Menu of Reforms Set for Lansing Action

The circumstances were dire: Michigan was facing a government shutdown in the wee hours of October 1, 2007.

So at the last moment, with the state facing disaster and after much wailing and gnashing of teeth on all sides, the Legislature adopted a balanced budget that temporarily resolved the state’s budget crisis for a couple fiscal years. Some taxes were raised, some modest spending cuts were made and a few minor cosmetic changes were imposed on public employee health care benefits.

But if you think our real problems were solved, think again.

For despite all the thrashing and moaning, nothing much was done to resolve the underlying structural budget deficit. We call it “structural,” because the whole process is virtually guaranteed to turn out in the red, since the deficit is baked into the state’s current level of spending and tax income. And every year, it gets a little worse.

The respected and non-partisan Citizens Research Council estimates this structural deficit in the state’s General Fund will grow to $9.6 billion by Fiscal Year 2017 – now just eight years away.
Compare that to this year’s entire General Fund total of about $10 billion!

And bear in mind that the reality will be even worse. None of this takes into account the effects of the Wall Street meltdown — or the revenue shortfalls sure to follow the coming national recession.
Plainly, it’s high time we put our financial house in order.

But it won’t be easy. The first thing we need to do is recognize that a deficit problem of this size isn’t going to be cured overnight. It’s going to take disciplined and sustained application of a long-term program to restore Michigan’s financial health over the next decade.

To think merely in terms of balancing the budget for the next year or two – the way Lansing has operated for generations – simply won’t do any longer. We’re going to have to adopt a program for the coming decade and have the strength to stick to it through ups and downs, thick and thin, Republican and Democratic control.

So what kind of program should we adopt?

With the deepening recession, it’s obvious that no one can make a case for a tax increase, either
economically or politically.

So we’re going to have to look at making spending cuts. And the best place to start is the Department of Corrections, and teacher and state employee health care and retirement benefits.

Turning first to corrections, the undisputed facts are these:

1) Michigan’s prison population is larger than average for the Great Lakes states. 2) We keep prisoners in the slam longer than do our neighboring states. 3) We spend more money per inmate than other Great Lakes states do. 4) Our crime rate is just about the same as that in our neighboring states. The bottom line: We’re spending a lot on putting criminals in jail but we don’t have much to show for it. We’re not getting much for our money.
Time to change that: Let’s first set an overall financial objective of cutting spending on prisons to the average of what our neighbors do. To do that, we’re going to have to attack the big “cost drivers” in our prison system. Here’s how to start:

1) Change our sentencing policies to reduce the number of prisoners and their average length of stay. 2) Change prison operations to reduce costs, which should include privatizing some parts of the system (food service, for example) and might involve responsibly privatizing some prisons altogether.

With respect to teacher retirement costs, it’s become clear in recent years that pensions are eating up much of the funding increases for schools. Over the past five years, for example, 42 percent of increases in state appropriations for schools have gone to pay for increased costs of school retirees and beneficiaries.

To get savings of any size over the next decade, we’re going to have to tackle the two biggest cost areas. And there is no great mystery about what we need to do:

1) Change the eligibility rules and benefit programs for newly hired teachers, then 2) Convert retirement plan s from their present expansive, old-style defined-benefit model to a defined-contribution system like 401(k) plans in the private sector.

Granted, this latter change won’t be an easy sell — especially now. The recent collapse of the stock market has converted most 401(k)s into 201(k)s, and probably the last thing anyone wants to hear is that their pension will depend on Wall Street.

Turning to state employee benefits — Michigan workers now get a health care package that costs more per employee than the national average. And Michigan government employees pay a smaller share of their health insurance premiums than the national average for both private and public sector employees.

So our financial objective should be to reduce this generous benefit package and increase insurance co-pays to something close to the national average.

According to a study recently completed by Public Sector Consultants for Detroit Renaissance, just these steps together would reduce state spending by around $800 million per year – just about the size of our present annual structural deficit.

There are likely many other areas where big savings can be achieved, if we look carefully at the structure, cost and workings of state government. Let me be clear: I am not proposing a detailed program to balance our budget for the next fiscal year or two.

Instead, I’m proposing a long-term general menu for fiscal responsibility, with the power to determine the individual recipes left up to the legislature and the executive branch.

Yet there is something important that can be done right now: The legislature and the governor should publicly announce and speedily agree on a long-term plan to set our financial house in order and cure our structural deficit.

To show they are serious about this, all sides should pledge to reduce annual state spending by no less than $1 billion per year.

And – crucially important – together they should commit to making a down payment on this program during the “Lame Duck” session of the legislature that starts after the November election.

The down payment doesn’t have to be enormous; $50 million would be a good start in getting to $1 billion. But it would be symbolically important. We need to demonstrate that our state government and political parties are prepared to chuck political orthodoxy and work together to get our financial house in order.

Starting right now. Otherwise, nobody — not Wall Street, not the bond rating firms, not anybody — will have any confidence in our ability to manage our own financial affairs. And Michigan will careen from budget crisis to budget crisis, while we fall farther behind in doing what we need to lay the foundation for our future prosperity.

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Editor’s Note: Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and econ omics, and a former chairman of the Michigan chapter of the Nature Conservancy. He is also the founder and president of The Center for Michigan, a centrist think-and-do tank which publishes the Michigan Scorecard. The opinions expressed here are Power’s own and do not represent the official views of The Center. He welcomes your comments at ppower@thecenterformichigan.net.