The MC: The Mackinac Center Blog

Michigan’s closed state employee pension system got some good news this year: unfunded liabilities did not increase. But taxpayers are still on the hook for the $6.2 billion promised retirees that the state has failed to save enough for.

A new valuation shows the system’s liabilities grew roughly $500 million since the last report — but so did the value of assets set aside to cover those liabilities. The state carries $16.2 billion in pension liabilities, and $10.0 billion of investments. Some of the system’s previous assumptions have been updated to reflect actual experience, which added $400 million to the projected liabilities.

Retirement system managers adjust for variations in the market value of pension fund investments using a five-year average. This “smoothing” keeps contribution rates from large year-to-year fluctuations. Recent investment gains exceeded the 8 percent annual return the system assumes, and so the (unsmoothed) market value of the pension fund’s current assets exceed their (smoothed) actuarial values by roughly $1 billion.

The not-bad news is a change from recent years. Unfunded liabilities increased from $1.8 billion in 2007 to $6.2 billion in 2012. They have remained at $6.2 billion since then.

Thankfully, nearly 20 years ago the pension system was closed to state employees hired on or after March 31, 1997. These employees are granted generous contributions to individual retirement savings plans that generate no long-term taxpayer liabilities. This saved taxpayers from even larger unfunded liabilities, but the risk will not be fully extinguished until the last pension check is sent to the last surviving pre-1997 employee, many decades in the future.

You Don’t Need $92,000 a Year to be 'Economically Stable'

ALICE report puts most past Michigan citizens below ‘survival’ budget

The United Way has released a report that says the vast majority of Michigan residents need a lot more money in order to be financially “stable.” The study has received wide media attention (sample headline: “More than 1.5 million Michigan households struggling”), but the claims paint a distorted picture.

According to the study, “1.54 million households in Michigan – fully 40 percent, and more than double the number previously thought – are struggling to support themselves.” Many of those households live at or below the federal poverty rate, but most of them are above that rate and classified by the United Way as ALICE (Asset Limited, Income Constrained, Employed). The report says, “The core of the problem is that these jobs do not pay enough to afford the basics of housing, child care, food, health care, and transportation.” It measures “a level based on the actual cost of basic household necessities in each county in Michigan.” It adds later, “ALICE households are forced to make difficult choices such as skipping preventative health care, accredited child care, healthy food or car insurance.”

The report says the “Household Survival Budget” for a Michigan family of four is $50,345 and in order to live with “stability” (“one that enables not just survival, but self-sufficiency”) in Michigan, a family of four needs $92,409.

But these figures are not composed of estimates of what families actually need to survive. Instead, they averages of what people are already spending on child care, transportation, health care, etc. The report assumes that anyone spending less than these average figures must be below the “threshold for economic survival.” Further, it does not attempt to show that citizens can’t live happily and healthily by spending less than these averages — in fact, most Michiganders did just that a short time ago.

For instance, the report says that in order to “survive” at the “bare minimum” a household with two adults, a preschooler and an infant need to spend nearly $600 per month on food and $700 monthly on transportation (among other things). But it is, in fact, possible to live a comfortably without having to spend these amounts. (My family of four lives very well and spends significantly less).

The other interesting perspective to consider about this report is that it suggests that economic stability was out of reach for the vast majority of people throughout history. Overall, Americans are getting a much better deal on food, child care, housing, transportation and health care, and devoting a much smaller portion of their income to these expenditures than they did in decades past.

Health care spending is the outlier here — it has increased exponentially over the decades. Not coincidentally, that is an area where taxpayers have paid more and more of the costs. But the value of the other four areas have increased substantially over the years.

Rising incomes and lower food prices mean the percent of personal income spent on food by Americans has fallen 60 percent since 1940, from 25 percent of family budgets to 10 percent — a steady decline for decades. Americans spent about 42 percent of their income on food in 1900.

According to the U.S. Bureau of Labor Statistics, transportation spending has declined since the 1980s (and today’s vehicles are safer, more reliable and get better gas mileage). Housing has gone from 27 percent of the average household budget in 1950 to 33 percent in the 2000s, but this is mainly because people have chosen to buy larger homes. The average house size has increased more than 1000 square feet since 1973 (with smaller families).

The cost of childcare has increased, but only from 6.3 percent of the average household budget in 1984 to 7.2 percent in 2010, according to Pew Research. But there are also more women in the workforce today, so much of extra spending may come from the extra income of employed women.

And for the nonessentials, things like refrigerators, washing machines, stoves, toasters, vacuum cleaners and televisions, they are more affordable than ever. As UM-Flint economics professor and Mackinac Center Scholar Mark Perry reports, it required almost 900 hours of labor to afford these amenities in 1959 — today, it requires less than 200 hours of work.

