Cynical Synapse

Sun, 13 Sep 2009

Michigan Politicians Don’t Get Budget Crisis

Filed under: Bailout, Budget, Duh, Economy, Government, Michigan, Politics, Rants — cynicalsynapse @ 4:14 pm

Playing partisan politics resulted in a brief Michigan state government shutdown in 2007. It sure as hell looks to me like House Democrats, Senate Republicans, and Democratic Gov. Jennifer Granholm are headed for another government shutdown in, oh, about 17 days. The Democrats did nothing all summer and Granholm spent the weekend in Japan.

Failing to understand the magnitude of the budget crisis, Michigan’s politicians plan to use Stimulus money to plug some of the gaps. The state has a structural operating budget deficit, however. Using federal recovery act money masks the magnitude of post-Stimulus deficits and defers the hard choices for two years. Just like deferred pay cuts, next term is when the real budget crisis will hit.

Michigan is in dire straits. Even a rebounding economy won’t fix budget issues. Especially in Michigan. And, especially after Stimulus money runs out. From the Wall Street Journal: “The Coming Reset in State Government“.

State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.

Most governors I’ve talked to are so busy bailing that they haven’t checked the long-range forecast. What the radar tells me is that we ain’t seen nothin’ yet. What we are being hit by isn’t a tropical storm that will come and go, with sunshine soon to follow. It’s much more likely that we’re facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand.

The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.

For now, my state’s situation is far better than most, but it won’t stay that way if we fail to act in Indiana. At present, we are meeting our obligations, without raising taxes, and still have over $1 billion in reserve. But the dominant reality is that even assuming the official revenue projections are accurate (and they have been consistently too rosy for the past two years), the state of Indiana will have fewer dollars to work with in 2011 than it did in 2007. Most other states face similar or worse prospects.

And, unlike the aftermath of past recessions, odds are that revenues will take a long time to catch back up to their previous trend lines—if they ever do. Tax payments have fallen so far that it would require a rousing economic rally to restore them. This at a time when the Obama administration’s policies on taxes, spending and more seem designed to produce the opposite result. From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

I doubt even that would suffice to rescue most states…

So, Michigan’s politicians, who refuse to even work together on the state’s current shortfalls, would rather play whack-a-mole with each other’s preferred fixes. Republicans chop Promise Grants. The Gov. cuts local revenue sharing and State Police. House Dems twiddle their thumbs. And the next election season is the only reason they’re even thinking about the 2011 budget. Michigan politicians have no clue the state budget will suffer meltdown in 2012. Some simply don’t care because term limits will dump their sorry asses.

HT: theblogprof

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