Thank you for that kind introduction, Renee. As director of fiscal policy for the Mackinac Center for Public Policy I have had many opportunities to discuss budget issues with state officials, business owners, and the general public. As Gov. Granholm is only one step away from locking in the state budget for 2004, and since state taxes and spending can have a dramatic effect on small businesses, Renee has asked that I direct my remarks to state budget issues. I am happy to do so.

Most of you may recall that at the end of last year and the beginning of 2003, the state of state budgets were in the news nearly every day. In January of this year, only 13 states had no mid-year budget deficits in their general funds. The general funds are accounts over which state legislators have the most discretion.

By mid-year I mean these were unanticipated budget deficits based on the appropriations made by state legislators in the budget process. And these were not the only accounts where anticipated spending "needs" outstripped anticipated revenue from all sources. Governor Engler’s administration was forced to make changes to the state budget before he left office to ensure that the budget was balanced when he left office at the end of 2002.

By the time Governor Granholm took office in January it was clear that she was going to need to make additional cuts in spending just to keep the 2003 budget balanced months before introducing her very first budget — and one that would need to address an anticipated $1.5 billion general fund deficit for the 2004 Fiscal Year, beginning in October of this year.

The Mackinac Center for Public Policy saw this deficit problem coming last summer. In August 2002 we began work on what would culminate in a 157-page budget study that would make more than 200 recommendations for cutting state spending in nearly every department of state government. We believed that it was necessary to make the case for spending cuts over tax increases for several reasons.

First, it is only fair. We recognized that citizens across Michigan were re-examining their own spending priorities and doing without some things they would love to have in order to cope with the downturn in the economy. There is no reason the state shouldn’t do the same. Second, we now know from the experience of the last recession what happened to states that balanced their budgets by raising taxes. The 10 states that raised taxes the most to cover their deficits had some of the slowest economic recoveries among the 50. Conversely, the states that cut spending, and even went so far as to cut taxes, had some of the fastest economic growth rates of any state in the nation. Lastly, as challenging as balancing the 2004 budget may have seemed, state government is not the only means, not necessarily the best means, for meeting human needs.

Our recommendations for cutting spending would include the mundane, the bold, the controversial, and even the humorous. All told our ideas were enough to save the state more than $2 billion in the general fund alone, and we didn’t touch Medicaid.

Allow me to share with you just some of the recommendations:

• Administrative staff. For every program reduction recommendation we made we also recommended cutting administrative staff by a commensurate percentage. This was a fairly mundane recommendation but one we thought important. Savings: More than $50 million.

• Devolved road patrols. We recommended devolving the state police road patrol function to county Sheriff’s and providing a grant equal to about 77 percent of what we currently pay State Police to do it for. Savings $65 million.

• Pageants and Dances. The Center encouraged the Department of Agriculture to end its practice of hosting the Michigan Equestrian Princess Pageant and Michigan Horse of the Year Ball. Savings $10,000.

• Fairgrounds and ski resort. We recommended selling off the state fairgrounds and state owned and run ski resort to the highest bidder, which would allow the state to stop subsidizing the fair’s general fund and capital investments in the property itself. From a state fairgrounds sale we estimated a $59.6 million one-time revenue enhancement.

• Conference centers. The state owns and operates a motel/convention center in Roscommon. We recommended that it be sold for $10 million.

• Human Resources. The state maintains a human resources staff for every department of state government. We recommended that Lansing officials consolidate the function into one unit and outsource the duties to a private firm. $5-$10 million.

• Arts grants. It’s the center’s view that arts are too important to be left to politics and politicians. Politicizing arts funding puts artists at risk of losing out to those who write great grant proposals, rather than those who make great art. It can also be unfair. We know that Michigan arts funds have funded by people with relative low incomes for the recreation of those with relatively high incomes. On a humorous note, how many people here know that past state arts grants have subsidized such arts as the "teaching artist"? One such performance paid a Lansing artist to visit public schools dressed as Cortez and bark at the students in gibberish, the lesson being, "well, now you know how the Aztecs felt."