None of this is to say that there aren’t many people in Michigan who are struggling economically, and legislators should pursue policy options that will help them. The ALICE report doesn’t call for many specific reforms, except for increasing Michigan’s minimum wage even more. Policymakers should instead remove barriers to economic opportunities, such as overbearing licensing laws, overcriminalization, and regulatory rules (like ride-sharing). These policies have a disproportionate effect on low-income families and should be reformed.

Assistant Fiscal Policy Director Analyses Michigan's Historic Unemployment Drop

James Hohman discusses the numbers on the Frank Beckmann Show

Since 2009, the unemployment rate in Michigan has dropped faster than any other state in the country.

It has gone from 14.9 percent to 5.4 percent from June 2009 to April 2015.

Assistant Director for Fiscal Policy James Hohman put the numbers in perspective on the Frank Beckmann Show.

You can hear his interview here.

Frank Beckmann Show Highlights Mackinac Center/Michigan Chamber Poll

66 percent of respondents support redirecting $50 million from films to roads

A Mackinac Center/Michigan Chamber of Commerce poll, showing overwhelming support to redirect film subsidies to roads, was highlighted by WJR's Frank Beckmann May 21.

The poll, conducted by Mitchell Research and Communications, shows 66 percent of respondents supported the idea of using the $50 million in annual film subsidies to fix the roads.

This week Gov. Rick Snyder released a broad, ambitious plan for criminal justice reform, seeking to enhance public safety while improving effective policing and the management of the state’s corrections efforts, including the Michigan Department of Corrections. Several of his recommendations draw from Mackinac Center research, including this section of his address, which discussed overcriminalization: 

Michigan’s criminal code is one of the longest in the nation with more than 3,000 separate crimes in statute. Most of these crimes have not undergone review since their enactment. The result is a steady increase in the number of criminal laws that impact Michigan’s residents and the penalties that can result. Between 2008 and 2013, Michigan enacted an average of 45 new laws each year, and the average minimum prison sentence increased 8.5 months between 2006 and 2014. These trends cost taxpayers tens of millions of dollars per year and have resulted in nearly 1 percent of Michigan’s residents being under the supervision of the MDOC at any given time.

Discussions have already begun in the Legislature about eliminating redundant and outdated crimes. The initial recommendations include many laws that have not been enforced in decades. Under our criminal code today, accepting a challenge to a duel is punishable by up to one year in jail. Posting reproachful or contemptuous language 11 about a person who refuses a duel, on the other hand, is a six-month misdemeanor. Other Michigan crimes include singing the Star Spangled Banner with “embellishments,” and promoting walkathons that last more than 12 hours. The work to clean up Michigan’s criminal code must continue. Consideration should also be given to the penalties currently in place for a number of laws that are being routinely enforced. Low-level felonies should be reviewed to determine if they are more appropriately classified as misdemeanors and misdemeanors should be reviewed to determine if they should be civil infractions that would not result in a criminal record.

The governor also proposed sentencing and probation reforms, building on research conducted by the Council for State Government in 2014. These ideas merit careful consideration by the Legislature.

Mackinac Center Event Featured in Media

Topic of civil asset forfeiture attracts media and various ideologies

The Mackinac Center's May 20 event "Civil Asset Forfeiture: How Government Private Property from Innocent Citizens" attracted a panel and a crowd of various idiologies.

The panel included Lee McGrath, an attorney with the public interest law firm Institute for Justice, Democrat State Representative Jeff Irwin and ACLU of Michigan Attorney Dan Korobkin.

The audience included attendees that described themselves as progressives, conservatives and libertarians.

The Detroit Free Press published an article about the event as well as Michigan Public Radio.

The complete video replay of the event can be viewed here.

As Michigan continues its economic recovery that has led to more jobs, higher real estate values and more government tax revenue, one might wonder what’s driving the state’s recent economic growth. Some point to the booming auto industry, praising the bailouts and speedy bankruptcies. Yet, while some pieces of the state economy are improving more than others, it’s all of them together that makes the difference.

Michigan’s recent economic growth is substantial. From the end of the recession in 2009 to March 2015, Michigan added 407,800 jobs, a 10.6 percent gain — seventh highest among the states. Michigan continues to add jobs and will soon have fully replaced all of the jobs lost during the recession.

Auto industry jobs rebounded even more. Jobs in auto and auto-part manufacturing are up 67 percent from their recessionary trough. Yet, compared to their peak in 2000, the state has fewer than half of the auto and auto-parts manufacturing jobs than it did 15 years ago.

Michigan’s growth in auto-manufacturing employment is a reflection of national trends. From 2000 to 2009, auto and auto-part manufacturing jobs fell nationally, with Michigan losing a greater proportion of jobs than the nation as a whole. Since then, these jobs have rebounded nationally, and Michigan, having lost more jobs, had more to gain. Subsequently, the state’s auto jobs growth has outpaced the national trend since the recession ended.

