Commentary: Governor’s budget skips part of long-term debt reduction

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When I got my first glimpse of Governor Gretchen Whitmer’s $74 billion fiscal year 2023 spending proposal last week, it reminded me of advice my grandmother shared at many dinner parties. Thanksgiving – make sure you have a balanced mix of offerings on your plate.

Faced with an abundance of my favorite holiday foods, I often hoarded all the items I loved, leaving little room for anything else.

Balance is just as important when it comes to public finances. In that vein, the governor’s budget base is replete with new and varied spending proposals with a small portion of tax relief sprinkled on top, but it does not include a portion of long-term debt relief.

This is unfortunate because the Michigan state government is in a historically unique fiscal position to provide taxpayers with a healthy portion of debt relief AND increase investment in critical state priorities. This is because of the huge budget surplus that the state is currently sitting on.

As noted earlier, current year budgets for general state government operations (General Fund) and education programs (School Aid Fund) are abundant and currently project a combined surplus. year-end projection of nearly $7.0 billion that will remain available in fiscal year 2023. .

The surplus actually represents one-time funding, so leveraging these dollars to fund permanent and ongoing programs risks creating a structural imbalance once the money runs out. These one-time resources should be allocated in the most appropriate way for one-time purposes, whether to finance additional one-time government expenditures, to provide temporary tax breaks, or to pay down part of the long-term debt of the state.

We were pleased to see that Governor Whitmer’s budget proposals broadly embrace this approach and, most importantly, maintain a structural balance between ongoing revenues and expenditures. However, the governor’s plan to use the School Aid Fund’s $3.6 billion surplus is entirely spending oriented and misses an opportunity to pay off some of the largest and most expensive debts in the school. State. 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 improvements in public schools. traditional schools in Michigan (charter schools are excluded).

Because the state hasn’t saved enough to meet its pension obligations in recent years, it has made public school workers its main creditors and racked up huge unfunded debts in the pension system. school. These liabilities are in fact IOUs issued by the state for services already rendered by teachers and other school employees.

Michigan taxpayers owe retirees and current Michigan Public School Employees Retirement System (MPSERS) workers $33.8 billion more than the state has saved to fund promised retirement benefits. Making an additional debt payment today would save districts and the state money in the long run.

Using a portion of the School Aid Fund’s $3.6 billion surplus for a one-time, large principal payment will save interest charges over the remaining term of the debt, freeing up this money to reinvest in classrooms in the years to come. It works much like the interest savings a homeowner realizes when they make an additional payment on the principal of a mortgage.

There is no easy alternative to paying off the MPSERS debt other than putting extra money into the system to pay what has already been promised. And, there is precedent for doing so; in 2018, the state used $200 million of surplus budget funds to make an additional principal payment. At that time, the School Aid Fund surplus was not even close to the $3.6 billion projected today.

The financial benefits of paying off pension debt early will only materialize in years to come, when interest savings can be reallocated to classroom operations. As such, there is no organized constituency today to advocate for this, which may explain why the Governor’s budget request reflects the spending of excess funds to pay down MPSERS debts.

A more balanced budget proposal would take into account the financial benefits that future Michigan school children would get from debt relief today.

Craig Thiel is director of research at the Citizens Research Council of Michigan.

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