Michigan's $1.6-billion budget hole

Dec 23, 2010

The state budget amounts to $47-billion.  There’s a predicted shortfall of $1.6-billion in the upcoming fiscal year budget.  But, maybe $1.6-billion out of $47-billion isn't that bad.  Just cut everything by three-and-a-half percent and, Voila!  Everything’s fixed.

“Well, that sounds right when you put it that way, but the problem is you can’t really do that,” says Mitchell Bean.  He's the Director of the House Fiscal Agency.  Mitch Bean is one of the people whose job it is to keep tabs on the budget for the state legislature.

He says here’s the problem with just making that three-and-a-half percent across the board cut:  a huge portion of the budget can’t be touched.  That’s because much of it is federal money with strings attached.

“And you really can’t cut them, you can’t do anything with it because the feds have so many restrictions that you can’t use it for anything else.  You use it for what they tell you to use it for or you don’t get it,” Bean explains.

And a few other big pieces that are restricted by the Michigan Constitution:  the School Aid Fund which can only be used for schools, transportation funding for roads, bridges and mass transit and revenue sharing with local governments.

See Michigan's Economy and  Budget (slides 43 and 45).

So, really, of that $47-billion, the legislature can only fiddle around with $8.3-billion.  And when you’re looking at cutting $1.6-billion from $8.3-billion, you’re talking about a 19-percent cut.  That’s a lot tougher.

Of that $8.3-billion, what the state calls the General Fund, we pay for all the agencies and services that make the rest of state government work and some additional money it shares with schools and local governments.

Now, everywhere from coffee shops to think tanks, I’ve heard people say, "Cut all those state employees’ pay.  And make them pay more for health care just like the private sector has had to do.  That’ll solve the problem."  Mitch Bean says if you cut state employees' pay by five percent and increased their share of health care costs to 20-percent, it still doesn’t get you very far.

“You’ve got about 115-million dollars of savings toward a one-point-six billion dollar problem.  It’s not that it’s not a legitimate question to ask whether you should do that or not, but it certainly doesn’t solve the problem,” Bean says.

That's about seven-percent of that $1.6-billion we need to cut.

So, you’ve got to look at the big items in the $8.3-billion dollar General Fund, such as Medicaid, prisons, colleges and universities, welfare and food stamps and State Police.

Medicaid is the big one.  One out of every six people in Michigan is on Medicaid.  Medicaid pays for 70-percent of the nursing home care in the state.  It pays for medical care for people who are disabled or on welfare.

There are federal government restrictions on Medicaid.  Michigan cannot raise eligibility requirements or it loses those federal dollars.  But, Michigan does go above and beyond federal requirements by providing prescription drug coverage and mental health services.  You could cut the drug coverage.  But, what good would it do to go to the doctor, if you couldn’t afford the medicine prescribed?  And people who need drugs for diabetes or other chronic diseases would be in a lot of trouble.  You could cut mental health services, but it’s commonly held if you do that, you’d end up with some of those people in prisons and that would cost the state even more money.

Which brings us to Corrections, the next biggest budget item in the General Fund.  It costs a little more than 35-thousand dollars a year to keep someone in prison.   About the only way to save significant amounts of money is:  put fewer people in prison.

Another item is cutting the number of State Police patrols, but that just shifts the burden to county sheriffs and city police.

You could cut colleges and universities, but a cut in state funding would likely mean higher tuition rates for in-state students.   Universities and colleges and state scholarships have already been cut by about $350-million a year in the last decade.  Some experts point out, cutting higher education when you’re trying to retrain the state's workforce might be a little short-sighted.

 

There’s welfare and food stamps.  You could put more strict time limits on how long someone could get welfare. But, every cut will likely mean more people going homeless, more people going hungry.  One out of every five people in Michigan is now receiving some kind of food assistance.

There are other cuts, but compared to the ones just mentioned,they’re tiny. They wouldn't won’t go very far in eliminating that $1.6-billion dollar shortfall.

Mitch Bean says the cuts that will have to be made are really difficult cuts.

“That doesn’t mean they can’t be made.  But you have to hit education hard.  You have to hit corrections.  You have to hit State Police.  You have to do things like eliminate statutory revenue sharing.  You hit Human Services.  Then everybody else gets hit ten-percent across the board,” Bean says, grimacing.

See slide show of budget options (turn on captions).

Now, I don't know about you, but dealing with billions is hard for me to get my head around.  So, I divided that original $47-billion budget by one-million and came up with $47-thousand.  That happens to be just under the median household income for Michigan.  That made me think, if a family had to deal with this, what are we talking about? 

Let’s say, like the state budget, you couldn’t do anything with the bulk of your budget because of restrictions such as taxes, utilities, basic shelter and food.  And let’s suppose what you had left to buy shoes and clothes for the kids, gas for the car, you know, the daily living expenses for the entire year was $8,300.  Now, cut $1,600 from that.  Ouch.

Kathryn Greiner works with people facing budget issues like that every day.  She’s a household budget counselor with the University of Michigan Credit Union.   She says even when a couple who love each other have budget problems, things can turn sour.

“They get defensive.  You know, ‘Well, if you didn’t spend all that money on hunting,’ ‘Well, if you didn’t all that money on clothes.’  And people get verbally combative sometimes because they’re defending their own turf with what they like to spend money on,” Greiner says.

Now instead of a loving couple, throw in 148 legislators steeped in partisan politics and all of the special interests who don’t want their areas cut.

“So, I can imagine, if you’re talking about a legislature where there are a lot of opposing views and people who don’t want to get along for a number of reasons, that makes this a much more difficult process,” Greiner observes.

Difficult.  Yes.  That’s why the legislature pushes off the vote on the budget until the last moment every year.

A colleague asked, ‘How much does that one-point-six billion dollar shortfall mean per person?’  Turns out when you divide it up among the people who have jobs in the state, the EMPLOYED people, it averages out to a tad more than a dollar-a-day per worker.  But Governor-elect Rick Snyder and the new legislature are not expected to ask for that dollar-a-day more.  No one expects them to suggest a tax increase. 

In fact… this week Governor elect Snyder said he plans to revamp the state business tax, which will mean a tax cut for businesses of $1.5-billion dollars.

“Now, we’ve suddenly gone from a one-point-six billion dollar problem to a three-billion dollar problem.  That gets a little more difficult,” says Mitch Bean with the House Fiscal Agency.

A spokesman for Snyder says the new administration will make up the difference by cutting the many tax credits offered to certain businesses.

We’ll soon see.  In an interview with the Associated Press this week, Rick Snyder said he’ll outline some of what he has in mind in an earlier-than-usual State of the State address in mid-January and submit a two-year budget proposal well ahead of the March 14th deadline.

UPDATE:  Correcting math error, 1% changed to 7% regarding impact of cutting state employee pay.