Archive for the 'Michigan Business' Category
Fiscal Armageddon – Time for Tough Choices
The October revenue report for the state of Michigan has been released, and there’s very little good news to be had. Revenues were again below the most recent projections. October saw tax collections that were $31 million below expectations. The best real-time indicators of economic activity, sales taxes and income tax withholding, are both down, again.
Due to the near-complete collapse of state revenues, the cuts have (finally) been forthcoming. Public schools received per-pupil cuts of approximately $300 for the current fiscal year. State agencies have been ordered by the governor to cut 10% of their budgets. The cycle of layoffs and reduced revenues continues.
The result? Governor Granholm and the MEA have begun hyperventilating. This week they staged a massive lobbying effort to get legislators to increase taxes. Apparently they don’t require Economics 101 in teacher colleges.
On the city level, Grand Rapids has seen a similar decline in income tax revenues and property tax revenues will probably see declines due to historic drops in resale values of homes and commercial property. Immediately upon announcing the layoffs of 125 city employees, Mayor Heartwell called for a ballot question to raise taxes in the city. He claims there hasn’t been a tax increase in 15 years. Apparently the constant reduction of the personal income tax exemption, the added property tax bill “service fee,” and the increase in trash collection property tax don’t count as tax increases in the mayor’s book.
Oh, and don’t forget that The Rapid is coming back, probably in early 2010 to ask, again, for a tax increase to build the redundant and wasteful “Silver Line” bus service, to clog up Division during rush hour.
But the fiscal problems are just beginning, and there is very little sign that anyone is proposing real solutions. The “easy” way out, increasing taxes, will only work so much. They will run in to the law of diminishing returns. The speaker of the state house, Democrat Andy Dillon, apparently grew some huevos and bucked his MEA masters by proposing the pooling of all public school health plans into one statewide health plan. The MEA, fearing the loss of their money-laundering cash cow health plan MESSA, promptly went ape-sh*t. This illustrates the difficulty of real, substantive change at the state level. So many special interests peddling their influence (in the form of money) makes it nearly impossible to propose an innovative solution to the state’s structural budget problems.
Of course, then there are the unsustainable defined-benefit Ponzi public pension plans. They will fail. It’s just a matter of time. Even politicians can’t repeal the laws of compounding numbers. But I’m sure they will try.
But we should turn to the local level, where real people can have the most chance of affecting change. We can, as a city, choose to continue down the ultimately disastrous path of “the easy way out,” or we can have real, substantive change in how city government does business.
A quick overview of what’s going on at the local level: As state revenue declines, so does the state subsidy to cities called revenue sharing. Revenue sharing has been on the decline for several years. City leaders keep pointing to how much has been “lost,” but their complaints fall on deaf ears – or at least ears that understand that cities fall further back in line from other special interest groups.
As revenue sharing declines, so have city income tax receipts. The city’s income tax revenue is down 14% (apparently year on year).
Not only has revenue been on the decline, the gigantic hydrogen bomb of the city’s pension system is preparing to detonate. The city’s 2010 fiscal plan (published before the layoffs were announced this week), is available here. One paragraph should stand out and set off all the alarm bells in the city:
In FY2007 our two pension retirement trusts were 110% and 120% funded. Both employer and employee contribution levels were at or near the lowest possible levels. This advantage was eliminated by the breathtaking decline of the financial markets over the past 18 months. We now know that our retirement funds are significantly underfunded. This means that both employee and employer contributions must move dramatically higher. Proposed changes to actuarial assumptions and plan provisions will freeze employee contributions at the bottom of the contribution range and provide additional time for the City to adjust to higher employer contributions. Nonetheless, the employer share will go from 7.7% in to 9.29% in FY2010, and 13.62% in FY2011 for the General Pension and from an FY2010 rate of 0% to an estimated 23% in FY2011 for the Police/Fire Pension. These percentages assume that we will be able to implement critical smoothing techniques that will mitigate the intense upward pressure on required contributions. The increase in employer funding requirements contributed to the FY2010 GOF operating deficit of $2.9 million. Unless we see a significant increase in the market value of retirement plan assets over the next couple of years, the estimated pension contribution will continue to rise. (emphasis mine)
Translation: 2010 layoffs are just the beginning. Fiscal Year 2010 includes a pension contribution (as a percentage of salaries) for the police and fire employees of 0%. Yes, 0%. This will go from 0% to 23% (of salaries) in one year. A search of the fiscal plan shows that total personnel costs for police and fire are about $67 million. Let’s back out about 40% of that (just a wild guess) to come to actual base salary cost. We come up with about $40 million. Now, re-read the above paragraph. The city is going from contributing $0 in the current fiscal year to the police and fire pension plan to (my estimate) of 23% of salaries in 2011 – or about $10 million. The increase in contributions for the other defined-benefit pension participants on the city’s payroll will increase from 9.29% this year to 13.62% next year. This is unsustainable.
