s hard to make predictions. Especially about the future.”

Here are some examples from 2003, right before the start of Michigan’s precipitous decline:

“On a calendar year basis, the Michigan unemployment rate will muscle down from 6.1 percent in 2002 to 5.9 percent in 2003 and 5.2 percent in 2004.” In actuality 2004 ended with an unemployment rate of 7.2 percent. That same prognosticator, U of M economist Joan Crary, also predicted personal income growth of 5.5 percent for 2004. She was off by 60 percent. It increased by 3.3 percent at the time. At the 2004 conference, Crary reported that personal income growth would go up from 4.7 percent in 2004 and to 6.5 percent. It ultimately declined to 2.5 percent, so she was off by about 150 percent.

One of my favorite predictions came from Standard & Poor’s chief economist, who said “there was a lot of talk about housing bubble” and “I don’t think we have to worry about a collapse of home prices.” In fact, that very year the price of homes in Michigan began its decline. The price trend turned negative in 2006 and stayed negative for 24 consecutive quarters (emphasis added).

Yet these same economists are still relied upon to make economic forecasts on which our budget is built. At least some folks, like state Sen. Pat Colbeck, have grown cautious about such testimony.

In February the governor presents his budget to the Legislature. This is also done very publicly and typically in joint sessions of appropriations committees. It is a big event for those individuals who care about public policy because the new budget proposal provides great insight into the governor’s priorities for the coming year.

Over the preceding months the governor’s budget is introduced in separate bills and competing factions fight to see more or less spent on this program or that one. There is a second revenue estimating conference and fiscal forecasts are refined. Leadership from the House and Senate meet with budget officers to determine final budget amounts for each department. These — again, according to SFA — are known as “budget target meetings.”

Remember the words “budget target meetings” because they play a role in reducing transparency of legislative action. I’ll revisit this topic momentarily.

Once these budget targets are met the new budget laws are approved and sent to the governor for his signature. There are typically two: one covers all education spending and the other everything else.

For the last several years budget business has been wrapped up by early summer. That is not always the case. During Gov. Granholm’s years it was not unheard of to reach September without a budget in place. In Michigan a fiscal year runs from Oct. 1 through Sept. 30.

The fiscal 2015 budget, as I mentioned, exceeds $52 billion. Of that amount, $30 billion comes directly from state taxpayers and the rest from the federal government. When the money is spent the Mackinac Center typically identifies it in one of four major categories:

Federal, General Fund, Restricted or Interdepartmental. The federal appropriations are self-explanatory. The money comes from the federal government for a particular program. The General Fund is technically the fund over which lawmakers have the most discretion. It is a major area of focus. Restricted monies are technically designed to serve a particular purpose. For instance, fees generated to the state may be restricted to uses associated with that industry. We have seen however that the notion of “restricted” is about as fungible as lawmakers want to make it. Interdepartmental grants simply represent transfers from one department to another.

The biggest spending areas from state resources are the School Aid Fund at $11.5 billion and Community Health at more than $5 billion. Total corrections spending comes in third at $2 billion. The majority of that money comes from Michigan’s $10 billion General Fund budget, which is why so many look to prison reforms as an area to save money.

It won’t surprise this audience to learn that Mackinac Center analysts have long called for significant state spending cuts. We do so for a number of reasons. Most often you may hear us speak of the economic benefits of fiscal restraint in government spending and taxation.

There is another, more important reason: taking ever more from taxpayers to operate many and large government programs expands Michigan’s “political society” and reduces its “civil society.” A political society is a coercive one that requires countless mandates and regulations and rules to function while a civil society relies on peaceful, voluntary association in a free-market economy.

As government grows, civil society shrinks. When government moves beyond its core functions, it does not create things out of thin air so much as it displaces what a free people would choose to do.  And it ends up performing too many tasks too poorly, including the ones we absolutely must rely upon for the sake of safety and basic, essential services. 

If this is a radical notion, then America was founded on radical notions. For all people interested in the advancement and enrichment of our culture, this is a crucial observation with far-reaching implications. Cultural progress should not be defined as taking more and more of what other people have earned and spending it on “good” things through a government bureaucracy. Genuine cultural progress occurs when individuals solve problems without resorting to politicians, or the police and bureaucrats they employ.  How can we restore and strengthen the attitudes and institutions that formed the foundation of American civil society?

