State Budget Will Only Get Worse

March 4, 2005
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GRAND RAPIDS — Shortfalls on Michigan's balance sheet are not without precedent. As the economy slides and unemployment rises, tax revenues veer downward. With less money to spend, the state purchases fewer services for its citizenry and distributes less revenue among local governments.

As Tom Clay, Citizens Research Council of Michigan director of state government affairs, explained, this was also the case in the 1980s and early 1990s. But the economy bounced back, tax revenue flowed in, shortfalls became surpluses and everyone was happy.

"There is more involved here today than just the economy," Clay said. "There is a structure in the state government where spending is growing faster than revenues. There is not only a cyclical deficit but a structural deficit as well."

In fact, Clay said, in the 1980s unemployment was far worse, interest rates were far higher, and the state was deeper in the red.

"But today, the possibility of growing out of a deficit as the economy increases is nil."

Clay was part of a panel hosted by WGVU-TV at Grand Valley State University last week to discuss Michigan's budget challenges for a special program, "Michigan's Future: State Budget at the Crossroads," which aired over the weekend.

Joining Clay was Paul Hillegonds, former Michigan speaker of the House and president of Detroit Renaissance, and Kalamazoo County Administrator Don Gilmer, former state budget director and chair of the House Appropriations Committee.

"That life just goes back to normal will not be the case," Clay said. "The budget will become increasingly difficult to balance."

Clay points to two programs as examples of the budget's systemic problems: the Department of Corrections and Medicaid.

Michigan's laws are tougher on crime than neighboring states, Clay said, and corrections accounts for half of state employees being paid through the general fund. Additionally, costs are rising by 7 percent each year. If the level of incarceration here matched that of other states, he said, hundreds of millions of dollars could be saved each year.

Meanwhile, the national issue of Medicaid and the growing costs of health care for state employees affect other services.

As Clay pointed out, four areas eat up five-sixths of the state's general fund: higher education, corrections, and the departments of Family Assistance and Health.

These programs affect the smallest portion of the citizenry, said Clay, as only one-seventh of the population is on Medicare, only a small percentage of families have a child in college at any given time, and an even smaller percentage has a family member in jail or prison.

According to Gilmer, however, cutting most of these programs would only worsen the problem. There is a $26 return for every dollar spent on higher education; a $10 return per dollar for early child development; and cuts in Medicaid could shift up to a billion dollars in costs to the private sector per year.

If cuts don't occur in these areas, however, they will be seen in areas more visible to the public like police, roads and state parks. Most of all, losses will be felt in revenue sharing for local units of government.

"There does not appear to be any sign that the state will return revenue sharing to the counties and other local governments," Gilmer said. "There are certain services like fire and police that these bodies are obligated to supply. When these get cut, people will feel it."

The three agreed that the only real fix is a systemic look at revenue streams and a price-of-government budget model.

"There are fewer options," Hillegonds said. "The state keeps using one-time fixes and there are none left. We need to talk about revenue, we need to talk about taxes.

"If you want to get elected, you basically have to sign a paper that you'll never raise taxes. Never is a very long time."

Hillegonds used the city of Detroit as an example. There the tax burden is already seven times that of surrounding suburbs, but without new revenue, the city will be in receivership within a few years.

"(During the surplus years) we had a $1.3 billion rainy day fund. It made sense to cut taxes," he said. "Everyone was fooled by the boom. No one could have predicted these problems happening so fast.

"There were long-term tax cuts with no trigger to roll them back for any but the Single Business Tax. That was a mistake."

Hillegonds said that if citizens expect services, they have to be willing to pay for them.

"Legislature and citizens want quality government, but they don't necessarily want to pay for it."

The panel believed that rather than replace the SBT, a manageable replacement should be established. A second issue that should be examined is the growing presence of the service sector.

The goods-producing companies that have fled the state to other parts of the country and world will not likely return, Clay said. Not only are service providers becoming a larger part of the state's economy, but they can be counted on not to relocate in search of cheaper labor, better collective bargaining agreements or less taxes.     

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