The mayor’s solution? Raise taxes.
Lest I be declared someone who only points out problems and no solutions, here are a few suggestions:
- Lay off all non-essential employees. This includes the “equal opportunity” department of five people.
- Outsource information technology (IT) services.
- Eliminate the Office of Children, Youth, and Families.
- Convert all employees, now, to a defined-contribution retirement plan. NOW.
- Eliminate the Downtown Development Authority. This entity sucks up about $17 million of local property tax revenue that would normally go to the city’s general operating fund. The DDA also currently owns the Van Andel Arena. Sell the arena, pay off the outstanding bonds, and use the excess to pay off some of the DeVos Place bonds. The DDA currently operates as a taxpayer-funded subsidy to developers, giving away free money to those who ask.
- Implement a fire department response fee. Most (if not all) homeowners insurance plans offer coverage if you’re charged for fire department response.
- Eliminate the city’s trash collection services. There is a special property tax levied for this. There are plenty of private trash haulers. Once the trash collection services are eliminated, go to voters and ask them if it’s ok to convert the current trash levy on property tax to a general fund levy so that it can be spent on other city services (including police).
- Contact every citizen and ask them what their priorities are. Do you prefer Police and smooth roads, or do you prefer an equal opportunity department and subsidies for developers?
If serious, dramatic changes are not implemented, the city will go bankrupt. This has started to happen in other states. There is no chance in h*ll that the economy is going to return to anywhere near where it was at the peak of the last cycle in 2007 – at least not any time soon.
Tough choices need to be made now – if our politicians can stomach it.
Posted by: GRPundit on Friday, 13th Nov, 2009
Michigan Tax Revenue Continues to Deteriorate
The latest monthly state revenue report was finally released today, and it doesn’t look good. A few of the money quotes:
The revenue collected from Michigan’s General Fund and School Aid Fund earmarked taxes totaled $1.3 billion in May, which was down 13.4% from last year’s level. This marked the fourth consecutive month that tax collections have declined in excess of 10.0%. While collections for almost all of the major taxes experienced declines in May from their year-ago levels, the most significant declines were experienced by the sales, use, and income taxes. Compared with the Senate Fiscal Agency’s monthly breakdown of the revised consensus estimates for FY 2008-09, May collections fell below the monthly estimate by $62.0 million and this shortfall was due primarily to weaker-than-expected sales and use tax collections.
When the Senate Fiscal Agency met in mid-May, they estimated the revenues for the remainder of the fiscal year. Despite the fact that they updated their estimates at that time, actual revenues for May declined by $62 million. In other words, in the matter of a few weeks, their estimates were already off. The budget is deteriorating that quickly.
More:
Sales tax revenue totaled $406.6 million in May, which was down a sharp 22.2% from the year-ago level. A consistent historical monthly series for the sales tax is available back to FY 1984-85 and the decline in May marks the largest percentage decline in monthly sales tax collections during this 24-year period.
. . .
Tobacco tax revenue totaled $84.0 million in May, which was down 5.9% from last year’s level. Most of this decline is likely due to the large increase in the Federal tobacco tax that went into effect on April 1. The Federal tax increase is having a negative impact on Michigan’s $2-per-pack cigarette tax because it boosted the price of cigarettes and therefore is having a negative impact on cigarette sales and Michigan’s tax receipts.