Certainly, we can never do so by blindly embracing government programs that crowd out private initiatives or by impugning the motives of those who raise legitimate questions about those government programs. We cannot restore civil society if we have no confidence in ourselves and believe that government has a monopoly on compassion. We’ll never get there if we tax away large portions of people’s earnings and then, like children who never learned their arithmetic, complain that people can’t afford to meet certain of their needs.

We can advance civil society only when people get serious about replacing government programs with private initiative, when discussion gets beyond such infantile reasoning as, “If you want to cut government subsidies for Meals on Wheels, you must be in favor of starving the elderly.” 

Civil society blossoms when we understand that “hiring” the expensive middleman of government is not the best way to “do good.” That often breaks the connection between people in need and caring people who want to help. We make progress when the “government is the answer” cure is recognized for what it is: false charity, a cop-out, a simplistic non-answer that doesn’t get the job done well, even though it allows advocates to believe they’ve done the right thing.

The kind of leadership we at the Mackinac Center for Public Policy hope to see from Lansing in 2015 and beyond is defined by adherence to the principle enunciated by Thomas Jefferson in his first inaugural address:

. . . a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government . . .

The Mackinac Center for Public Policy recognizes that not all budget cuts are created equal. Some represent the proverbial “low-hanging fruit” — easy to reach, if not painless.  Other budget cuts would surely entail at least short-term pain.  We encourage people to consider the potential for long-term gain — from all the cuts recommended herein, whether they be “low-hanging fruit” or, to mix metaphors, the “sacred cows” of the Lansing establishment.

We believe that there is perhaps “no better manifestation of the political society approach to Michigan government than the state budget.” That is why we recommend shaving it down dramatically and why many of our policy recommendations are bold and controversial.

On three occasions Mackinac Center experts have produced formal budget studies and made billions of recommendations. There have been other efforts including one made just in October. I put together a list of 35 ideas — not all of them my own — for trimming $2 billion plus from the state budget.

This list was inspired in part by the road funding debate that has been going on in Lansing. The governor has for two years pushed for at least $1.2 billion in additional taxes. Consider just 10 of our ideas:

  1. Adopt the package of reforms passed by the House in May: $462 million.

This series of reforms was considered last spring by the House and would dedicate some money currently raised at the pump to roads. It did raise some fees but those may have been a function of offsetting damage to roads by users.

  1. Eliminate statutory revenue sharing: $419.2 million.

This money could be cut as official revenue sharing and returned immediately to the communities from which it was taken but earmarked for more specific and pressing needs.

  1. Eliminate the Michigan Economic Development Corp.: $300 million. Mackinac Center experts first recommended cutting statutory revenue sharing in 2003.

The MEDC is Michigan’s corporate welfare department. It does little to create net new jobs and evidence shows such departments may actually contribute to slower economic growth rates. The $300 million in savings we estimated is now in my opinion a conservative figure.

These first three items alone total nearly $1.2 billion worth of reform ideas, nearly what Governor Snyder has been asking for to repair roads. We recognize that repeal of each of these ideas is relatively controversial and hard to achieve. That’s why we have dozens more ideas.

  1. End the state subsidy for the University of Michigan Ann Arbor: $279.2 million.

We first recommended eliminating the subsidy for the University of Michigan-Ann Arbor in 2004. The idea was picked up by the state budget office in 2010 but nothing came of it. It is not the only UM campus that could see its subsidy cut.

  1. Repeal Prevailing Wage law: $250 million.

Mandating higher than market wages on government construction projects is an archaic and expensive practice and one that unnecessarily increases the cost of government construction projects. Our 2007 estimate of possible savings, based on 2002 data, is a deeply conservative one.

A more recent study, by the Anderson Economic Group of Lansing, suggests that repealing Prevailing Wage would save public schools and universities alone some $224 million a year.

  1. Adopt “presumptive parole” for prisoners who have served their minimum sentences. $80 million.

Lansing-based nonprofit Citizens Alliance on Prisons & Public Spending has long argued that the state spends too much on housing men and women who have met requirements for release. Parole boards may have too much discretion in rejecting parole candidates.

