Thursday Thoughts for June 25, 2020

This week, the topic is government funding, particularly state budgets.  I believe it is  worth sharing some thoughts based on eight years of experience working on them, including addressing a large deficit in my first year as governor in 2011-2012.  The budgets for 2019-2020 and 2020-2021 are going to be two of the most challenging in history.  When I took office in 2011, our first budget had to address about a $1.5 billion deficit.  It took some very hard, but necessary, decisions.  My honeymoon period in office ended in February of 2011 when I announced my budget proposal.  Today, I still have some people upset at me for those decisions.  But some of those tough calls set the stage for a record economic comeback for Michigan and have created a strong foundation to address these next two difficult years.

1. Face reality and start making tough calls as soon as possible.

In the past, governments have used rainy day funds or waited for federal bailouts to hopefully solve the deficit.  Rainy day funds should be used to soften landings, particularly in human services, but not to avoid making tough cuts.  They should be used gradually and not all up front.  In Michigan, the government depleted the fund too quickly in the early 2000s.  In 2011, Michigan had a meager $2 million in the fund, which would cover our government costs for only 30 minutes.  By 2018, we had put over $1 billion into the rainy day account.  If the funds are used all up front, the dramatic immediate drop in budgets required later will only be more painful.  

Too many politicians want to rely on federal bailouts, since the federal government prints money and doesn’t have to balance its budget. That is not a good solution because nothing is free.  Someone has to pay more to or receive less from the government, with the usual victim being our kids getting stuck with debt their predecessors created.  According to a May report by the Congressional Budget Office: “The federal budget deficit was about $1.9 trillion in the first eight months of fiscal year 2020, CBO estimates, $1.2 trillion more than the deficit recorded during the same period last year.”  These numbers are staggering.  The increased federal deficit for just the eight months through this May of $1,200,000,000,000 divided by 330,000,000 people is approximately $3,600 per person. Covering state and local deficits would add hundreds of billions more to our national debt.  

A better idea would be a loan program from the federal government.  Interest rates are very low.  The repayment period could reasonably extend up to 10 years.  An example was Michigan’s unemployment trust fund balance in 2011.  We owed over $3 billion to the federal government due to our high unemployment.  We made major reforms, paid back the debt, and had a positive balance of over $4.2 billion by December 2019.  That balance is now there to help during this crisis.

2. Across-the-board-cuts are easy decisions but terrible answers.

Politicians like to avoid making people upset so a traditional answer is to say let’s treat all government expenditures as equally important.  This is not responsible.  Our leaders were elected to make tough decisions when necessary, which is now.  In 2011, I hated having to make deep cuts to certain areas; but all areas are not created equal.  This time of crisis is when we should examine topics that would likely be politically hard to impossible in normal times. 

In Michigan’s case, we have over 500 public school districts and over 50 intermediate school districts.   We can consolidate to a much smaller number and save a lot of taxpayer dollars without directly affecting funding for classrooms.  We also should look at reducing the number of our public universities and implementing more focused curriculums that lead to good-paying careers.  We don’t need all of the overhead costs of these institutions.  Fifteen universities are competing for the same students with duplicate degrees. This is especially true since our school- and college-age populations have and will continue to decline.  These are long-term structural imbalances that aren’t going to get better, so let’s address them now when hard topics can be addressed.

We also should look at encouraging greater efficiencies at the local level of government.  Many of our local governments should be doing many more shared services between themselves or with the state.  We created a Municipal Services Authority to encourage these efforts; but few governmental units took advantage of the opportunity to save money and provide better services.

3. During extraordinary times, certain extraordinary actions can make sense.

Some tax or fee increases may make sense.  This is a tough statement to make; it is hard asking taxpayers who are already facing financial challenges for more of their hard-earned income.  But by increasing the fuel taxes 15 cents per gallon, for example, we could put several hundred million dollars more into roads each year and provide additional flexibility with our general funds.  In 2015, we implemented a program to generate $1.2 billion per year in additional funds for roads and bridges.  Roughly half was from fuel tax and registration fee changes with the other half coming from General Fund money.  The gas tax was an additional 7.3 cents per gallon.  My preference at the time would have been to do more in fuel tax and less in general funds; but it was a good compromise with our Legislature.  It was interesting that with lower gas prices, I didn’t get any negative comments about the additional fuel taxes once they were implemented.   

4. While making tough cuts, we need to invest in growing our economy

In 2011, while making major budget cuts, we took actions that resulted in economic growth beyond the national average.  We went from 50 out of 50 to a top 10 state.  We need to do that again.  Our economic future is tied to growing the private sector.  The public sector is critically important; but it is a service provider, not an economic engine.  We need to reinvigorate our small businesses, we need to encourage innovations in healthcare and technology, and we need to attract many of those jobs that are currently in big cities to Michigan communities.  This is not about starting a big tax-credit program.  I hate those things.  It is about building on what  we have done before with some common-sense additions.  Over the past couple of articles, I mentioned investments needed to move our education system to a lifelong learning system, as well as the need to better connect customers with businesses at both the local and state levels.  The most important item is to improve civility within our state.  I have been doing economic development for years and the number one item is to have people working well together across the board.  You can’t get people excited about a place if they don’t see unity and excitement vs. discord and blame.

I recognize that some of these items will generate strong responses. People have vested interests in government spending and don’t want to see changes unless there are budget increases.  That choice is not available for at least the next couple of years in most places in our nation.  It is time to face reality and make the best choices available for the short-term and long-term common good.  Every action has a cost associated with it.  The longer we wait to make tough decisions, the harder their impact will be.  We need to share the burden among all of us while minimizing the impact on those who have the greatest need and the least ability to contribute today.

Remember, Relentless Positive Action in your life will help you and others. So, I wish you RPA every day!