A version of this blog appeared as a commentary in Crain’s Detroit Business.
When I got my first glimpse of Governor Gretchen Whitmer’s $74 billion Fiscal Year (FY)2023 spending proposal last week, I was reminded of some advice my grandmother shared during many a Thanksgiving dinner – make sure you have a balanced mix of offerings on your plate. Faced with a bounty of my favorite holiday foods, my inclination often was to pile up on all the items I liked, leaving little room for anything else. Balance is just as important when it comes to government finances. In this vein, the Governor’s budget plate is overflowing with new and varied spending proposals with a small portion of tax relief sprinkled on top, but it does not include a serving of long-term debt relief.
This is unfortunate because Michigan state government is in an historically unique fiscal position to offer taxpayers a healthy serving of debt relief AND increase investments in critical state priorities. That is because of the massive budget surplus the state is currently sitting on. As we noted previously, the current-year budgets for general state government operations (General Fund) and education programs (School Aid Fund) are flush and currently looking at a combined projected year-end surplus of nearly $7.0 billion that will remain available in FY2023.
The surplus effectively represents one-time funding, so tapping these dollars to finance permanent, ongoing programs runs the risk of creating structural imbalance once the money runs out. These one-time resources should most appropriately be directed toward one-time purposes whether that is to finance additional one-time government spending, provide temporary tax relief, or pay down a portion of the state’s long-term debt.
We were glad to see that Governor Whitmer’s budget proposals largely take this approach and, importantly, maintain a structural balance between ongoing revenues and spending. However, the governor’s plan to use the $3.6 billion School Aid Fund surplus skews entirely towards spending and misses an opportunity to pay down some of the state’s largest and most expensive debts. Major spending items include $1.5 billion for teacher and school employee retention bonuses over the next four years and $1 billion for building and infrastructure capital improvements across Michigan’s traditional public schools (charter schools are excluded).
Because the state has not saved enough to meet retirement obligations in past years, it has made public school employees its largest creditors and amassed massive unfunded liabilities in the school pension system. These liabilities are effectively state-issued IOUs for services already rendered by teachers and other school employees.
Michigan taxpayers owe the Michigan Public School Employees Retirement System’s (MPSERS) retirees and current workers $33.8 billion more than the state has saved to finance promised pension benefits. Making an additional debt payment today would save both districts and the state money over the long term. Using a portion of the $3.6 billion School Aid Fund surplus dollars for a sizable, one-time principal payment will save interest costs over the remaining term of the debt, freeing up this money to re-invest in classrooms in future years. This works much like the interest savings a homeowner realizes when she makes an additional principal payment on a home mortgage.
There are no easy alternatives for retiring MPSERS debt other than to put additional cash into the system to pay what has been promised already. And, there is precedent for doing so; in 2018 the state used $200 million in surplus budget funds to make an additional principal payment. At that time, the School Aid Fund surplus was not even close to today’s projected $3.6 billion amount.
The financial benefits for paying down pension debt early will not accrue until years in the future when the interest savings can be redirected to classroom operations. As such, there is no organized constituency today to advocate for doing so, which may explain why the governor’s budget request passes on spending surplus funds to pay down MPSERS liabilities. A more balanced budget proposal would consider the financial benefits accruing to Michigan’s future school children from providing pension debt relief today.
Permission to reprint this blog post in whole or in part is hereby granted, provided that the Citizens Research Council of Michigan is properly cited.