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Published: Saturday, 10/26/2002

Michigan's finances worse than anyone will admit

LANSING, Mich. - Throughout this fall's campaign for governor, the state budget deficit has been looming in the background, barely acknowledged by either party. Republicans would prefer it be thought of as little as possible, since they've been in control of state government for more than a decade.

Democrats want to blame Republicans for it - but also want to give the impression that they will be able to overcome the shortfall and move on to find the money to do new things and create new programs.

So how bad are state finances really?

Worse than you think.

And far worse than either side wants to admit, according to A. Thomas Clay, a senior research associate with the highly regarded, non-partisan Citizens Research Council of Michigan. And he should know. Mr. Clay worked for Michigan's Department of Management and Budget for 30 years, eventually becoming deputy director, the highest non-political post in the department. Later, he served as deputy state treasurer.

“This is an honest, highly-regarded, straight-up kind of guy,” said former Gov. Jim Blanchard, one of four governors who relied on Mr. Clay. “If he says it, it is so.”

What Mr. Clay says is that “This is going to be a very, very difficult situation with no easy solution in sight.”

The analyst worked for Michigan's last four governors, three of whom were Republicans, before taking early retirement in 1996.

The crisis will be with us, he fears, regardless of whether the economy improves. Michigan, which operates on a fiscal year from Oct. 1 to Sept. 30, is officially projected to have a $500 million deficit for fiscal year 2003, which began Oct. 1.

But Mr. Clay thinks that is likely to grow - and next year will be far worse - “in the area of $1.5 billion,” with deficits projected to grow steadily after that.

That's something that state officials cannot legally allow to happen. Michigan's constitution requires that the budget be balanced. So state officials have only two choices: Find some way to get more revenue, which means raising taxes, or make cuts.

Lt. Gov. Dick Posthumus, the Republican nominee for governor, has flatly ruled out a tax increase. Jennifer Granholm, the Democrat, has said she “doesn't want” to raise taxes. That would seem to mean spending cuts - but those, Mr. Clay said, will be far harder to make than in the past.

“The structure of state employment is very different than in past [budget crises],” Mr. Clay said. Indeed, Mr. Blanchard in 1983, and current Gov. John Engler in 1991, inherited budget problems. Mr. Blanchard's deficit was even larger than it is now.

But there was more room to cut. A lot of the so-called “fat” already has been pared from Lansing. Unnecessary workers were eliminated in previous crunches, and not replaced.

Flipping through a PowerPoint presentation, he notes that the real deficit for this fiscal year actually would have been far worse, except for a one-time gain of $750 million the state realized through the sale of some assets.

Now, however, the cupboard is really bare. The state's “rainy day fund” and other surpluses are essentially empty, and the mechanisms that generate revenue for the state cannot, in his judgment, possibly keep up with spending for the next few years.

Looming increases in what the state has to pay for Medicaid are expected to add an extra $400 million “problem” by next year. Worse, though cuts in the state's unpopular Single Business Tax have been suspended, further automatic cuts in the state income tax are on the books.

Even suspending that, however, would only shave $352 million off the deficit. “Both major state funds - the general fund and the school aid fund - have very large operating deficits. [This] fiscal year begins the period of reckoning,” Mr. Clay said.

What will the next governor and legislature do? One likely target: Higher education. Tuition could rise as much at 20 percent.

Local governments may have to kiss revenue sharing good-bye. There may be less money, too, for primary and secondary education. And still the root causes of the shortfall will remain - “and we'll have a new governor, and a legislature that is mostly new (because of term limits) and without experience dealing with these problems.”

That doesn't mean that the problem won't be solved, or that the parties won't cooperate to find some unexpectedly creative new solution. Michigan has been flat on its back before - and surprised the experts by bouncing back. Still, when one looks at the figures, it is hard to resist thinking that the candidate who loses on election night may be the lucky one.



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