Budget Address

Governor February 11, 2010


Thank you Committee Chairs Cushingberry and Jelinek, Minority Chairs Moss and Switalski.  Good morning members of the Michigan Legislature.

Because of the significant changes contained in the Fiscal Year 2011 Executive Budget recommendation, I decided to join our budget director, Bob Emerson, in presenting this proposed budget to you.  I'm here until noon; after my remarks, I'll turn it over to Director Emerson.

We've also been joined by our state treasurer, Bob Kleine; director of our Department of Corrections, Pat Caruso; and director of the Department of Community Health, Janet Olszewski. 

Two weeks ago, I began outlining my agenda for 2010, which I said I would unveil in three parts.

First, I presented a plan to transform state government that outlined 29 specific reforms for state and local governments and our public schools to reduce costs and improve efficiency.  I said we needed to trade in our 20th century governmental structure for a 21st century structure.  Included were tough but necessary changes to retirement and health- care benefits for state employees.

With state revenues at their lowest levels in 46 years when adjusted for inflation, like the private sector, Michigan has to continue to reduce the size and the cost of the state workforce.  My proposals will encourage eligible state employees to retire and also reduce the cost of new employee health-care for the state by 21 percent. 

I've also made a similar retirement proposal for public school employees. 

These proposals will significantly stabilize the public employee pension systems. 

And, along with my other government reforms, these proposals are in the budget that I am submitting today.  Combined, they will save $7.8 billion over the next decade. 

My State of the State address was the second part of my 2010 agenda, continuing to transition our 20th century economy into a 21st century economy through essential steps we must continue to take in economic diversification, job-creation and education.

Because of the need to focus on higher education as an economic issue, I proposed reinstating the Michigan Promise scholarship, which I am today proposing as a new, refundable $4,000 tax credit available to any student who completes a college degree and works for one year in Michigan.
I also have called for continuing to fund our award-winning Pure Michigan advertising campaign.  Tourism is one of the economic sectors we've been working to grow and create jobs.

My budget recommendation agrees with the tourism industry on the need for a permanent funding stream for Pure Michigan.  Like some other states that consistently fund their tourism ads, I propose relying largely upon a small fee from out-of-state tourists or business travelers who rent cars at the airport.  One-hundred and sixty-thousand Michigan jobs depend on it.

My budget reflects Michigan's priorities: investing in education and job-creation.

So today, I'm presenting the third and final piece of my agenda for this year:  a state budget that brings spending and revenues in line with Michigan's stark economic realities.

By the end of this year, due to the meltdown in the American auto industry, Michigan will have lost one million jobs since the year 2000.  Our unemployment rate still stubbornly hovers around 15 percent.  Across our state, people have lost their jobs, their homes, their businesses.

The old Michigan economy, which provided a middle-class standard of living for so many, is gone.  We are now transitioning to a new Michigan economy - an economy requiring knowledge, speed and efficiency.

However, our efforts to grow a 21st century economy are hampered by a state government and a state tax structure designed for the mid-20th century.  

We must reinvent state government.  We need to further cut state spending.  We must address the structural deficit and modernize the tax structure.  And we need to reform the budget process.  

The budget recommendation we're presenting today is the third part of our 2010 plan to move Michigan forward.  This budget:

  • cuts spending while still investing in job-creation and education;
  • modernizes the state's tax system to stabilize funding for schools and create jobs; and
  • reforms the budget process.

Cutting state spending

Every year that I've been governor, we've had the challenge of presenting a balanced budget in the face of declining state revenues.  In my first budget address in 2003, I said, "As long as I am your governor, this state will live within its means." 

And it has.  Every year it has closed in the black.  It hasn't always been pretty.  But I'm proud that we've been able to balance every budget without having to resort to borrowing, selling off state assets, or other extreme measures that other states have done.

Balancing the state budget during tough economic times is like walking a tight wire - only more difficult.  As you know, state government operations are "countercyclical" - while revenues continue falling, demand for state services keeps increasing.

Our response has been to cut spending while still providing the services that protect people, especially by leveraging technology.

According to the National Association of State Budget Officers, from 2001 to 2008, Michigan cut and contained spending more than any other state in the nation.

Since 2003, I have cut more state spending than any governor in Michigan history, resolving more than $10 billion in deficits.  Those of you who have been in office since 2003 have made these cuts with me.

