The Fiscal Year 2012 (FY2012) General Fund budget was balanced, in part, based on a commitment by the Snyder Administration to achieve $145 million in state employee concessions.  The specific savings, while unidentified at the time the budget was enacted in June, were intended to be permanent and reduce the amount of state operating appropriations going forward.  On September 28, the Snyder Administration, after terminating summer talks with represented state employee unions, announced an alternative plan to achieve the assumed savings for the upcoming fiscal year.  While some of the savings will be achieved through the state workforce, the remaining savings result from other changes, such as closing state facilities, privatizing services, and debt refinancing.  Some savings are structural in nature, but others are short-term, which means the FY2013 budget will have to cope with the resultant budget hole.

The Michigan Legislature completed its budget work in early June and by the end of the month the Governor had signed the two appropriation bills that constitute the FY2012 budget.  With the new fiscal year scheduled to start a little more than three months later on October 1, state officials began a dialogue with the represented employee unions to achieve the $145 million in concessions the budget was premised upon.  Because unions are under an existing collective bargaining contract through FY2012, they had to agree to open them up.  By mid-September a mutually-agreeable solution was not evident and the parties were at an impasse.  Still needing to secure the savings for the upcoming fiscal year, the State Budget Director, on September 28, announced the state’s contingency plan to achieve an equal amount of savings in the budget.

With the recent announcement, the good news is that the full amount of the savings will be realized and the FY2012 budget remains balanced.  However, the savings were not entirely achieved through permanent reductions to the state workforce, changes to employee compensation, or other long-term solutions, which could create a challenge for the FY2013 budget and beyond if more permanent solutions are not found.

The anatomy of the alternative plan is this.  The initial $145 million figure was reduced as a result of a concurrent $50 million savings plan announced by the Department of Corrections.  This involves closing a Detroit prison and privatizing another Southeast Michigan facility.  The Department also plans to privatize mental health and health care services.  These reforms represent structural changes and will yield on-going appropriation reductions.

Of the remaining $95 million savings to be achieved, the largest single item ($33 million) is a plan to eliminate 367 funded vacancies contained in the budget.  Another $19 million will come from a new requirement (effective 1/1/12) that employees covered by the state’s defined benefit pension plan contribute 4 percent of their compensation toward pension costs or risk being moved to a defined contribution plan.  The proposed 4 percent contribution is contemplated in House Bill 4701.  Finally, exclusively represented state employees would have to take 4 furlough (unpaid) days, saving the budget $10 million.

The plan also calls for further savings ($15 million) to be realized in the Department of Corrections from unidentified reforms that may require negotiations with unions and employee concessions.  The final component of the state’s contingency plan involves $20 million in savings from refinancing state debt.

The FY2012 budget remains balanced; however, the original plan to achieve this in part through $145 million in employee concessions was scraped when summer talks between the State of Michigan and its unions broke down.  It is likely that the state will revisit the issue of employee concessions in the upcoming year as part of the new employee contracts.  Many of the components of the alternative solution, if enacted, represent real, lasting savings to the state budget.  However, other components do not, such as the plan to furlough state employees.  Eliminating 367 state positions (currently vacant) represents a long-term cost saving item; however, it calls into question the ability of state agencies and programs to deliver the level and quality of services that taxpayers have come to rely upon.

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