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What Does $1B In Cuts Look Like?

November 7, 2018

When Michigan’s state budget was on the ropes between 2002-2011, then-House Fiscal Agency Director Mitch Bean would carry around a list of $1 billion in budget cuts in his suit pocket.

Before 2007, it was because the state budget was looking at a $2 billion shortfall and legislators didn’t want to raise taxes. After 2007, legislators wanted to eliminate the income tax increase from 3.9 to 4.35 percent and wanted to know what budget cuts would be needed to make that happen.

Once they saw the list, the conversation usually ended. According to lore, former Senate Majority Leader Ken Sikkema once threw a budget with $1 billion of cuts on the GOP caucus room table and challenged any of his members to pick it up and sponsor it. Nobody did.

In 2017, the prospects of trying to find $1 billion to cut from the budget sank a House tax-cut plan because 12 Republicans didn’t see where the savings would come from.

The cuts aren’t pretty. And as long-shot Republican gubernatorial candidate Bill Schuette continues to make “eliminating the Granholm income tax hike” a major plank of his campaign, MIRS asked Bean to brush off his old list.

To be fair, the Schuette campaign says Bean is a two-time donor of Gretchen Whitmer. Spokesperson John Sellek said they aren’t talking budget cuts because “Bill’s goal is to aim for growth and stop talking about Michigan’s budget like a stagnate, shrinking pie. He has said many times he will not stand by and govern a slowly shrinking state.”

That said, the House Fiscal Agency analysis for the version of HB 4001 that phases in a return of Michigan’s income tax rate back to 3.9 percent would cost the state $1.1 billion when fully implemented over four years.

So, how do you eliminate $1 billion from the state’s $10 billion General Fund? Roughly $45 billion of the state’s $55 billion budget is federal and restricted money and can’t be touched.

Assuming transportation and K-12 education is off the table, the first place to go is Medicaid, the state’s biggest program. A 1 percent reduction in state Medicaid spending saves about $30 million. The problem with cutting Medicaid by 33 percent, however, is that for each $1 you cut from Medicaid, Michigan loses another $1.80 in federal matching funds.

“So a $1 billion General Fund cut cost is actually a $2.8 billion cut to health care,” Bean said. “There are some optional services you could cut or eliminate such as Mental Health, Home and Community Services, Pharmaceutical, Hospice, and Dental Services, but you still lose federal dollars, and they’re usually considered cost saving services in the long run. “

Prison funding is an option. About 20 percent of the General Fund pie goes to Department of Corrections — or about $1.96 billion. 

“The only way to save serious money in Corrections is to lock less people up. The cost of incarcerating someone is $36,000 to $37,000 per year, so for every 1,000 prisoners you release, you save about $36 million,” he said. 

“If you release 5,000 prisoners you save $185 million — of course that assumes there’s no increase in probation and parole costs — so there is no oversight of released prisoners. You could save about $53.5 million for education, job training, and career readiness programming for prisoners while they’re incarcerated, but that would probably increase recidivism. We could always go back to privatizing prisoner food costs – that worked really well!”

Higher education is the next likely suspect. Michigan used to spend more on higher education than corrections, but that’s not the case anymore. Now it’s about $1 billion for Higher Education coming out of the General Fund.

Appropriations per student declined 39 percent from Fiscal Year (FY) 2001 to FY 18. In FY 2019 higher education spending is about 11 percent below it’s highest peak.

“More cuts would mean increased tuition and fees,” he said.

What about cutting or eliminating statutory revenue sharing? 

This year statutory revenue sharing is under-funded compared to “full-funding” by about $633 million — but Cities, Villages and Townships are still getting about $255 million and Counties are getting about $221 million — so there’s about $471 million in savings right there. 

“Of course they would have to lay off a bunch of public safety personnel (the Michigan Municipal League reported that budget constraints led to the loss of 2,315 police officers and more than 1,800 firefighters from FY 01 to FY 10). And several local governments would probably go into insolvency during the next economic downturn (if not before) – but what’s that among friends,” he said.

There are at least nine other budgets where cuts could save money. 

Eliminating General Fund money to all of them — Department of Agriculture and Rural Development, Attorney General’s office, Department of Environmental Quality, Department of Education, Executive Office, Auditor General’s office, the Legislature, Secretary of State, Department of Technology, Management and Budget, and Treasury saves $578 million.

“Some might say ‘that’s a good start,’ but without Treasury I guess tax collections would be optional,” Bean said. “Good luck with that, too.”

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