Michigan’s economy is a much different state than it was in 2000. Back then, one out of 14 jobs were in auto and auto-parts manufacturing. Even with the recovery of the auto industry, it’s currently one out of 24 jobs. Motor vehicle and parts manufacturing accounted for 12.8 percent of state GDP in 2000, but just 7.6 percent in 2012, the most recent breakdown available. And while not strictly comparable due to changing industrial classifications, motor vehicles and equipment manufacturing used to account for more than 20 percent of state GDP in the 1960s.

Michigan produces other things than cars and trucks. And this is where Michigan has seen some unexpected growth. Non-auto manufacturing jobs in Michigan have fully rebounded from the recession, bucking national trends. Nationally, these jobs have stayed at their ratcheted-down levels since the recession.

According to the most recent state gross domestic product release, which unfortunately only reports detailed industry information for 2012, the largest manufacturing growth in Michigan during the recovery is in chemical products, textile products and the ambiguous “miscellaneous manufacturing.” The value of products in these three industrial categories increased by more than 60 percent from just 2009 to 2012.

Michigan’s auto jobs recovery is great news for the state. But it is much more than just auto-related industries that have come back. In many ways, the state’s economy is more economically diverse than it has been in decades.

Residents should be grateful for this rebound. But these statistics also show how hard it is for anyone to predict the future and centrally plan a state economy. Yes, the heavily subsidized auto industry has rebounded, but so have many other industries that received no taxpayer support.

Policymakers should keep this in mind when designing policies that affect businesses. Business taxes and regulations should be fair and broad, applying equally to all, rather than to just a select few. A state economy is too diverse and complicated to nudge forward by subsidizing one or a few preferred industries.

In a recent Mlive column, Tim Skubick says critics of the House Republican road funding plan think it violates accounting principles. “If you are a respectable bean-counter you are loathed to predicate any budget on revenue that may or may not materialize,” he writes.

If this criticism were valid, Michigan’s and every other state’s budget process would be impossible. Budgets are always forward-looking and rely on estimates of future revenue. As the months pass, policymakers adjust the budget to reflect actual tax income. The state revised its budget per updated revenue estimates just four months ago, for example.

Critics also misread the House plan. The legislation earmarks set dollar amounts to roads from the state’s personal income tax. These earmarks on not contingent on growth in state tax revenues.

Nevertheless, projecting such growth is hardly wild-eyed. In just the past four years, state tax revenues (and spending) have increased by $3.5 billion. Recent fiscal agency reports project continued growth.

If critics find budgeting based on future revenue projections unsettling, they should be far more concerned by a much larger threat to future state spending: the grossly underfunded school employee pension system. The state is supposed to contribute $1.9 billion this year to begin catching up on $25.8 of unfunded pension liabilities. The long term plan is to increase this amount by 3.5 percent annually until the underfunding is erased. Every penny is money that won’t be available for other spending needs and desires, so the only way to meet this future cost without impacting current budgets is through new revenue growth.

Maybe the state will get caught up someday, but the only guaranteed method to avoid racking up even larger unfunded liabilities going forward is to close the system right now to new employees. Eventually, the current liabilities would be paid off.

Management of state finances requires making projections of an uncertain future. If that exercise worries those looking for more road funding, they should be tearing their hair out over pension underfunding, which is a far greater fiscal threat than unfilled potholes.

Schools of Choice Program Causes Greater Competition

Mackinac Center research cited on WILX News

Schools of Choice research conducted by Mackinac Center Director of Education Policy Audrey Spalding is cited in a WILX report.

More than 80 percent of Michigan's school districts are accepting students into their boundaries. More than 100,000 Michigan students use Schools of Choice, which is comparable to those students attending charter schools.

Many schools have reacted positively to Schools of Choice, making conscience efforts to be more competitive and attracting higher enrollment by meeting the needs of students and parents.

Mackinac Center Event Panelist on Frank Beckmann Show

IJ's Lee McGrath talks about civil asset forfeiture

Right now in Michigan the government can take the personal property of private citizens even if the citizen has not been charged with a crime. It's called civil asset forfeiture, and it's the topic of a Mackinac Center Issues and Ideas forum.

Lee McGrath, Institute for Justice legislative counsel and managing attorney of the Minnesota office, served as a guest on the Frank Beckmann Show on WJR 760AM Tuesday morning.

McGrath says in the last nine years in Michigan $149 million in property was siezed. He says last year $24 million was taken. It involves cars, cash, homes and other property. The citizen must then go to court and litigate whether the property is guilty of being associated with an alleged crime.

The other panelists joining McGrath for the Wednesday event will be Jeff Irwin (D-Ann Arbor) and ACLU of Michigan Attorney Dan Korobkin.

The event will be live-streamed and available for viewing at the link here.