Breaking Down the Budget Battle in Michigan

The Problems are Massive, The Soutions Require Courage

    icon Mar 31, 2011
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As my former colleague on the Saginaw Charter Commission, Greg Schmid, writes in a guest editorial in this current edition of The Review, Michigan is set to enact a controversial law that expands state power over fiscally stressed local governments and gives emergency managers broader authority, including the ability to terminate labor contracts.

The measure, which overhauls the state’s 20-year old law for dealing with distressed governments, sparked some of the largest protests that Lansing has seen in years. Opponents call it an assault on collective-bargaining rights that echoes proposals in Wisconsin & Ohio and seriously undermines the power of local governments.
But Governor Rick Snyder & State Treasurer Andy Dillon urged the bill’s passage, warning that dozens of municipalities and school districts are facing insolvency and would benefit from the new tools.
The Bill expands the circumstances under which the state may step in to review a local government, and expands the number of triggers that would lead to a takeover. It would allow managers to remove pension fund trustees if a pension fund is less than 80% funded and would allow emergency managers to terminate labor contracts, strip local ordinances, hold millage elections, dissolve a government with the governor’s approval, and merge school districts.
One way a review could be ‘triggered’, for example, is if one or more rating agencies assign a lower rating to a unit’s long-term debt, or if a school district ended its most recent fiscal year with a deficit and had not submitted a deficit elimination plan to the state.
As one that has followed and participated in politics for many decades, this type of accountability is essential at this juncture of our state & nation; but as with so many laws, will work only if they are enforced.
From a state perspective, the unfunded liability for the state's four major pensions — schools, state employees, police, and judges — is pegged at $11.6 billion, and the future health care liability ranges from $45-50 billion. Even if the state started meeting its obligations today, it would take $2 billion annually for the next 30 years just to get even.
The scary reality is simply that our chickens have come home to roost.
Problems cannot be changed without radical changes in our standing living, or unless we go after the perpetrators who got us into this mess and get creative about the way we make up our state’s $1.8 billion deficit.
With the Bush sponsored and Obama sanctioned bailout of Wall Street, the government transferred all of Wall Street’s bad debts into the U.S. Treasury and has printed trillions of dollars to paper over those debits, both in March, 2009, and in October of 2010. Indeed, the government has been borrowing so much money using short-term loans that we can’t afford the interest on those loans.
The Congressional Budget Office in its January 2011 report states U.S. income tax receipts at $900 billion a year; corporate taxes at $200 billion annually, and our current annual deficits at $1.3 trillion.  Even if we doubled the tax revenue we still would be running a deficit of more than $100 billion per year.
Currently the government counts all $865 billion of payroll taxes for Medicare & Social Security as income, which it is not – its supposed to be financing future liabilities, but is spending that money now. This is one part of solving the puzzle. Social Security will post $600 billion in deficits over the next ten years, so even if U.S. citizens – rich & poor alike – were taxed 100% of their income, the U.S. government would still not be able to balance the budget.
These realities with the U.S. government printing trillions of dollars to meet its existing obligations is threatening to have the dollar removed as the foundation of the world banking system. As the reserve currency we can print as much money as we want, but if the dollar is removed as the IMF reserve currency, we could easily witness a 25% reduction in the U.S. standard of living.
So taxation alone is not the answer. And through this sobering crisis we need to get creative, which is why this latest move by the State of Michigan to rein in control over fiscally irresponsible communities is at least an important first step.
The number of government workers, former judges, and ex-Sheriff’s currently receiving sizable pensions from former posts while ‘double-dipping’ with salary packages from new positions is staggering, just in Saginaw County alone. With Education, the head of Delta College receives a total compensation of $212,770 plus fringe benefits alone, not to mention a full pension plan and an agreement to pay potential back personal income taxes estimated up to $60,000.
According to The Free Enterprise Nation, which is a national organization representing the economic interests of those within the state who actually work and support the ‘private sector’ portion of our economy, the latest survey by the U.S. Government’s Bureau of Economic Analysis showed that the average federal employee earns $119,982 per year in compensation & benefits, while the average private sector employee earns $59,909. To cover the additional compensation packages of government employees, $100 billion a year is taken from the private sector in income taxes.
State Sen. Roger Kahn and Rep. Ken Horn are veteran Republicans who support Snyder. They emphasize that they respect state public employees’ rights to protest in Lansing. Horn notes, “I thought it was good to see people actively participating in the process, even if there weren’t as many people as we expected.” Kahn adds that the protesters “don’t necessarily represent a majority.”
Regarding Synder’s proposal to appoint emergency managers in distressed communities, Kahn says the concept is not draconian or heavy-handed.
“We’re looking at a four-step process, rather than one size fits all,” Kahn says.
The steps are:
(1) The state treasurer identifies a distressed community. (2) The treasurer’s reasons are either upheld or rejected with independent financial analysis. (3) If the community still is judged to be distressed, the emergency manger enters the picture.  (4) If the emergency manager is unable to bring about solutions, then bankruptcy is declared.
