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August 12, 2019

How quickly we forget

This article appeared in the Michigan Association of Counties’ magazine.

As an observer and commenter on state and local government finances in Michigan, I feel compelled to remind our policymakers and finance manager to follow the KISS principle – Keep It Simple, Stupid.

Much of the state’s attention in the first part of the year was focused on Lansing’s efforts to find resources to fix the roads. Most agree that more money is needed to fix roads that have slipped into poor condition and better maintain those in good or fair condition. We would also expect the legislature to look at opportunities to use new and existing funding more efficiently and effectively. This might involve reexamining truck weights, jurisdiction of roads, and funding for transit. 

Yet state policymakers are drawn to plans that make funding schemes overly complicated. This erodes confidence in government and makes each subsequent effort to address funding needs more difficult. 

The quality of our roads has been a long-standing issue. The first, recent effort to address this issue culminated in the May 2015 constitutional amendment that would have increased the permissible sales tax rate to pay for schools and state revenue sharing so that motor fuel taxes could pay for roads. I started calling this the Rube Goldberg contraption of policy initiatives: Flip a switch, and a complicated chain of reactions leads to a simple result. It was too complicated and voters rejected it.

That led to a lame-duck effort to fund the roads. You’ll recall the final agreement settled on a plan to raise $1.2 billion – an amount acknowledged to be too little – over a long, drawn-out period. Half was to come from new revenues and half from the redirection of existing revenues. We’re now four years removed from that agreement and full funding has yet to materialize. 

With term limits, many of our current legislators were not around to learn lessons from these unsuccessful efforts. Once again they seem hell-bent on devising a funding scheme that is as complicated as possible.

I felt the taxpayers of Michigan collectively roll their eyes when the proposal to issue pension obligation bonds was floated recently, in association with a plan to change the amortization period for the teacher pension plan. 

Nobody understands the problems of cash flow and frustration with being unable to access financial resources better than county and municipal officials. But kicking the can further down the road is a gimmick that creates new problems for tomorrow’s leaders to address. And the road-funding can has been kicked so often it’s as dented as a demolition-derby car, if it hasn’t been lost in a pothole by now.

What is the lesson for county officials? The KISS principle is best adhered to when the pleasure of spending money is attached to the pain of raising it in the most simple, straightforward way possible. 

Often state and local government officials look for funding schemes that will export taxes to people in another jurisdiction. Pension obligation bonds and lengthening amortization periods are ways to export taxes to future generations. 

These gimmicky schemes are not a replacement for taxes. The simple approach is to understand that governments raise sustainable funding by levying taxes or charging fees. Assets can be sold, but that only provides one-time funding. 

Governments do not raise revenue by selling bonds. They borrow against future revenues. Because bonds are sold as investments, the investors want to be paid back with interest.  The net result is the creation of extra costs for tomorrow’s taxpayers for services provided yesterday. 

Yes, pension obligation bonds have been used productively in some places, but employing this financial tool comes with great risk. (Ask anyone in Detroit.) 

Likewise, lengthening amortization of liabilities for a closed pension plan asks future taxpayers to contribute to the cost of services that were provided in earlier periods. Intergenerational equity suggests that the taxpayers 30 years from now should not be left with a bill for services provided years ago. 

Both amortization and bonding are designed to export the financing of a cost over the period of time when a service or item of infrastructure will be consumed. They are perfectly legitimate funding mechanisms when the pension plans remain open to new participants or to fund infrastructure that will be used for many generations. To use these mechanisms for other purposes, as a means of exporting financial burdens to future generations is not good government practice. 

We have learned that funding schemes are not a replacement for taxes many, many times over the years. That lesson seems to be lost on our current state officials. How quickly we forget.

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

How quickly we forget

This article appeared in the Michigan Association of Counties’ magazine.

As an observer and commenter on state and local government finances in Michigan, I feel compelled to remind our policymakers and finance manager to follow the KISS principle – Keep It Simple, Stupid.

Much of the state’s attention in the first part of the year was focused on Lansing’s efforts to find resources to fix the roads. Most agree that more money is needed to fix roads that have slipped into poor condition and better maintain those in good or fair condition. We would also expect the legislature to look at opportunities to use new and existing funding more efficiently and effectively. This might involve reexamining truck weights, jurisdiction of roads, and funding for transit. 

Yet state policymakers are drawn to plans that make funding schemes overly complicated. This erodes confidence in government and makes each subsequent effort to address funding needs more difficult. 

The quality of our roads has been a long-standing issue. The first, recent effort to address this issue culminated in the May 2015 constitutional amendment that would have increased the permissible sales tax rate to pay for schools and state revenue sharing so that motor fuel taxes could pay for roads. I started calling this the Rube Goldberg contraption of policy initiatives: Flip a switch, and a complicated chain of reactions leads to a simple result. It was too complicated and voters rejected it.

That led to a lame-duck effort to fund the roads. You’ll recall the final agreement settled on a plan to raise $1.2 billion – an amount acknowledged to be too little – over a long, drawn-out period. Half was to come from new revenues and half from the redirection of existing revenues. We’re now four years removed from that agreement and full funding has yet to materialize. 

With term limits, many of our current legislators were not around to learn lessons from these unsuccessful efforts. Once again they seem hell-bent on devising a funding scheme that is as complicated as possible.

I felt the taxpayers of Michigan collectively roll their eyes when the proposal to issue pension obligation bonds was floated recently, in association with a plan to change the amortization period for the teacher pension plan. 

Nobody understands the problems of cash flow and frustration with being unable to access financial resources better than county and municipal officials. But kicking the can further down the road is a gimmick that creates new problems for tomorrow’s leaders to address. And the road-funding can has been kicked so often it’s as dented as a demolition-derby car, if it hasn’t been lost in a pothole by now.

What is the lesson for county officials? The KISS principle is best adhered to when the pleasure of spending money is attached to the pain of raising it in the most simple, straightforward way possible. 

Often state and local government officials look for funding schemes that will export taxes to people in another jurisdiction. Pension obligation bonds and lengthening amortization periods are ways to export taxes to future generations. 

These gimmicky schemes are not a replacement for taxes. The simple approach is to understand that governments raise sustainable funding by levying taxes or charging fees. Assets can be sold, but that only provides one-time funding. 

Governments do not raise revenue by selling bonds. They borrow against future revenues. Because bonds are sold as investments, the investors want to be paid back with interest.  The net result is the creation of extra costs for tomorrow’s taxpayers for services provided yesterday. 

Yes, pension obligation bonds have been used productively in some places, but employing this financial tool comes with great risk. (Ask anyone in Detroit.) 

Likewise, lengthening amortization of liabilities for a closed pension plan asks future taxpayers to contribute to the cost of services that were provided in earlier periods. Intergenerational equity suggests that the taxpayers 30 years from now should not be left with a bill for services provided years ago. 

Both amortization and bonding are designed to export the financing of a cost over the period of time when a service or item of infrastructure will be consumed. They are perfectly legitimate funding mechanisms when the pension plans remain open to new participants or to fund infrastructure that will be used for many generations. To use these mechanisms for other purposes, as a means of exporting financial burdens to future generations is not good government practice. 

We have learned that funding schemes are not a replacement for taxes many, many times over the years. That lesson seems to be lost on our current state officials. How quickly we forget.

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

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