We've saved $1.1 billion by reevaluating every state contract and eliminating no-bid contracts.  We've sold off state planes, made state facilities and state vehicles more energy-efficient, consolidated offices and sold off surplus property, saving another $460 million.  Hundreds of millions more have been saved by targeting waste, fraud and abuse in the Medicaid, food-assistance and day-care programs and by lowering the prison population.

The state workforce now numbers almost 11,000 less than it did in 2001.  And state employees have contributed more than $650 million in savings to date, including unpaid days off and higher health insurance premiums.  And we are asking them to do more. 

Seven years ago, there were 20 state departments.  Now there are 15, and we've eliminated nearly 300 obsolete state boards and commissions.

We've also leveraged technology to make state services less costly and easier for people to access - we have created a 24-7 government, continually streamlining business processes and cutting regulations and redundancies, making it easier for everyday citizens to find help.  And we will continue to do more.

And we still must cut more.

So in this budget, I am recommending $566 million in further general fund spending reductions, impacting every state department.

In order to make those cuts and savings, you must adopt those reforms I described.  I ask you to do those first. 
But we cannot create an environment more conducive for jobs and economic growth by only cutting spending.  We must invest in the things most critical to attracting business investment.

One of the most important needs of a 21st century business is having a 21st century talent pool.  And that means education.  Education directly correlates to job-creation.  Therefore, despite declining state revenues, my budget recommendation maintains per pupil funding for K-12 education at the same level as in the current state budget. 

Schools took huge cuts last year.  That's enough. 

The budget also maintains operational funding for universities and community colleges at present levels as they continue their vital roles in educating and training our citizens for the new Michigan economy. 

And for adults, although general fund support for the No Worker Left Behind and Michigan Nursing Corps programs has been eliminated, federal and other state support will continue to fund these and other crucial career education and retraining programs.

My budget recommendation also maintains our commitment to protect Michigan citizens, including our most vulnerable.  Medicaid provides children, the elderly, and the disabled with basic physical and mental health services. 

Revenue sharing payments to cities, villages and townships, which support police and fire services, will remain at current levels.  And this budget maintains funding for Michigan State Police troopers at their present strength.

Modernizing Michigan's tax system

We also must address the state's structural deficit.

There are two sides to the structural deficit:  expenditures and revenues.  My government reforms address the expenditure side with proposals to reduce retirement and health-care costs for state employees and public school employees.  We now must address the stability of the revenue by modernizing an outdated tax structure.

Michigan's sales and use tax has been in effect since 1933.  It's now levied at a rate of 6 percent on the sale of tangible goods and a few services.  In 1950, the sale of goods constituted 60 percent of consumer spending.  But today's economy has shifted dramatically from goods to services.

The sale of services now comprises more than 66 percent of consumer spending.  Since the current, narrow sales tax funds schools, this means that the base for school funding continues to shrink.  According to survey data from the Federation of Tax Administrators, Michigan taxes only 27 of 168 transactions it classifies as services, which ranks 39th lowest in the nation.

I am recommending that the existing sales and use tax rate be lowered from 6 percent to 5.5 percent while broadening the base to include other services.  All of the revenue would go to the School Aid Fund to ensure that we have the stable funding necessary for our children to receive the world-class education they need to compete in a global economy.    

This proposal will significantly solve the structural problems of the School Aid Fund into the future.

Also, when we make this change, Michigan will have one of the lowest sales tax rates in the country for those states that levy state and local sales taxes.  Only five states would have a lower rate.

Let me give you an example of how this would work.  Say you buy a $20,000 car.  Today, the sales tax you pay would be $1,200.  Once this proposal is adopted, the buyer would pay $1,100 - a savings of $100.   

Some have asked about the fraction - 5.5 percent, how would that work?  When combined with local sales taxes, 34 states have some kind of fractional rate.  By way of example, the rate in Illinois is 8.4 percent.  The rate in Ohio is 6.85 percent. Pennsylvania is 6.4 percent. New Jersey is 6.95 percent.  New York is 8.45 percent.  In other words, you can drive from here to Connecticut with fractional sales tax rates.

To help spur business growth and job creation, I also am calling for eliminating the Michigan Business Tax surcharge.  I propose cutting the surcharge in half in 2011 and completely phasing it out in 2012.

