Traverse City Record-Eagle

Election 2010

October 22, 2010

Next gov. will face large deficit

LANSING (AP) — Both the Republican and Democratic gubernatorial candidates say they don't plan to raise Michigan residents' taxes and that they'll cut business taxes so companies can create more jobs.

The lower-taxes, less-government mantra is popular with voters this year. But fulfilling their promises could turn the job of balancing Michigan's next budget into a Herculean task.

Whoever is elected Nov. 2 will have only a short period after being sworn in Jan. 1 to craft a budget proposal — 60 to 90 days, at most. Both Rick Snyder, a Republican businessman, and Virg Bernero, Lansing's Democratic mayor, say they would reduce spending by trimming unnecessary costs and improving efficiency.

Michigan already has done a lot of cutting, including dumping a popular college scholarship program, tapping the state's tobacco settlement money and scrapping requirements for all-day kindergarten. State spending has increased just 3 percent over the past decade.

Even so, the nonpartisan Senate Fiscal Agency says Michigan still will face a $1 billion shortfall in the budget year that starts next Oct. 1. The nonpartisan Citizens Research Council puts the deficit even higher, at $1.5 billion.

The gap will be caused by a number of factors, including the loss of federal stimulus money, higher personnel costs, tax exemptions for businesses such as the film industry, a scheduled drop in the state income tax rate and lower revenues caused by the continued sluggish economy. General fund revenue is down more than $2 billion, a decline of nearly 25 percent in just three years.

Neither Snyder nor Bernero has offered detailed plans for what services would be cut or eliminated and how big a hit state workers may have to take to balance the budget. About the only guarantee voters have at this point is that both would cut business taxes — but that could just deepen the hole.

Snyder's proposal to eliminate the Michigan Business Tax and replace it with a corporate income tax could cut revenues by $1.5 billion, doubling the size of the deficit to $3 billion. He also wants to cut the personal property taxes businesses pay on machines and equipment, eliminating up to $1 billion annually that mostly goes to local governments.

He says he'll find places to lower spending once he gets a closer look at the state budget.

"We need to get to a new budgeting system ... that gets to outcome and results instead of the broken model today, which is simply about spending billions of dollars on activities and such," Snyder said during his and Bernero's only debate.

Bernero's proposal to do away with the business tax surcharge could increase the deficit by $500 million, although the Lansing mayor says he'll try to find a way to make the change revenue neutral. He doesn't say where he'd increase taxes elsewhere, noting that a tax hike could hurt Michigan's struggling economy. He wants Congress to require companies to collect state sales taxes on online sales, which could generate more than $300 million. But such a move could be years down the road.

Nonetheless, he said during the debate that "we can and we will balance the budget without gimmicks." Although both say there's room in the budget to cut, Snyder and Bernero may have a tough time addressing two of the biggest areas of state spending outside of public education: Medicaid and corrections. The programs eat up over half of the general fund with nearly $4 billion in spending. Throw in $1.8 million for higher education and $315 million to pay off state debt, and there's not much left in the general fund to cut.

The state has dropped some health care services for the poor to save money, but it risks losing federal funds if it cuts Medicaid options much more. More than 1.8 million children, seniors and disabled adults are covered by Medicaid, 71 percent more than a decade ago, when economic times were better.

Congress has helped states deal with the rising Medicaid caseloads by sending stimulus money and raising the limit of federal matching funds. But that help is set to expire in the current budget year, leaving the state to pick up a $1.6 billion tab, according to the fiscal agency.

On corrections, costs are rising as Michigan continues to lock up a greater proportion of its citizens than other Great Lakes states. Prisoner health care costs have grown 116 percent over the past decade, the fiscal agency says. Personnel costs have risen even though the number of corrections employees has dropped.

Gov. Jennifer Granholm tried to get lawmakers to let nonviolent criminals serve less time in prison, but the move was resisted by many legislators and law enforcement officials. The next governor is likely to face the same roadblocks when it comes to cutting corrections.

Both Bernero and Snyder say state workers are going to have to get less if the state is to live within its means. They're now paying 3 percent into a health care retirement fund and picking up a larger share of their health care costs, and it's likely state workers will face contracts that include more givebacks.

According to the Senate Fiscal Agency, the state is spending 38 percent more on personnel costs, or nearly $4.8 billion, even with about 8,000 fewer employees than in fiscal 2000. That's about $86,100 for each worker's pay and benefits. The bulk of the increase has been in retirement costs and insurance costs.

Cutting state worker compensation is inevitable, Snyder says. But he adds that "it needs to be done in a very thoughtful way where there's shared sacrifice with people." Bernero says he already has cut his pay and health care benefits as Lansing mayor and will do the same if state workers are asked to absorb cuts.

"It's important that sacrifice be shared from the top," he says.

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