Should State Borrow Money for Environmental Programs?

Michigan voters will be asked on the Nov. 5 ballot whether to allow the state to borrow $1 billion for sewer upgrades to reduce water contamination. An informed vote will depend, in part, on knowing how the state has managed other bond funds as well as understanding the consequences of Lansing’s increased reliance on borrowing to finance environment-related programs.

If approved, "Proposal 2" would dwarf all previous environmental bond programs. The largest to date, the 1998 Clean Michigan Initiative (CMI), authorized $675 million in bond sales to underwrite brownfield cleanups, waterfront redevelopment, and pollution prevention activities.

The state auditor general has conducted no performance review of this bond program as required by the Clean Michigan Initiative Act. Nor have the state agencies that administer the CMI evaluated the success or failure of its various components. However, the Mackinac Center for Public Policy recently examined how CMI funds have been spent, and found cause for taxpayer concern.

For example, the sale of bonds to finance CMI has inflated the total cost of the program by 60 percent. To date, three CMI bond series have been issued, raising $153,620,000. But in addition to repaying this $153 million in principal, taxpayers also now owe bondholders $91,234,136 in interest. Legal and other administrative services related to the three bond issues cost an additional $346,000. Thus, taxpayers will repay about $1.60 for every dollar spent on CMI projects.

This debt service is troubling considering that Michigan’s per-capita debt relative to other states has worsened in recent years. The state ranked 36th nationally in state debt per capita in both 1980 and 1990, but had jumped to 24th by 1997. This debt load has also outpaced inflation. Between 1978 and 1998, for example, inflation increased 115.8 percent, while state debt increased 550.2 percent.

Such debt might be justified if the borrowed funds had been spent to counteract significant environmental threats. But our findings indicate that the CMI funding formula does not adequately distinguish among environmental priorities.

A substantial portion of the money is reserved for commercial, recreational and aesthetic improvements that will yield relatively minor environmental benefits. For example:

• $48 million in CMI-funded recreation grants have been awarded to 214 various units of local government for swimming pools, roller rinks, tennis courts, ice arenas and even renovation of a dairy barn and construction of a fish-cleaning station.

• $50 million in CMI funds have been allocated for state park renovations. Yet only eight years ago, voters approved an endowment fund for park maintenance, the balance of which currently exceeds $96 million.

• $47 million in CMI funding has been appropriated for 43 waterfront development projects, including $6.2 million for a cement "promenade" along the Detroit River and $85,000 to construct a parking lot in Mt. Pleasant.

The largest portion of CMI funds – $263 million – is reserved for decontaminating abandoned industrial sites, known as "brownfields." The goal of these cleanups is to curb suburban sprawl by increasing the availability of unsoiled and unencumbered urban properties.

But our examination found little evidence that brownfield cleanups funded under CMI are attracting private investment to urban areas. More progress might have been achieved had the state evaluated prospects for brownfield redevelopment before funding decisions were made. Instead, the Michigan Department of Environmental Quality essentially guessed whether tens of millions of dollars invested in specific brownfield cleanups would spur private investment and job creation.

Before Michigan voters approve an even larger bond program in Proposal 2, they should remember that large-scale borrowing eases the budgetary discipline that otherwise demands spending priorities. It also strains government’s ability to maintain adequate oversight of programs. Moreover, by creating two-dozen new programs, the CMI further enlarged government bureaucracy and exacerbated environmental politics – both of which frustrate a judicious allocation of funding.

Michigan citizens do care deeply about the environment, and have generously approved major spending increases for environmental programs through bond sales and endowment funds that supplement already sizable budget appropriations made annually by the Legislature.

But money alone does not maximize environmental quality. To the extent the state simply lavishes money all around, more will be spent on pet projects, and less will be targeted for the problems that need fixing most.

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Diane Katz is the director of science, environment and technology policy at the Mackinac Center for Public Policy, a Midland-based research and educational institute. This essay appeared in the Detroit Free Press Oct. 25, 2002. Her study on the Clean Michigan Initiative is available at www.mackinac.org/4765.