Prison reform ideas have been percolating in this state for years. Indeed, in March 2011 several nonprofit groups and individuals attended a symposium in Lansing to talk about shaving Michigan’s [then] $2 billion prison budget by a whopping $500 million.

  1. End rail operations and infrastructure (Amtrak subsidies): $40.7 million.

This line item purchases Amtrak services for three routes, the Blue Water, Pere Marquette and Wolverine lines. The money for subsidizing the Amtrak lines comes from the “Comprehensive Transportation Fund” and could be redirected in a limited fashion. My colleague, Michael Farren, has estimated that the state subsidized Amtrak operations to the tune of $98.11 per roundtrip passenger in 2014.

The total fiscal year 2015 appropriation for rail operations and infrastructure is actually $57.0 million. With the help of the state’s House Fiscal Agency, the Center teased out subsidies to Amtrak operations for this entry, but there is no reason the Legislature should not explore trying to capture whatever remains of CTF dollars for a higher valued, transportation-specific use.

  1. End certain one-time appropriations: $10.1 million.

The 2015 budget includes one-time appropriations for corporate and industry welfare such as the “Food and agriculture industry growth initiative” (in addition to the growth initiative line item above) for $2 million; the “Muskegon farmers market” for $200,000; and the “Ottawa County agriculture incubator” for $500,000. “Regional Prosperity Grants” garners an additional $1 million.

The 2015 budget also includes one-time appropriations for the “Senior Olympics” for $100,000. We found the subsidy for the Senior Olympics on page 19 of the state budget, under the heading titled “Michigan Department of You Can’t Be Serious!”

There are other “one-time” appropriations that deserve the readers’ attention, too, such as with the Michigan International Speedway, mentioned further below and still others we have excluded from this letter. 

  1. End multicultural integration services: $1.9 million.

This line item specifically targets subsidies to Michigan’s Arab-Chaldean Council and Arab Community Center and Jewish Federation for “social services programs in Southeastern Michigan.” 

Targeting specific favors for particular ethnic, religious or other groups over others is unfair. Why stop with these groups? Why not subsidies for Orthodox Greeks, Maronite and Opus Dei Catholics, Michigan Ghostbusters, Detroit Drunken Historical Society, Michigan Protectors or witches covens for that matter?

  1. End Morris Hood Jr. educator program, $148,600.

This line item attempts to increase the number of minority students that enroll in and complete K-12 teacher programs in education. The program specifically targets African Americans, Native Americans and Latinos.

It is worth noting here that the program appears to be totally ineffectual. According to the Center for Educational Performance and Information, the percentage of minority teachers in Michigan dropped from 10.2 percent to 8.9 percent of all teachers between 2007 and 2013. This occurred while the percentage of minority students increased from 28.8 percent to 31.7 percent during the same timeframe.

As an aside, state lawmakers and/or the recipients of their appropriations should not immortalize active or retired colleagues and benefactors at taxpayer expense.

That goes for Morris Hood Jr., Glen Steil Sr., Dominic Jacobetti and perhaps others.

Some of these items may seem like trivial recommendations. After all, in a $52 billion budget why should we concern ourselves with puny expenditures like $50,000 for livestock indemnification or the Morris Hood educator program?

My response is that if it is just a little bit of money its supporters should have no problem raising the money privately. Moreover, confiscating wealth for a failed program, or one that subsidizes one industry at the expense of others and individual taxpayers is just uncivilized. At the end of the day state budgets are about people. When government gets big people practically by necessity get smaller. A civil society budget works to reverse that trend.

At the Mackinac Center for Public Policy we believe it is long past time to offer up a personal income tax cut. Recall that in 2007 our personal income taxes were raised by 11.5 percent. We were promised then that this tax hike would be rolled back starting in 2011. After a delay the personal income tax rate was cut 0.1 percentage points and the tax cut killed outright. At a minimum we should restore that rollback and preferably take it down further.

We estimate that a $1 billion personal income tax cut could get the rate down to 3.75 percent, from 4.25 percent. This would be a good start, but much more could be done if the new Legislature would only try.

Restoring civil society requires reducing the role of coercive institutions like government and increasing the role of formal and informal voluntary associations in improving peoples’ lives and solving problems. If a state function is outside the proper role of government it should be cut along with the taxes used to support it.

Thank you for your time and attention. I will be happy to field and questions you may have.