Regional leaders react to Snyders budget reinvention

February 18, 2011
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State Rep. Roy Schmidt, D-Grand Rapids, said Gov. Rick Snyder has taken a very difficult situation and developed a very clinical proposal to remedy it. Schmidt said the governor’s businesslike approach to the state’s fiscal ills is interesting, but the former city commissioner added the state isn’t a business.

“He has proposed cuts to revenue sharing by more than $200 million. That is going to have a devastating impact on cities across Michigan, especially Grand Rapids, at a time when our cities and counties are already strapped for cash,” said Schmidt.

“Cutting revenue sharing translates to even fewer police officers and firefighters protecting our families. Grand Rapids is at minimal staffing levels now. Michigan has already lost thousands of police officers and firefighters to state funding cuts in the last decade, and we can’t afford to lose any more.”

Schmidt said the focus should be on maintaining revenue sharing, investing to improve the state’s infrastructure, and properly funding all levels of education to develop a “first-class work force.”

Snyder announced he plans to eliminate statutory revenue-sharing payments to cities, townships and villages in the coming fiscal year and replace those reimbursements with a new incentive-based revenue-sharing program. The governor also said he plans to raise constitutional revenue-sharing payments to cities, townships and villages by 4 percent.

Grand Rapids City Manager Greg Sundstrom said eliminating one and hiking the other will result in less revenue for the operating budget and possibly more employee layoffs.

“From what we understand, between the cut to statutory state revenue sharing and the proposed increase in constitutional state revenue sharing, the city would suffer a $6.15 million cut. This is equivalent to 51 police officers, 53 firefighters, or 61 non-public safety employees,” said Sundstrom in an e-mail to the Business Journal.

“I suspect that there may be other reductions in the state budget that would additionally have a negative impact on the city. We will have to wait to understand the governor’s entire budget,” he added.

The governor’s budget also reduces statutory revenue sharing to counties. Kent County Administrator and Controller Daryl Delabbio said the cut will likely result in a loss of up to $4.5 million for next year’s general operating budget and a reduction of about $1 million this year because the county’s fiscal year is the calendar year, and the 2012 state budget starts Oct. 1. “I’m not exactly sure how we’re going to do it,” he said of making-up for this year’s budget loss. Revenue sharing to the county has been worth $12 million annually, prior to Snyder’s reduction.

In addition to the state cuts, Sundstrom also pointed out that he has seen potentially significant reductions for the city in President Barack Obama’s 2012 budget, like lowering federal funding for Community Development Block Grants that financially support local projects. The city has received about $6.2 million in CDBG funds for the past several years.

“Although we have prepared several scenarios anticipating state reductions, there are far deeper cuts than we anticipated. At this time, the city cannot offer a response because we do not yet understand the entire budget proposal,” said Sundstrom.

“I can assure you the city cannot withstand these reductions without significant impacts on our ability to provide important outcomes to the community. The city’s options must include further employee layoffs and service reductions.”

Michigan Democratic Party Chair Mark Brewer said Snyder’s proposed budget doesn’t include shared sacrifice and leaves plenty of people behind, breaking his campaign promises. The budget represents a huge tax shift from big corporations and wealthy CEOs to students, senior citizens, the middle-class and low-wage workers, while at the same time cutting education and other vital government services like public safety, Brewer said.

Business reactions

Grand Rapids Economic Development Director Kara Wood said the elimination of brownfield and MEGA tax credits would not mean the end of the city’s brownfield redevelopment efforts. “We will continue to utilize the TIF to the full extent until a new incentive is developed. Our hope is that there will be a replacement incentive sooner rather than later,” she said.

“Regional and economic gardening and economic development is where we are focusing our efforts with our partners, and we are positive that these efforts will be successful. The city is taking a close and careful look at the governor’s recommendations and how they impact existing companies in Grand Rapids and new investments we are working to attract,” said Wood.

