Snyder gets his changes; consequences unclear

Michigan won’t be reinvented in a day. Or a dog year. But as Gov. Rick Snyder concludes his first (human) year in office, the general course he defined as a candidate is coming into view as legislative markers are set.

Eight years of partisan division and economic decline prompted public interest groups such as The Center for Michigan and Business Leaders of Michigan to call for fundamental change in how Michigan compensates its employees, taxes its businesses and residents, and spends the tax dollars it takes in.

Two weeks from taking the oath as Michigan’s 48th governor last year, Snyder told a Dec. 13 summit organized by CFM and BLM that he was receiving two threads of advice: Be bold and don’t set expectations too high.

“The interesting thing is quite often it’s the same people” offering it, Snyder said.

Actions completed to date and proposed this fall by Snyder are indeed some of the boldest seen in years, to the extent they challenge the conventional wisdom of what can and can’t be done in Lansing. And expectations are high that they'll work. And that more tough votes will be taken in the Legislature.

Last year's summit focused on three core areas:
* Public Sector Efficiency
* Michigan Competitiveness
* New Budget Priorities

Public Sector Efficiency: Snyder wins without much rancor

Because Snyder and Republicans decided to preserve the principle of collective bargaining, Michigan will make significant gains in controlling public employee benefit costs, with little of the rancor that turned the capitols in Madison and Columbus into political war zones in 2011. That cost containment will save hundreds of millions in annual benefit costs and shave billions in unfunded retirement obligations.

Senate Bill 7, sponsored by Sen. Mark Jansen, R-Gaines Township, retains health insurance as a subject of bargaining, but caps what taxpayers will pay for it -- 80 percent of total premium or a set dollar amount, $15,000 for a family policy. Higher mandated employee contributions kick in as current union contracts expire.

Lawmakers are on track to approve legislation that would make graduated retiree health care optional for employees hired after March 1997, eliminate it for new hires and require employees hired before March 1997 to pay 4 percent of their salary, if they choose to remain in the defined benefit pension system.

Public Act 312, the binding arbitration law long cited by municipal managers as overly inflexible has been modified to make a city’s ability to pay the primary factor in labor arbitration.

Paring employee costs is a benchmark cities and school districts must hit in order to qualify for some $450 million in state incentive funding that replaced statutory revenue sharing and a chunk of per-pupil school aid. Legislation that removes barriers to intergovernmental cooperation -- such as barring the decision to share services from collective bargaining table -- was approved by lawmakers Nov. 3.

Ray Holman, a lobbyist for UAW Local 6000, said Snyder and lawmakers like Jansen have succeeded where Republicans in other states have failed by entertaining negotiation instead of picking fights.

“We’re not saying there doesn’t need to be sacrifice. We realize that and we’re willing to sacrifice, but we don’t want our rights taken away,” he said. “We want to do it in a collaborative fashion. When you compare (Snyder) to the other governors, he’s much better.”

Michigan Competitiveness: Big bet placed on tax changes

The state added 22,000 private-sector jobs in the first three quarters of 2011, building on the gains achieved since the employment rate hit bottom two years ago. Michigan's unemployment rate is, however, is half a point higher since Snyder and the new Legislature took office in January.

That’s the good news. The bad news is that according to a new report from IHS Global Insight, the economic consultants who help forecast state revenues, Michigan is one of three states that will wait the longest -- at least 2017 -- to recover just the jobs lost since the financial crisis. Replacing all 783,000 jobs lost between the April 2000 employment peak and the December 2009 trough will take years longer.

Building net employment requires more hiring by Michigan firms and less layoffs. The success of Snyder’s tenure depends on that happening through his primary prescription: significantly lowering the tax burden on the owners of some 95,000 sole proprietorships, limited liability corporations and partnerships that don’t file a federal corporate income tax form.

With the previous tax regime that Snyder asserted was killing jobs, the Tax Foundation said Michigan had the 48th best corporate tax climate and the 17th best tax climate overall. With the changes, it projects Michigan will move up to  22nd and 13th respectively. The foundation said the changes “could” make Michigan more attractive to business.

Bigger firms, manufacturers mainly, say Michigan won’t be competitive until Snyder and lawmakers also move to eliminate the personal property taxes they pay on equipment. The Snyder administration and lawmakers have yet to address the $1.2 billion revenue loss to local governments and schools elimination would mean.

A 6-percent tax rate on C-corporation profits does make Michigan competitive with other states, but the old MBT (and the old Single Business Tax) was accompanied by an economic development strategy in the Engler and Granholm administrations that gave offsetting tax breaks to pretty much any firm that asked for one. Snyder has replaced tax breaks with grant money for firms that invest in Michigan.

The firms benefiting from what will be $1.6 billion in state business tax reduction through the elimination of the MBT are already here. The economic success of the tax plan depends on what those firms’ owners do with the savings, pocket it or hire people.