The Michigan Business Tax was never designed to include a surcharge.  The business community has told us that the elimination of the surcharge, along with additional phased reductions in the MBT gross receipts tax rate, will significantly help Michigan job providers to better compete, invest and create jobs.  They indicate that making these changes and reforms will put Michigan on the path to being a top 10 state for job and economic growth. 

Due to timing only, the net revenue impact of the changes to the sales and use tax and the Michigan Business Tax is $554 million for the 2011 fiscal year.  That $554 million will go directly to the School Aid Fund, and combined with savings realized from the school employee retirement proposal, will stabilize finances for Michigan schools.

But by the end of the 2013 fiscal year, these changes to the sales and use tax and MBT will be revenue neutral.  These changes - lowering the sales tax rate, spreading it to services, eliminating the business tax surcharge - have been recommended by job providers across Michigan.  They have been suggested by almost every economist and expert that has reviewed Michigan's tax structure - Democrats, Republicans and non-partisans.  Let's take them up on it. 

Reforming the budget process

Along with modernizing our tax system, we also need to update our budget process.  I proposed these changes last month as part of those 29 government reforms, but they bear repeating here.  All will require amending the Michigan Constitution.  But it shouldn't be too hard to get a two-thirds vote for these common-sense changes.

First, we need to switch to a two-year budget cycle.  Two years.  This will allow longer-term projections of revenues and expenditures and enhance stability

As I mentioned in the State of the State, we should take the bipartisan freshman caucus up on their fine suggestion to require a July 1 completion date for the budget.  In fact, you all stood and applauded last week when I said it, so I assume you support the idea.  If the budget isn't completed by July 1, then the pay of all legislators and the governor should be docked every day thereafter until the budget is done.

It's also time to require examination of all the tax breaks and loopholes we grant in this state.  For the 2010 fiscal year, these tax breaks added up to $36 billion.  Thirty-six billion dollars.  Some of those expenditures have been there for decades, with no review.  Every two years, in the off-year that the Legislature is not passing that two-year budget, the Legislature should be required to revisit state tax credits and tax exemptions to make sure they're still producing the desired results:  jobs.  An honest review of these tax expenditures could fix the remaining gap in the structural deficit of the general fund. 

Tax credits are useful tools.  The long-term tax credits we use to attract jobs to Michigan are an important part of our economic diversification toolbox, and companies that rely on them will be able to continue to do so.

But we should treat tax expenditures like every other expenditure in the state budget.  We need to periodically scrutinize them to make certain we're getting the benefits - in job- creation and economic growth - that we expected, that they're not just permanently baked into the tax structure if they are not creating jobs.

We also need a "pay-as-you-go" state budget.  If the Legislature commits to spending new money, granting tax cuts or approving new tax loopholes, then those commitments will have to be paid for either by raising revenue or reducing spending elsewhere in the budget.

Finally, we should require that every piece of state legislation include information on its financial impact - not just on government, but on everyone affected by the legislation.  This fiscal information would have to be available before bills could be acted on.

Conclusion

The fiscal year 2011 budget that I am presenting today is balanced.

It will reduce the structural deficit in the general fund and effectively solve it in the School Aid Fund.

It changes our tax system to help all Michigan businesses - large and small - grow and create jobs.

This budget allows us to keep investing in job creation and in job training.  It protects people during this transition from the old Michigan economy to the new.

And it finally stabilizes funding for our schools so they can focus on educating our children.

For Michigan to prosper in the 21st century, we must invest in education.  No investment will produce greater returns than the one we make in educating our children in terms of creating new businesses and new jobs for Michigan.

Accordingly, I will not sign a budget that cuts education.  Nor will I sign a continuation budget and put off the tough decisions that we have been elected to make.  Do it by July 1.
 
Pundits are predicting that you will pass only a fake budget built on inflated and invalid assumptions in order to get out of town without having to take any tough votes in an election year.  Or that you won't pass a budget at all and will simply pass a continuation budget that kicks the can down the road. 

Just to be clear:  I will veto any budget that makes further cuts to education, that passes off this responsibility to some later date or later Legislature, or that is not backed by the professional estimates of the nonpartisan fiscal agencies. 

By submitting my budget recommendation today, I have met my deadline as required by law.  Now it's the Legislature's turn.

Hand the budget back to me by July 1.  The people of Michigan deserve no less.   

Thank you for this opportunity.  Budget Director Emerson now wants to say a few words, and we'll be happy to answer any specific questions you may have.