As for the governor’s pledge to eliminate tax credits, that promise just might include a credit program the Michigan Economic Development Corp. unveiled Feb. 14 — only three days before Snyder delivered his budget. The Small Business Investment Tax Credit offers individuals a 25 percent credit if they finance start-up and early-stage technology firms in the state.

“Regarding the Small Business Investment Tax Credit, it’s important to remember that the SBITC provides tax credits to individuals for their personal income tax while the business tax outlined today by Governor Snyder applies to a business’ MBT liability,” said MEDC spokesman Michael Shore.

“This said, we are waiting to see how everything plays out. Right now, we’re processing applications for the SBITC and will move forward with the program until directed to do otherwise.”

The chair of the Michigan Chamber of Commerce board of directors said he believes Snyder’s budget recommendations “make sense for the state.”

“There has been a lot of careful thought going into this,” said Jeffrey S. Ammon, an attorney with Miller Johnson in Grand Rapids and Chamber chair for 2011.

Ammon said the immediate reaction to Snyder’s proposals will be criticisms of “bits and pieces” of it, but that criticism “misses the point. The point here being — and the governor has made it — that when you talk about a state budget, there is an element of shared sacrifice.”

“Are we doing what makes sense for the state to fix its fundamental budget problem, which is lack of job creation, imbalance between state spending, revenues, and the private economy? If you take a step back, you see that’s what he’s trying to solve here.”

“From a public policy perspective, it makes great sense” to get rid of the Michigan Business Tax and “put in a simple, understandable tax, a corporate income tax without a whole bunch of credits and incentives,” said Ammon.“The key is the part of the plan that would get Michigan back on the road to jobs creation, moving the state forward.”

He added that many of the state’s other critical issues, such as education, poverty and protection of natural resources, can’t be fixed without a strong economy.

“We have to recognize we’re all going to be nicked, maybe somewhere, somehow. I don’t think there is any sector of the economy that the governor is suggesting shouldn’t share in the sacrifice,” said Ammon.

Andy Johnston, director of legislative affairs at the Grand Rapids Area Chamber of Commerce, said he believes the business community “is excited to see a budget that reflects where Michigan really is at. We can’t afford the status quo any longer; things need to change.”

Johnston said the best way to fix the state’s financial situation “is to get people back to work, and I think the governor’s budget and tax proposals reflect that. I think this is an honest budget, in that it addresses the dire fiscal situation that Michigan is in, and the fact that we put off for the past decade some of these tough cuts.”

He said that the governor’s proposals would end existing incentives to lure business here, but is “approaching incentives in a different way, which is going to be on a cash basis.”

Johnson noted that other states competing with Michigan to attract business have effectively used cash incentives. “Really, the governor’s taking an approach of trying to eliminate special interest carve-outs across the board, and part of that are the business incentives. He wants to create a fair and level playing field for businesses to succeed.”

Johnson equates ending all incentives to lure businesses to Michigan as “unilateral disarmament,” which he said is “not a sound policy either. Now he’s going to be incorporating these incentives into the appropriations, using cash for incentives, to help close deals with companies we want to attract here.”

“I think the next one hundred days are a going to be a flurry of activity,” said Johnson.

Randy Thelen, president of the Lakeshore Advantage economic development agency in Ottawa County, predicts “a fair amount of drama” in the short term, “but I think long term, this is going to work out just fine.”

“From an economic incentive standpoint, I think, frankly, it was probably time for a change. We’ve had the same incentive mix for about 20 years, which would be like the equivalent of a retailer having the same sales program for 20 years. At some point you have to shake it up, and I think that’s what we’re going to see.”

“In the short term, I suspect there will be a fair amount of drama. We’ve got projects that we have to figure out how to bring to close, and with the incentives landscape changing, we’ve got to quickly sort that out. But long term, if all this goes through, I think seeing a new business tax that by all accounts looks to be a lower, more competitive business tax is going to be good for economic development. And I would imagine, again in the long term, we’ll see a new incentive toolbox that will be fresher, more focused and more effective.

Education funding

The proposed state budget includes a one-time slash of nearly 22 percent to the higher education budget for Michigan’s 15 public universities. The cuts would be mitigated to 15 percent by an $83 million fund allocated to universities that have kept tuition hikes under 7 percent.

