By Frank Weir
Legal News
Michigan’s new state budget director John Nixon brought Gov. Snyder’s gospel of economic rejuvenation to Jackson recently.
Nixon spoke at a meeting of the Jackson Chamber of Commerce’s Economic Club.
Nixon began the post on January 1 after being hired away from Utah.
He entitled his remarks, “Right-Setting Michigan—The State Is Now Set for Michigan’s Recovery,” focusing on key economic factors, their impact on the state’s revenues and expenditures, and how the budget just passed helps to begin the road to “fixing Michigan.”
The presentation began with the obvious: Michigan’s economy has bottomed out and it’s recovering “but at a slower pace than the national average.”
“Our recovery is going to be slower and longer than any other recovery in the past,” Nixon said. “Most other states experienced a significant recovery in 2002. In Utah, we had more revenue at that time than we knew what to do with. But Michigan never came out of 2002. In one sense, you didn’t have as far to fall as those states that experienced a bubble in 2002 that popped in 2008.”
Nixon noted that due to Michigan’s ongoing high unemployment rate coupled with a continuing drop in personal income, has meant that “less revenue is coming into the state to fund services.”
“It has been a very difficult economic environment here over the last 10 years. There has been no revenue growth in the last decade while expenditures have increased. The Medicaid caseload has increased by 84 percent since 2000 and food assistance expenditures are four times our 2004 numbers.”
In fact, one out of every five people in Michigan now receives food assistance, he said. And corrections spending has grown from 5 percent of the budget to 24 percent from 1982 to this year.
“In Michigan, we spend more on corrections than on higher education. That’s a real problem. In 1982, corrections represented 5 percent of the budget to almost 25 percent today while Medicaid takes up another 25 percent. That doesn’t leave us with a lot of flexibility.”
But what keeps Nixon “awake at night is that we have $58.4 billion in unfunded state and local government pensions including education and post retirement health care liabilities.”
“We have 56,000 retirees that the state is providing health costs for and we have 44,000 state employees. This is a significant funding problem. We aren’t saying we are going to alter anyone’s healthcare coverage for the folks that are there now. But this is something that we need to address for the long term going forward. It’s a benefit we just can’t afford anymore.”
He went on to say that benefit programs were “given out when they were inexpensive but now we have to start paying the bill.
“The legislature will be debating this and it’s very important. Both sides of the aisle know its a problem and must be dealt with.”
How does this all affect the state’s budget?
Nixon referred to Michigan’s “perpetual budget problem,” the amount by which expenditures exceed revenues, projected to be $1.4 billion for fiscal year 2012.
Snyder’s “strategy to fix Michigan” includes three key principles:
––Structural balance;
––Simple, fair and efficient tax reform that is predictable and stable; and
––Accountability and transparency.
Nixon knew very well what he was walking into when he joined Snyder’s team in January, he said.
“To have a $1.4 billion budget gap with expenditures greater than revenues, you can’t run a business like that for long-term sustainability. I knew I was coming into this. People I spoke with told me this was not a new problem, that it has existed for the last 10 years but that no one has wanted to address it permanently. One time fixes were used but today we are dealing with decisions that are not panning out the way they were projected to.
“Gov. Snyder told me, ‘Let’s fix this once and for all.’ That brings us to structural balance.”
Nixon explained that if a potential home owner obtains a mortgage, he or she doesn’t base their ability to pay a monthly mortgage on a savings account but on monthly income. “If you don’t, once those savings are gone, you lose the house. That’s what has happened when Michigan has used one-time solutions to balance the budget.”
So the approaches to achieving structural balance in the budget include:
––Ensure annual revenues support annual expenditures;
––Address long-term liabilities;
––Eliminate one-time solutions;
––Bring all expenditures into the budget process; and
––Right-size government programs.
“Only a few states are even talking about other post employment benefits (OPEBS). As I said earlier, we have to address long-term liabilities in this area. And even though we have grown over the last 10 years, we are dead last in revenue growth, zero. So on the tax side, we need a simple, fair, efficient, predictable and stable tax reform.
“In terms of business taxes, we must create a stable and predictable environment so businesses can operate, expand, and relocate here. For individual taxes, we must reform our plan so those benefitting from state services are contributing to the costs.”
He noted that, “There has been a lot of discussion about taxing pensions. Michigan is growing in its retiree population and by 2030 we will have many more retired. People will be moving off the tax rolls and for long term structure, that’s difficult. If we don’t tax pensions now, it will happen down the road when the stakes are higher.”
He added that the burgeoning retiree population “makes it harder on college grads and those staying in the state. We are saying that we are in a new environment and we need to look at linking up our tax structure with the new Michigan to provide a solid foundation going forward.”
In a question posed after his formal presentation, Nixon said that most states currently tax pensions.
“Only two or three states don’t tax pensions. We are not after folks with no money. We are just saying that we have had inconsistent taxation policies. The state is in the top 10 percent in the way it treats senior income. There are safeguards built in and we are treating senior income more favorably than a lot of states do.”
“But we want to get people to start thinking long term about pension costs. We’ve got to understand what the liability is and agree that its a problem. None of the bills we’ve proposed will do anything today. They are designed to address the long term.”
Nixon added that unfunded pension and healthcare benefits are receiving a “lot of national attention. The Pew Center has estimated that nationally, we have some $2 trillion in unfunded pension and healthcare costs.”
In response to a question concerning cuts in higher education, Nixon stated that “education is a priority. We all had to pay a price here and the higher education community knew it was coming. We wanted to protect community colleges since they’ve lost a lot and can’t increase their revenue easily.
“Our main goal here is to get us out of crisis management. Then we can think about what we want out of our higher education system and start talking about what will it take on the funding side to get us there. Too often we just say how much money do we have and how shall we allocate it.
“The goal here is to put the budget in the back seat and then look at policy and what we want and how to get there. We all know that long term economic growth requires a robust K-12 system and a robust higher education system. We want to build on the great platform that we have here.”
Nixon concluded by noting that his department is developing “scorecards” to show taxpayers that their money is being spent “wisely, efficiently, and effectively.”
“We are committed to accountability and transparency,” he said.
He said that with the passage of the budget on May 26, it was the “first time in 30 years that a budget passed that early. We’ve got the budget in balance. We aren’t done but we aren’t in crisis management anymore.”
He said that national rating agencies are impressed with Michigan’s budget efforts thus far and he hopes to see the state’s credit rating upgraded.
“Most states are rated Double A. Michigan is Double A Minus, or 2 in different rating systems. One agency analyst told me in New York last week that our reliance on one-time gimmicks is the reason we aren’t Double A. But that same analyst told his superiors that this is a new Michigan; that our budget is a phenomenal achievement for us and that this is not where Michigan has been. He noted that we are operating like a top-tier state but I know it will take time for us to get our rating back.”
Nixon reminded the audience that an improvement in the state’s credit rating means a savings of “millions of dollars in interest costs over 30 years.”
“And you also make people realize that our budget is no longer built on a house of cards. A long term stable structure benefits us going forward.”
“In investment terms, Michigan’s stock is a strong buy right now. We have a lot to offer here and that’s what brought me here. Gov. Snyder is actually doing what he said he would do. He has set off on a mission and he really believes what we are doing is going to bring long term sustainability to our state and help everyone at the local level.”
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