• User fees. We also recommended increasing fees in two areas: park user fees, which were only covering 64 percent of actual park costs, and notary services at the secretary of state’s office, which has not seen a fee increase since 1942.

We do not know precisely what effect our studies and ideas had on the state final state budget produced by the Granholm administration because no one in the administration has given us credit. Our inability to clearly quantify our influence is the bad news. The good news is that we influenced the debate.

Legislators and policymakers have discontinued such programs as the princess pageant and horse ball, and reduced funding for the"taste of Michigan" program — which gave money to a group in Southwest Michigan to hand out free fruits and Christmas tree corsages at the New Buffalo rest area. Governor Granholm also tried to halve state funding for the arts. In addition, the Department of Natural Resources is attempting to outsource the management of the state-owned ski resort, and that at least one representative is interested in outsourcing human resources management at the state level.

Also, our idea to devolve state road patrols was cause for vigorous debate among state legislators, pundits and the general public.

So how has Jennifer Granholm done thus far with respect to the state budget? On balance, pretty good. The Center has had the great pleasure of praising her moves these past 7 months for her candor, astuteness, and willingness to look at the state budget crisis as an opportunity to reform the way the state does business.

Not everything she has done has been ideal, of course, but it is likely that no Governor would have produced the perfect budget. Indeed, relative to other states Michigan is in much better shape for having avoided a general tax increase. According to Americans for Tax Reform, Alabama is looking at increasing taxes in the next two years by $1.2 billion to cover its current deficit and to increase spending. And need I mention California, which sports a $38 billion deficit and is attempting to recall its Governor?

Today, the Governor is one step away from finalizing her freshman budget.

The last hurdle to be surmounted involves about $230 million in pay and benefit concessions. State employees are in no mood to give up pay they’ve been expecting which may result, according to the Governor, in large layoffs. Other important components of the Granholm/Legislature budget deal include:

• $650 million-plus in federal assistance as part of the last Bush tax cut deal. The money will be used to cover 2004 budget costs and $200 million of it will be placed into rainy day funds. Not surprisingly there is some anecdotal evidence — already — that states are using these new federal funds, meant to help close big deficits, by introducing new spending. At least Governor Granholm is using it cover a current deficit and future rainy day;

• $200 million in new fees;

• $70 million in new charges to bad drivers;

• $43.7 million cut in revenue sharing — that portion of revenues directed to local units by the state;

• $36 million to provide computers to sixth graders.

Again, while the deal struck in Lansing to balance this year’s state budget is not ideal, it could have been much worse. To Granholm’s great credit she was willing to scrutinize much of what state government does and demand real cuts in state spending—something the press did not entirely expect from a Democratic governor. In fact, in mid-July when the budget deal was made public a member of the press asked the Governor what it was like to pass a Republican budget. She shot back that she was a 21st-Century Democrat — the exact language the Mackinac Center for Public Policy used to describe her in March:

We said, "If Granholm keeps going on the course she has set for herself, she could well become a model for the New 21st Century Democrat; one with feet planted firmly enough in fiscal reality to begin taking back the upper hand republicans have gained on the national political scene . . ."

A single sage warning must be offered. This year’s deficit may have been easier to address than next year’s budget. If the economy doesn’t pick up, and there are no more federal bailouts, Governor Granholm will again be faced with touch choices: raise taxes or cut spending. The Governor cannot afford to rest on her recently earned laurels, nor should she.

For the Center’s part, we’ll be ready and willing to offer assistance with ideas from our March budget study that have not yet been used, or to offer new ideas for cutting spending.

Michael D. LaFaive is director of fiscal policy for the Mackinac Center for Public Policy, and senior managing editor of Michigan Privatization Report, published by the Mackinac Center.