Grand Valley State University Vice President of University Relations Matt McLogan said it’s too early in the process to give a full assessment.

“The governor’s ability to pay for the tuition restraint program — indeed, the entire higher education appropriation — is contingent upon the House and Senate agreeing to tax pensions and eliminate tax exemptions,” McLogan told the Business Journal while on his way back from Lansing. “That is very much a work in progress.”

State appropriations account for about 20 percent of a general fund budget that is nearly $300 million, McLogan said.

“We knew this day was coming,” he added. “The federal stimulus money runs out later this year, and it has been the device by how large higher-ed cuts have been avoided the last two years. We’re certainly not surprised. We have certainly planned for as many contingencies as we could conceive.”

McLogan said GVSU’s highest priority is to maintain courses that students need to be able to graduate on time.

At Ferris State University in Big Rapids, absorbing the entire cut would chew into its state appropriation by about $10.6 million, the largest funding decrease in its history. “By any standards this is a historic shift in how the state funds higher education,” said Ferris President David Eisler. “Michigan needs well-educated, productive workers who will reverse the state’s economic situation.  We will work to temper the negative impact these cuts will have on producing the graduates our state needs.”

The governor also proposed an $83 million fund that would be allocated among universities that keep tuition increases under 7 percent. Anticipating that Ferris would qualify, that would mean a 15 percent slash, or $7.3 million.

The impact of other details of the governor’s plan, such as rolling funding for higher education into what would effectively become the K-20 budget, remain to be seen.

“Over the past decade in Michigan, our state government has steadily stepped away from its financial responsibility to public universities,” said Eisler. “What was once a state commitment to higher education has now become the financial responsibility of our students and their families. This is a disappointing turn of events that is not likely to be reversed.”

The proposed cuts for school districts would be a huge blow for Grand Rapids Public Schools, spokesman John Helmholdt said. At $470 per student, the cut would mean a loss of $8 million to GRPS, he said. Combined with an already-anticipated shortfall of $15 million, the district would be looking at cutting $20 million to $23 million from a total budget of $208 million.

Helmholdt said that district leaders plan to brief school board members, but expect to meet with area lawmakers to find areas of compromise before the budget is finalized.

“GRPS has defined what it means to right size a school district,” he said. “We have closed buildings, we have closed programs, we have consolidated services, we have laid off staff, we have secured concessions from our employee groups, we have privatized.

“We have done pretty much everything to weather through the economic storm this district has faced for the last decade. Then at the end of that decade to be hit with the worst of the worst scenario budget projection is staggering. There really isn’t a whole lot more that we can do that would not have a direct impact on the classroom.”

Those impacts could include staff cuts, higher class sizes, cuts to or elimination of educational programs and extra-curricular activities, he said.

Grand Rapids Community College spokesman Raul Alvarez said college leaders are pleased with Snyder’s proposal to continue state funding for Michigan’s 28 community colleges at current levels.

“We’re just happy that he recognizes the important role that community colleges like GRCC play,” Alvarez said. “As we talk to business and people in the community, it goes back to meeting the needs for higher education and work force readiness.”

Snyder’s budget proposal includes $670 million for work force development and training.

The proposal leaves intact a Medicaid budget of $11.2 billion, but includes a new 1 percent insurance “assessment” on paid claims for health and dental insurance.

The Council of Michigan Foundations was still trying to assess the impact of the proposed elimination of state tax credits for certain donations, Director of Communications Melissa Freye said.

But the Michigan Community Foundation Tax Credit has been one factor in fueling the growth of those foundations since 1988. Today the state has 64 community foundations covering all 83 counties. Collectively, community foundation assets had grown from $300 million in 1989 to more than $2.5 billion in 2008.

The loss of tax credits also would impact such organizations as public television, public radio, universities and libraries.

Representatives of the Michigan Nonprofit Association and the Grand Rapids Community Foundation were unavailable for comment on Thursday.

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