One question people are asking is how a local government can be declared invalid yet the state continue to tax? What about ‘No taxation without representation’, which was the founding impetus of our country?
However, local governments have always existed at the pleasure of the state. It's generically called Dillons’ law - and it basically says that local government has no inherent sovereignty. Local governments are mere subdivisions of the state, and the state has granted them some self-rule options.  
Both Horn and Kahn declined to evaluate whether they see similarities or differences in the approaches of Snyder and Wisconsin Gov. Scott Walker. Horn said he would not answer because he felt the question was “politically motivated,” while Kahn said he was not familiar enough with Wisconsin to make comparisons to Michigan.
Other mid-Michigan legislators did not respond to the Review survey.
But while this new bold ‘Marshall Plan’ for forcing accountability on local units of government is needed, the looking glass must obviously be focused on Lansing and beyond to Washington.
Senators who voted against the bill package warned that, combined with Snyder’s proposed 2012 budget cuts, it would end up sending more local governments into fiscal stress.
“This bill, along with the governor’s proposed cuts, is going to create a race to the bottom, which guarantees that many of our cities and schools are going to head into bankruptcy,” Senate Minority Leader Gretchen Whitmer, D-East Lansing, said before the final vote.
One thing Americans do not like – regardless of their mindset or party affiliation – is for elected officials and public servants to enjoy advantages, which they as taxpayers, are denied. In the last year alone your U.S. House & Senate have voted themselves $4,700 & $5,300 raises and also voted not to give a social security cost of living raise in 2010 and 2011.
Taxpayers have put up an estimated $17.5 trillion toward guarantees, loans, and bailouts since 2008, but what do they really have to show for it?   Banking interests have been the key beneficiaries of that $17.5 trillion in guarantees, loans & bailouts, yet they actually do have something to show for it.
At top-tier firms such as Goldman Sachs and J.P. Morgan Chase, the aid has meant record profits. Along with Morgan Stanley these three entities, which received funds from the ‘Troubled Asset Relief Program’ will reportedly dole out an unprecedented $29.7 billion in bonuses for 2009, almost half of that by Goldman Sachs alone, meaning it will enrich its 31.700 employees by an average of $415,000 each.
And this is where our lawmakers are falling short.
Take the case of JP Morgan Chase CEO Jamie Dimon. Before the banking world hobbled the rest of the world with its wanton recklessness, JP Morgan held a singular role in the whole mess as the primary clearinghouse for the American banking system. As firms such as Lehman began facing liquidity squeezes in 2008, JP Morgan demanded more than $7 billion in collateral to cover its risks, which only exacerbated Lehman’s decline. For banks like JP Morgan, the playing field with two major competitors out of the way, is smaller and a whole lot smoother.
Yet JP Morgan, acting essentially as the clearing house for unregulated betting that drove governments & businesses into the ground, leaving untold millions without work around the world, walked away with $135 billion in compensation just last year. 
And that’s only one bank. Imagine if lawmakers had the courage to actually tax 20% of that windfall? On JP Morgan alone this would realize $27 billion in revenue, which would certainly be enough to handle Michigan’s $1.8 billion shortfall, along with providing sizable relief to the other 26 states in the union currently on the verge of oblivion.
During the first ‘Great Crash’ of Wall Street, President Franklin Roosevelt said of the banking world, “They are unanimous in their hatred for me – and I welcome their hatred!’ But not so with President Barack Obama, who seems to ceaselessly enlist the aid and advice of those perpetrators that put us into our current mess.
In December of this year, Irving Picard, the trustee in the Bernie Madoff Ponzi scheme, charged in a 114-page complaint that JP Morgan was at the very center of the criminal enterprise, alleging that the bank, including senior officers, continually ignored internal warnings about the swindle, thereby allowing the Ponzi scheme to continue for years. The trustee is suing the bank not just for the $1 billion in feels it was charged over the years, but also for $5.4 billion in victim’s losses.
So again, where is the courage on the part of our government leaders to follow suit and go after the money that was raided from the cookie jar?
Another controversial provision of Governor Snyder’s plan, in addition to tightening the reins on local municipality spending, is eliminating the Earned Income Tax Credit, which will raise taxes on nearly 800,000 lower income families and their children by $400 million in 2012, while 85% of Michigan’s 300,000 businesses will receive a $1.8 billion tax cut.
An additional $900 million per year would be made up by taxing pension funds. Pensions of public employees have never been taxed in Michigan, but those working for privates are when they exceed $45,000 a year. Under Snyder’s proposal, both would be taxed, which seems fair on the surface; but again, is it really necessary or prudent for government to go after the weakest links in the chain when they are unwilling to make similar sacrifices?
Of course, apart from going after the perpetrators of this financial meltdown – as noted earlier – another relatively sane solution would be to simply end the War on Drugs, which would save $7.7 billion in combined State & Federal spending. Taxation of marijuana alone would yield up to $46.2 billion a year on a national level.
No small change, for certain.
One thing that is for certain is that unless something changes, we’ll be out of money by 2014, if not sooner.
It doesn’t take a rocket scientist to solve our financial woes; but it does take courage. And until that is summoned, the battle for what remaining scraps are left at the bottom of the barrel will rage, and the gulf between the Haves & Have Nots will widen like the sunset over a Third World Republic.

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