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Published: Friday, 6/1/2007

Michigan lawmakers avoid tough decisions, mortgage future

LANSING - Let's say you are making less money than you thought you would this year, and as a result, you are having a hard time paying the bills. You didn't do well last year, either, and as a result your savings are completely wiped out.

As a result, you decide to:

A) spend less.

B) try to get a second job and bring in more money.

C) do both A and B.

D) sign over your future Social Security benefits to a guy who will give you half of what they are worth, but will give that money to you now, in cash.

If you think the answer is D, you might flunk high school economics, but you'd be right at home in the Michigan Legislature.

Michigan's state budget is, everyone admits, structurally flawed. Lawmakers reduced both state income taxes and business taxes in the 1990s without cutting programs or getting money elsewhere.

So as a result the budget never generates as much revenue as projected, and now, with thousands of auto workers losing their jobs forever, the state's revenue stream is even weaker.

Last week, the state budget, which legally has to be balanced by Sept. 30, was $800 million in the red, despite hundreds of millions slashed earlier by executive order. A budget solution needed to be found by today, or the major bond rating agencies had threatened to again downgrade the state's already anemic credit rating.

There was speculation that Michigan's lawmakers might stay in session all weekend, and come up with a comprehensive program that would involve some new revenue.

But no. Lawmakers opted for a quick and dirty fix to balance the budget so they could take off for the long holiday weekend.

And they did it largely by putting off hard decisions and selling off the state's future. The "Social Security" money in question is actually the money the state gets every year from the 1998 settlement of a multi-state lawsuit against the big tobacco companies.

Michigan now gets about $242.7 million a year from the fund. Originally, the money was to be used for scholarships and tobacco-prevention programs. However, not only has the state been raiding it for the general fund, it now wants to sell off future payments for a fraction of their net worth. This isn't the first time this has happened.

Two years ago, Michigan decided to sell off future tobacco proceeds to set up the 21st Century Jobs Fund. The result was appalling. The state had to give up or "securitize" $940 million in future earnings to get $490 million up front - a figure that state officials say was reduced to $400 million after all the costs were factored in. That means a net loss to the state of $46 million a year for many years to come. Now, the state wants to repeat that.

Voting to sell off the state's future income for a pittance was a move that left virtually everyone stunned. But that wasn't the only move the lawmakers took to "balance" the budget.

The other things they did were as bad, or worse. While there is general agreement that the state's only hope for the future lies in higher education, the lawmakers again cut higher education by $26 million and "deferred," or put off, another $165 million in payments to the state's colleges and universities, until next year.

Look for steep rises in tuition as a result. Most of the rest of the debt was artfully pushed over to the next fiscal year, meaning the fiscal 2008 starts with a deficit of at least $1.6 billion.

"They dodged a bullet, and now they face a Gatling gun," said Craig Ruff, a senior fellow for the nonpartisan Public Sector Consultants, Inc.

What the budget deal really represents was a victory for State Senate Majority Leader Mike Bishop (R., Rochester) who said he would refuse to consider any tax increases to balance the budget.

Governor Jennifer Granholm accepted the deal, but was notably silent after its conclusion.

However, Mr. Bishop did agree not to block any vote on raising revenue for the 2008 budget. And virtually every observer agrees, on or off the record, that taxes will have to be increased next year. Considered most likely: Boosting the state income tax from its present 3.9 percent to the 4.4 percent it was in 1994, or the 4.6 percent it was before that.

"I still think we shouldn't use taxes as the answer to a revenue shortfall," Mr. Bishop said in a brief interview on his way to the legislative floor Wednesday. "But we have to look at every possible solution."

Apart from abolishing education altogether, it is hard to imagine many solutions worse than the way they balanced the current budget.



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