State Budgets

State of the State: Michigan

A renewed focus on fiscal prudence and a diminished tax burden will strengthen Michigan’s capacity to compete going forward.

Governor Rick Snyder’s State of the State address celebrated the vastly improved economic conditions in the Wolverine State. The much needed Michigan turnaround is underway. “In the last few years since 2010, we created almost 500,000 jobs, making us number one in the Great Lakes region and number six in the nation for private sector job growth,” boasted the governor. Although the state suffered stunning population losses of more than 614,000 through domestic outmigration from 2005-2014 (when many uncompetitive policies of the Granholm era were still in place), the governor noted that Michigan “has the highest net-bound inward migration of people with bachelor’s degrees of any state in the Great Lakes region.”

Michigan’s current last place rank in economic performance (based on past GDP growth, domestic migration, and job growth) is a lasting reminder of the legacy created from years of mismanagement and onerous tax burdens. But according to the American Legislative Exchange Council (ALEC) annual report Rich States, Poor States, Michigan is ranked 20th in economic outlook. This represents a big jump from 34th place in 2009 and is largely due to tax reform and the state passing right to work.

A return of fiscal sanity has brought Michigan back from a financial precipice. “For the last six years, we have gone six for six getting structural balanced budgets done, three months ahead of schedule, setting a benchmark for the nation for the best budget practices and we should be proud of that and we need to keep that up,” said the governor. Not only has the budget achieved annual balance, but “during the course of 2017 we will reach over $700 million dollars in our rainy day fund.”

Although Michigan does boast many positive free-market reforms, cronyism still spurs wasteful spending, namely tourism promotion. The governor claimed, “Thanks to Pure Michigan we are showing America just how beautiful we think our home state is.” But a recent report by the nonpartisan Mackinac Center indicates that much of the more than $200 million spent by the state on government advertising over the past 10 years is an economic waste. “For every dollar taxpayers spend on tourism promotion, they lose 98 cents and create only 2 cents of value for their state’s hotel industry,” according to this analysis by the Mackinac Center of programs in 48 states over 39 years.

A larger problem facing the state is public sector pension funds. Governor Snyder warned, “we have 334 local units that provide retiree health care and pension, that have $14 billion dollars in unfunded liabilities—a huge burden.” The unfunded liability of the state pension plans is even more daunting. According to the ALEC report Unaccountable and Unaffordable 2016, using an assumed rate of return of 2.344 percent (an estimated “risk-free” rate”), Michigan’s unfunded pension liability is nearly $157 billion. The state’s funded ratio is 5th worst in the nation at under 28 percent, or $15,817 per capita. Governor Snyder’s Executive Budget notes that the state pension plan’s assumed 8 percent annual rate of return on its pension investments is unrealistic, but recommends lowering it by just half a percentage point. A more realistic assessment of this financial threat is required.

Despite the still fragile economic conditions, the governor hinted at new taxes and debt to fund more infrastructure spending. The governor noted:

Michigan residents deserve safe, reliable, sustainable infrastructure… We need to literally invest billions of dollars of new investment over the next several decades. We need to look at all public and private sources for this, including fees, taxes, grants, bonds.

But Reason Foundation’s 22nd Annual Highway Report suggests more spending is not the answer. The state spends more money per mile of state-owned highways on capital and bridge disbursements of state-owned highways than 35 other states ($111,170 per mile vs. $84,494 equally-weighted average), and the state spends more money on maintenance per mile than 32 other states ($29,869 per-mile vs. $25,996 equally-weighted average). For all this spending, the state’s urban interstate pavement condition is 10th worst in the nation and the rural interstate pavement condition is 11th worst. Should the focus be on more spending or greater efficiency?

Already, debt service as a percentage of revenue is 14th worst in the nation—more than $9 of every $100 in taxes goes to debt servicing. And despite reform, Michigan’s s top marginal personal and corporate income taxes, as well as property taxes (22nd, 17th, and 18th highest, respectively), remain uncompetitive with most other states. A focus on more efficient use of taxpayer dollars through priority-based budgeting (as explained in State Budget Reform Toolkit) is in order. The governor’s suggestion of “integrative asset management” is a start. Certainly, more debt and taxes to fund these projects are not the answer to supposed infrastructure needs.

Fortunately, the governor recognizes that the government can best enable growth by removing artificial obstacles to entrepreneurs.“Over the last few years we dumped the dumbest tax in America, we cut needless regulations, we started paying down our long-term debt, we started saving for the future, we laid the groundwork for success we have today so our businesses could create jobs. We create the environment for job creation, we don’t create those jobs.” A renewed focus on fiscal prudence and a diminished tax burden will strengthen Michigan’s capacity to compete going forward. Governor Snyder noted:

Over the last few years we dumped the dumbest tax in America, we cut needless regulations, we started paying down our long-term debt, we started saving for the future, we laid the groundwork for success we have today so our businesses could create jobs. We create the environment for job creation, we don’t create those jobs.

A renewed focus on fiscal prudence and a diminished tax burden will strengthen Michigan’s capacity to compete going forward. A renewed focus on fiscal prudence and a diminished tax burden will strengthen Michigan’s capacity to compete going forward.


In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace …

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