Is Two-Year Spending Plan the Answer to Michigan’s Budget Woes?

Facts don’t support the rush to two-year state budgets

by Douglas C. Drake
April 16, 2010

From time to time — and this is one of those times — “reformers” call for the Michigan Legislature to change its budget process by adopting a two-year spending plan rather than an annual one. Most recently, Business Leaders for Michigan, a prestigious group of private sector CEOs, says in its turnaround plan for the state that “adoption of two-year budgets…[would] more accurately project the ongoing cost of programs.”

So, the question before us becomes: is a two-year budget the answer to Michigan’s budget woes?

The answer, quite simply, is no.

The problem isn’t so much the budget calendar as the budget process, the state economy, and the inability of the participants to find common ground for decision-making.

But wait, isn’t moving to two-year budgets the closest thing to bipartisan and executive-legislative agreement around Lansing? The governor has suggested it, the speaker of the House has a proposal, and at least one Republican candidate for governor has another proposal. Other legislators have similar plans.

As usual, they are all different except in one regard. They really do little more than tweak the calendar, with no fundamental improvements to a failing process.

Following are five fundamental questions and research-based answers about two-year budget proposals.

Question 1: What kind of two-year budget?

The National Conference of State Legislatures (NCSL) reports that 30 states have a traditional annual budget, although two of these states (Alaska and Kansas) do a two-year budget for some small agencies, and another state (Missouri) does a two-year capital budget.

Sixteen states have a practice of adopting two one-year budgets at once. This, in effect, creates a promise of what year two will be like, although we are not aware of any studies that show how frequently year two gets changed in the process (or year one, for that matter). In reality, it seems likely that changes will occur, and in those states with part-time legislatures, it would be likely that the governor would have more power to make those changes.

Only four states (North Dakota, Oregon, Washington and Wyoming) adopt a true 24-month budget. Again, these simple categorizations don’t tell us how often changes get made during the year in each state, or what role legislatures might play relative to the executive in approving those changes. All of these states are much smaller than Michigan.

Generally speaking, annual budgets give more control and influence to both governors and legislatures relative to administrative agencies. In Michigan the legislature has relatively strong budgetary powers: the governor has limited authority to make transfers or spending cuts without the concurrence of the legislature. In many other states, governors have much more discretionary control over expenditures.

Simply changing the dates on the budget calendar won’t change these fundamental differences of approach and control. And simply changing the dates won’t do anything to improve program efficiency, or program evaluation either.

Question 2: Doesn’t the two-year budget give more predictability in spending for state agencies, local units, schools, and colleges? 

In theory, and maybe in Camelot, but in a state like Michigan, with a highly volatile economy rooted in cyclical manufacturing, even annual budgets have led to a bumpy budget ride. In Michigan the longer budget cycle simply could not smooth the economic cycle, and in those now immortal words from the Clinton presidential campaign: “IT’S THE ECONOMY!”

Question 3: Can’t we get greater forecasting and planning accuracy from a longer focus, and by bringing in more outside experts and charging them with the responsibility of providing a longer-term outlook?

The current process places the responsibility for a “consensus” forecast in the hands of the House and Senate fiscal agencies and the Department of Treasury’s Office of Revenue and Tax Analysis. The current process already involves far more than the public consensus meeting sessions and also involves a wide range of non-governmental experts.

And what about the certainty part? Ask the K-12 folks about the certainty of their multiyear budget experience a few years back. Michigan tried a two-year budget process for K-12 and it didn’t work very well. In reality, every lengthening of the forecasting horizon increases the risks to accuracy rather than decreasing them.

Question 4: What can we do to improve the forecasting and budgeting process?

First, both legislators and residents need to better understand the current process and what the forecast can and cannot tell us. Think of the forecast itself as setting the broad parameters, not guaranteeing the specifics.

Second, beef up the existing Budget Stabilization (“rainy day”) Fund as soon as possible. Use it sparingly when it does return to significant levels. It is intended to buy time, not to insure against all disasters — time for policymakers to make tough decisions on spending cuts, time to use all the other tools of budget balancing, including revenues.

Third, understand that even as Michigan’s economy is changing, with the auto industry less dominant than it has been, it will still be the big kid on the economic block.

Fourth, Michigan needs to adopt a modern tax structure that will grow (and, yes, sometimes decline) more in sync with the economy. That means things like: a graduated income tax; taxing lots of services; taxing gasoline, tobacco, and beer on an ad valorem basis; and restoring some old taxes that seemed to work when our economy was thriving in the past, like the Estate Tax and the Intangibles Tax. This restructuring could be crafted at a revenue-neutral level as of a specified point in time, or benchmarked against a specified “normal” year if it is possible to agree on what normal is anymore. Or it could include phased-in increases that could be part of an overall structural budget solution.

Fifth, Michigan needs to conduct a serious, comprehensive evaluation of the effectiveness of tax expenditures. Are they all equally valuable and effective? Are they all more important than investing in preschool or K-12 or universities or health care or roads? Surely, haven’t some outlived their original value?

Many of these exemptions and special treatments are structured to help manufacturing. Is that the best policy for economic diversification into a knowledge economy?

The cornerstone of Michigan’s economic development policy for nearly four decades has been cutting property taxes for manufacturing via PA 198 of 1974. Has that policy worked better than investing in our research universities might have, or investing more in workforce development? We’re still manufacturing-dependent, and manufacturing is still declining — and so is our investment in our schools, our universities and our cities in a nation and world that are growing more educated and more urban.

Sixth, Michigan can build a better budget system, with established goals for programs and measurements of the effectiveness of those programs in meeting those goals in the most cost effective (not necessarily the cheapest) way possible. Set the goals. Measure the progress. We need mutually agreed upon benchmarks. Use facts in making expenditure decisions, not perceptions. That would be progress. That would help us build the future a lot quicker than playing a three card monte game with the budget calendar. What ever happened to all that “Price of Government” training everybody went through a few years ago?

Question 5: Can this be done by statute or is a constitutional amendment needed?
There are constitutional issues around a two-year budget, and that’s the right way to go to avoid litigation of a statutory-only approach if policymakers really want to try it. Going constitutional does have its own issues: amendments would be needed to multiple sections in multiple articles, including both Proposal A and Headlee Amendment references. Even if the proposed changes are kept strictly to the necessary technical ones, this could be a hard sell on the ballot.

Most important in this dust storm of activity surrounding all of the two-year budgeting proposals is to remember this: the real problems facing Michigan, the governor and the legislature are the economy, the tax structure, and the budget information and decision-making system. Simply changing the calendar won’t change any of these.

Douglas C. Drake is a senior policy consultant and director of Health, Human Services, and Philanthropy for Public Policy Associates, a Lansing-based national public policy consulting firm. He previously was associate director of Wayne State University’s State Policy Center and held several key budget-related posts in state government.

Note: A more detailed version of this article will appear on the Public Policy Associates website beginning April 21.