Rep. Wayne Schmidt, a Traverse City Republican, says there is emerging anecdotal evidence that the tax change will give employers the confidence and certainty to add workers.

“It won’t be huge gains, but talking with some of the smaller businesses that I deal with, when you’re hiring one or two, it makes the world of difference,” said Schmidt, chairman of the House Commerce Committee. “Right now there’s a sense of confidence. People are feeling they have a clear direction in where they want to go. They know that government is working to get out of the way.”

Rep. Jim Townsend, Democrat from Royal Oak, countered: “I haven’t heard anyone outside of Lansing say these tax cuts are effective. What I hear is a lack of demand in the economy and a lack of confidence in the overall global situation. That is a much bigger factor than anything we’re doing with the tax code.”

If Schmidt is correct, then you can make the case that the individual financial sacrifice being made to pay for it - $1.4 billion worth by applying the income tax to some retirement income and paring back tax credits for just about everyone else - would be worth it from a policy standpoint.

That doesn’t negate Townsend’s point that the talent that’s headed out of state after earning their degrees remains drawn to high-tax, high-service locales on the coasts. Or his view that that repairing a decade’s worth of budget destruction is necessary for Michigan’s competitiveness as well.

In June, Snyder announced the formation of three citizen-stakeholder panels to review three key areas of state regulation -- environmental protection, liquor control and occupational licensing. The panels are expected to wrap up their work by the end of the year. The fate of their recommendations in the Legislation - particularly one that would challenge the beer and wine wholesalers business model - is unclear.

New Budget Priorities: Fast road to balance

Though the fiscal 2012 budget was approved in modern record time, it also maintains 10 years of budget priorities that doubled college tuition, eroded the state’s ability to rebuild its infrastructure and took billions in cash from local governments to help the state keep its own budget in technical balance.

Michigan will spend $677 million less on higher education than it did in fiscal 2002. It will spend $274 million more on the Michigan Department of Corrections. The state spent about $300 million less on its prisons than its universities in 2002. In 2012, it will spend nearly $700 million more. (These are raw numbers, not adjusted for inflation.)

In the past, lawmakers would simply cut $50 million out of the corrections budget as the Oct. 1 fiscal deadline approached and tell department officials where to find the savings. In the 2012 budget, lawmakers have been more specific in spelling out system-wide change. For example, the budget assumes $62 million through more cost-effective inmate housing, contracting out food service, bidding out prisoner store operations and eliminating 81 lieutenant positions.

The problem is that given the sheer size of the department, the 2012 adjustment for employee economics, energy, maintenance and food is $58 million. Neither Snyder nor lawmakers appear inclined to adjust sentencing law so well-behaved inmates can serve less than 100 percent of their minimum terms.

Only when the department cuts hundreds of millions, instead of tens of millions, will state aid to public universities once again surpass the cost of incarceration.

Michigan already ranked in the bottom of states in terms of state aid to universities when Snyder and lawmakers slashed the higher ed budget by 15 percent. At best, the fiscal 2013 budget will maintain assistance where it is now.

Rather than game the budget to take statutory revenue sharing from municipalities, Snyder and lawmakers simply eliminated it. Assuming cities comply with the terms of the $200 million cost-cutting incentive fund that replaced it, municipalities are still looking at a $100 million reduction in state aid.

Snyder’s suggestion to modernize gas tax collections and effectively double registration fees merely stalls further deterioration in road condition and mass transit. Republicans quickly rejected the idea anyway. After being rebuffed on the New International Trade Crossing project, Snyder doesn't appear eager to change their minds.

The good news is that fiscal year 2011 generated an estimated $500 million more in tax receipts for both the general and School Aid funds than last May's revenue estimating conference forecast. Democrats want to restore cuts to K-12 and universities. Snyder and Republican lawmakers say hold on. It's a disagreement that will help define political year 2012.

In conclusion, the budget would be in worse shape had Snyder and lawmakers chosen to finance tax cuts solely through spending reduction. But if tax expenditures are fair game to pay for those tax cuts, they can be tapped to pay for investment in the areas also critical to Michigan’s economic well-being: education, transportation and quality of life.

Michigan’s broad exclusion of services from the sales tax represented $4.3 billion of lost revenue in 2000, for example. A decade later, given the changing patterns of consumption, that number was $10.3 billion.

In the end, can a business tax overhaul designed to promote entrepreneurial risk-taking work if Michigan isn’t a state where entrepreneurs want to live? Can Detroit be the essential component to Michigan’s reinvention if it doesn’t have a police force, but has one of the nation’s highest murder rates? And 70,000 abandoned buildings?

Pretty much all you need to know about how much ground Michigan has to make up can be found in the measurement of per-capita gross domestic product. In 1999, Michigan ranked 22nd. A decade later, we were 41st.

