Smoke and Mirrors

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Photograph by Al Goldis

Gov. Jennifer Granholm and Michigan lawmakers tiptoed through another state budget this year, putting up numbers and calling them balanced. But they skated past long-range problems — an omission analysts fear will send state finances spinning out of control.

Staying solvent requires inoculation by restructuring government itself, declare several recent studies. The civic group Detroit Renaissance and others have all sounded alarms and proposed fixes. But this year was an election year for legislators — not ideal for reforms that might trim benefits and advantages sought after by special interests. What’s more, Granholm has exhibited minimal leadership skills since taking office in 2003. While past governors led the Legislature, Granholm seldom rolls up her sleeves to tackle reform in the state Capitol.

“There’s so much bad news I don’t know where to begin,” says Patrick Anderson, CEO of Anderson Economic Group in East Lansing. “This is the worst predicament I’ve seen in Michigan in my entire professional career. This is not something we will pull out of, as in ‘first it rains and then the sunshine comes out.’ We dug ourselves in a hole and we haven’t stopped digging. You have to stop digging to get out of a hole.”

If current spending and tax policies continue, the state’s structural deficit will grow to $9.6 billion by 2017, according to a recent study by Detroit Renaissance and Lansing-based research group Public Sector Consultants.

The report, titled “Budget Action Plan,” echoes alarms sounded in 2007 by Granholm’s Emergency Financial Advisory Panel, chaired by former governors Bill Milliken and Jim Blanchard. They urged a “fiscal plan that includes a combination of revenue increases, spending cuts, and reform of how public services are delivered.” The solutions were largely ignored. In early November, Granholm said she may have to issue an executive order by year’s end to cut the budget due to a shortfall of up to $600 million in revenue.

By most accounts, the governor and state lawmakers have mostly fiddled while burning through the state’s cash. They raised taxes continually through what is now a six-year state recession, but they didn’t do enough in other areas, critics say. “I call it the ‘muddle along’ approach,” says Dan DeGrow, a member of the 2007 financial advisory panel. “Instead of solving a problem, they just muddle along and hope that someday the economy improves.”

DeGrow, a former state senator, says he’s especially worried about Granholm and the Legislature’s lack of support for higher education, especially after the governor set a goal a few years back to double the number of students attending college. “They’ve been overly harsh on higher education,” DeGrow says. “And the effect is that higher education raises tuition at a time when we need more kids to go college and be successful. We’re making it harder. That concerns me greatly.”

The pending mismatch between state revenue streams and spending has been tracked for years by the Citizens Research Council of Michigan (CRC), a respected nonpartisan think tank in Lansing. “Storm clouds are brewing on the horizon,” says CRC director of state affairs Craig Thiel. “The budget for next year is based on a significant amount of one-time resources that won’t be available when they go to write the budget for 2010. That’s a problem.”

Thiel notes that a tax hike was approved in 2007 but says it didn’t solve long-range problems. “There was also a major tax restructuring with respect to the business tax,” he says. “The problem is that neither of those things — on their own or combined — [affected] the projected growth path of the revenue that’s coming into the state. In effect, we solved the immediate problem, a shortfall, a mismatch between revenue and spending. But when you start running those revenues out and the spending out, the lines diverge quite rapidly. Characterize it as a missed opportunity in terms of restructuring the system to get more growth out of it.”

The research council and others say the state faces a “structural deficit,” created when the cost of programs and policies grow faster than revenue, even when the economy performs well. “This gets to an issue that we’ve been tracking,” Thiel says. “The state really has an inherent mismatch between the ongoing revenues … coming in and the spending that’s built into the budget.”

Last year, lawmakers did make some changes amid highly publicized sturm und drang. They raised taxes and replaced the hated Single Business Tax with the Michigan Business Tax, itself controversial. Change didn’t come easy. Mosh-pit bargaining ran past deadline, and the state government began to shut down before a deal was cut.

“The business tax went a long way to shift the burden that was on capital investment,” Thiel says. “But it did little to bring it in line with the revenue needs of the budget.” Some argue that it’s become more volatile now — that the peaks will be higher and the valleys lower, as opposed to the old tax structure. “The argument,” Thiel says, “is that you’ve introduced an income-tax component. Obviously, if firms that aren’t doing well and aren’t showing a profit won’t be paying that portion of the tax, they’ll still be subject to the gross-receipts tax.”

The study by Detroit Renaissance offers a road map for reforms: zero in on the prison system, Medicaid, teacher retirement benefits, and state employee health benefits.

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