Governor Rick Snyder released his report "Dollars and Sense, How State and Local Governments in Michigan Spend Your Money" on Monday, January 31st 2011. He calls it a 2011 citizen's guide to Michigan's Financial Health. In the report, Snyder addresses key issues with Michigan government revenue and spending, and of course the ever growing budget deficit.
The report, compiled in conjunction with Business Leaders for Michigan, Anderson Economic Group, as well as a handful of other Michigan data and financial associations, also contains a letter from the governor, explaining the purpose of the report and its three main objectives: (1) to explain how taxes and fees are collected and used across the state, (2) to identify the long-term consequences of future budget decisions, (3) and to address the bills that are growing for the future.
The report identifies six overall issues that Snyder believes are contributing to Michigan's economic crisis. These include the following:
- Michigan residents are earning less than they were a decade ago, therefore less tax revenue is being generated in conjunction with an increased need for governmental services to citizens.
- State and local governments are spending more than they are taking in.
- Michigan has been unable to successfully invest in its own future and infrastructure and higher education have plummeted.
- State employee compensation in Michigan has grown, while private sector compensation has fallen, which in turn inhibits the taxpayers' ability to support public employees.
- The state's future has been mortgaged through extensive borrowing in addition to accumulation of unfunded pension and retiree healthcare liabilities.
- High unemployment over the past decade has rendered the state's unemployment fund insolvent.
Snyder claims that for every $7 earned in Michigan, $1 in taxes, fees, or charges for services is taken for state and local government. He claims further, that $50.4 billion was made in taxes in FY-2010 from the Michigan citizens, where $29.4 billion goes towards state government, $14.3 billion goes towards local government, and $6.7 goes towards public schools. Further, Snyder explains that the state government received $22.2 billion, local government received $2.6 billion, and public schools received $6.7 billion all from the federal government. Additionally, the state government allocates an additional $10.8 billion to public schools and $8 billion to local governments. The total tax revenue is calculated to be $82.5 billion dollars in 2010 alone.
He talks about the future of Michigan briefly, and highlights trends that are stifling the economy. First, he says that the Baby Boomer population in Michigan is more acute, due to a reduction in young people. He claims people over the age of 60 provide less revenue because pension income is exempt from state income tax and retirees require more public services, such as healthcare and they also consume less. He also mentions jobs and unemployment, where he estimates that between 2000 and 2010, unemployment increased from 3% to 14%, higher than the national average of 10%. He claims that the number of Michigan private sector jobs lost were equivalent to two-thirds of all jobs lost in the U.S. between 2000 and 2010. Finally, he discusses income levels. He explains that personal income in Michigan grew by 7% between 1995 and 2009, where the national average was 35%. The income per-capita was $37,195 in 2000 and in 2009 dropped to $34,182. This puts Michigan ranking at 37th in the nation, falling from 18th in 2000.
He addresses also the public budget deficit Michigan has established. He shows that state and local government received $82.5 billion in revenue and spent $84.8 billion in 2010, and adds that Michigan has tended to overspend in this fashion for the past 10 years. He claims that instead of making investments to stimulate economic growth, Michigan has had to meet heightened demand for community health and human services. Community health (which includes expenditures like medicaid and mental health services), human services (which includes expenditures like disability insurance, child foster care programs, and food stamp programs), and K-12 spending, account for 75% of government spending. The health categories have been growing at the fastest rate over the past years, doubling the inflation rate. State appropriations for revenue-sharing decreased one-third from $1.5 billion in 2002, to $1.0 billion in 2010, accounting for such a decline in this category.
Snyder spends a lot of time evaluating disparities in employee compensation, especially between that of the public sector and private sector. He outlines the following trend from 2000-2009: Private sector employee compensation decreased by 13%, while state and local government compensation both increased by 19%. He claims that average annual compensation for state employees was over twice the annual compensation of average private sector workers in 2009. He demonstrates this, by showing that in 2009, state classified employee compensation was 113% greater than private employee compensation.
He explains that in order for Michigan to sustain this overspending in the past decade, it had to draw down reserves, borrow money, and increase unfunded or outstanding pension/retirement liabilities. The report claims that the "Rainy Day Fund" or the Budget Stabilization Fund, which currently stands at $2.2 million, "is not enough to cover the cost of state government operations for 30 minutes." He adds that it is considered good practice to keep 10% of annual operating expenditures in unrestricted fund balances to cover new, unexpected expenses or an unanticipated drop in revenue, and that Michigan had $720 million in reserves in 2010, which is only 1.5% of total expenditures. Obviously this ratio is far below the recommended 10%.
The report exclaims, "The state has borrowed money at a faster pace than personal incomes have grown over the past 20 years...Today, outstanding state debt levels are greater than annual state tax revenue."
This debt he partially attributes to pension fund obligations and unemployment, where the pension obligation has not been met for 10 years and the Michigan Compensation Fund is completely depleted, as Snyder puts it "broke." He says by the end of 2010, Michigan's unemployment trust fund was in the red by $3 billion. Finally, his research team determined that the state government has incurred a cumulative public budget gap (deficit) at the end of FY-2009 of $43.3 billion.
It seems Synder has done his homework in preparation for his term, specifically, he's identified the key problems and systems that are continuing to drag Michigan's economic situation further and further into crisis. At this point, Michigan citizens look to Snyder to wield his economic and business expertise to find ways to curb the outstanding debt and deficits. We can only hope he will be able to translate his business savvy into the political machine and create changes to the current system through new policies and budget reform.
Dollars and Sense: How State and Local Governments in Michigan Spend Your Money, 2011 Citizen's Guide to Michigan's Financial Health, Presented by Rick Snyder