Think back to 1999 and you know that being in the top half of states feels a lot better than languishing in the bottom fifth. Snyder's optimism that Michigan will once again be in better shape than most hasn't wavered. He just has to make sure that the policies required to help make that happen don't either.

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Comments

Tue, 12/06/2011 - 8:15am
Fascinating. Not a word about the Governor's failure on DRIC! If he had worked WITH the Ambassador Bridge Company rather than fighting them for reasons unknown, thousands would be working now building their bridge and Michigan would be telling investors it is open for business. Instead the Governor looks at ways to endrun the Legislature to create a massive multi-billion dollar boondoggle.
goods
Tue, 12/06/2011 - 10:19am
The problem with Snyder working with the Ambassador bridge owners is that they wanted to build a second span next to the existing one. The Canadian government would not approve it. Therefore, it was a moot point. A second bridge is necessary to the economic vitality of Michigan. Free enterprise does not thrive under a monopoly which is what the Ambassador bridge is. The free market system thrives under competition. Therefore, a second bridge would enhance the free market system.
Allan Blackburn
Tue, 12/06/2011 - 1:05pm
Totally disagree with the assessment that Governor Snyder messed things up by not wanting to work with a monopoly on the bridge. To build an international crossing right next to the one that is already there is an invitation to Al-Queda to bomb both bridges at once, thereby disrupting trade between Canada and the United States with our auto plants and other industries. The Snyder and Canadian plan built the new bridge six miles away from the current one, which makes perfect sense from a security standpoint. The real reason there is nbo bridge being built today is that Matty Marouns money has purchased a lot of advertising that spread many lies to people who can't think for themselves and are easily led by whichever lies the one with the most money spreads. A lazy voters way of claiming that they stay involved in current affairs is by watching Fox (Faux) News and claiming to be fully informed. I read both sides of the issue to gain a perspective to try to come up with something beyond the; "My way or lets shut down Government to get it done crowd." While I think Snyder has done some things well because it is easy to get things your way when one party rules, it will be more interesting to see them reach across the aisle and try to gain bi-partisanship leadership and compromise. The bridge is something he should not be compromising on though for the security of our state and our future. The last thing we need is to have our state coming out of a ten plus year recession, build a bridge next to the other one so that one family benefits and watch them both get blown up to disrupt our state and national security.
Graydon DeCamp
Tue, 12/06/2011 - 1:52pm
Enough already! The bridge was last year's war. The rich guy preserved his monopoly by assaulting good sense, sound policy and public good with untold sums of cash for shamelessly misleading television ads. So let's tax international bridge-toll receipts and move on . . .
Joan Reyes
Tue, 12/06/2011 - 11:07pm
What has he really done to bring jobs to the state? After the debacle of the film incentives program, who will be willing to come to the state and renovate abandoned manufacturing plants, which will take millions, and bring new industries to Michigan? The Raleigh Michigan studios took millions to build and once "The Great and Powerful Oz" finished filming, the studio will close and 35 people who were employed there lost their jobs. Michigan needs to have a very diverse industry portfolio, so that when one industry goes through a downturn, people can take their transferable skills, and move to another industry. But it seems that in this state, everyone only thinks in terms of manufacturing. They refuse to think outside of this industry and if officials do not change their thinking, this state will never move ahead.
Thomas W. Donnelly
Wed, 12/07/2011 - 1:14pm
Snyder and his team have made many changes to promote business without getting any new jobs out of it. Citizens create demand for products if they have the money to purchase them, so taxing retirees' pensions will have the opposite effect. Shifting the tax burden from corporations to individual taxpayers is a backward step. Snyder has many simplistic, goofy ideas to make ends meet. Raising registration fees by 120.00 per car per year shifts the burden of fixing roads to auto drivers ,while the real damage to highways comes from trucks bearing too much weight.There is no effort to make truckers kick in more highway repair money. Short-changing K-12 education by lumping community colleges and universities into money constitutionally guaranteed for only K-12 has been a disaster to school districts. It is easy to be a bean counter when you do not feel the effects of your budget shifts personally. For retirees and school kids and the poor, Snyder is no prize! He has no heart for people's needs, since he is a millionaire without money woes.
Wed, 12/07/2011 - 6:14pm
People continue to support the ongoing fallacy that there's a "surplus" in the School Aid Fund. Under normal accounting rules there is a massive unfunded liability tied to the school pension fund, MPSERS. The unfunded liability is between $35 and $60 Billion depending on what investment return you assume; regardless either number is big and bad. Payments to amortize that liability are draining school operating budgets to the tune of $0.25 ON TOP of every salary dollar paid to staff; staff costs typically represent 85% to 90% of operating budgets. The required contribution is scheduled to increase for years, rapidly reaching a +35% premium on every salary dollar paid. Until that problem is fixed the pension legacy costs will drain money away from current operations leaving less for teachers, books, computers, etc., it is EXACTLY the same problem that nearly killed the auto companies.