That last quote is vitally important. It perfectly exemplifies the power of taxation. It’s common sense, but the politicians in Lansing don’t seem to get it. The more you tax something, the less of that “something” you’re going to get. Clearly, the more cigarettes are taxed, the fewer cigarettes that will be sold. The same goes for businesses. The more you tax businesses, the fewer businesses there will be, and hence the fewer jobs there will be. Gosh, it’s pretty simple, but our tax-hiking pals in Lansing and elsewhere don’t seem to get it.
Finally, the $406 million of sales tax revenue in May was the lowest monthly level of sales tax collection I could find, going back at least until 2005. Michigan is hurting, folks, and it’s only going to get worse, as exemplified by the state’s skyrocketing 14.1% unemployment rate.
Read a little about how California’s government is collapsing because of that state’s inability to enact any rational level of reform: California Collapsing.
Posted by: GRPundit on Monday, 22nd Jun, 2009
Michigan Unemployment Hits 11.6%. Time to Raise Taxes!
Gimme more. Gimme more. Gimme gimme gimme more.
Today it was announced that Michigan’s unemployment rate hit 11.6%. What is governor Granholm’s reaction? She announces her support for an increase in gas taxes! Great idea! She has already succeeded in increasing the income tax by 12% and increasing business taxes by 22%. That seems to be working out really well. Not.
Her insatiable appetite for more of your money won’t be quenched until no one in Michigan is left with a job.
“In five years, you’re going to be blown away by the strength and diversity of Michigan’s transformed economy.” – Governor Granholm, State of the State address, January 25, 2006 (unemployment rate was 6.2%).
Posted by: GRPundit on Thursday, 5th Mar, 2009
What Happens When You Take Away the Corn?
There’s an old parable about getting hooked on government handouts. I had heard this years ago, but it just popped in my mind again today. I searched the Internet and found one version of it.
A chemistry professor at a large college had some exchange students in the class. One day while the class was in the lab the Professor noticed one young man (exchange student) who kept rubbing his back, and stretching as if his back hurt. The professor asked the young man what was the matter. The student told him he had a bullet lodged in his back. He had been shot while fighting communists in his native country who were trying to overthrow his country’s government and install a new communist government.
In the midst of his story he looked at the professor and asked a strange question. He asked, ‘Do you know how to catch wild pigs?’ The professor thought it was a joke and asked for the punch line. The young man said this was no joke. ‘You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come every day to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again.
You continue until you have all four sides of the fence up with a gate in the last side. The pigs, who are used to the free corn, start to come through the gate to eat; you slam the gate on them and catch the whole herd. Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught.
Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.
The young man then told the professor that is exactly what he sees happening to America. The government keeps pushing us toward socialism and keeps spreading the free corn out in the form of programs such as supplemental income, tax credit for unearned income, tobacco subsidies, dairy subsidies, payments not to plant crops (CRP), welfare, medicine, drugs, etc. While we continually lose our freedoms — just a little at a time.
It’s a good story by itself, explaining how government breeds dependence. But another thought popped into my mind as I thought about this story. What happens we you take away the corn?
We’re in the midst of the largest expansion of federal spending in the history of this nation, with over $8.5 trillion of federal government outlays and guarantees, just in the last four months. We have a national debt that has doubled under the Bush administration, to over $10.5 trillion. We have future unfunded liabilities, just at the federal level, of over $40 trillion. We have state and local governments that put taxpayers on the hook with unsustainable defined benefit pension plans that are just now beginning to collapse.
The point is this: The American people have been fattened up by corn over the last several decades, with an acceleration over the last two decades of Federal Reserve-induced malinvestment orgies. First in technology, then in real estate. These malinvestment orgies led to expanded government spending and government promises, making more and more people dependent on government money (corn), one way or another. However, the math doesn’t work in the long term. Something has to, and will, give.
We are seeing the first stages in a potential catastrophic collapse. We are in the midst of deflation. The Federal Reserve and politicians in Washington will do anything they can to prevent deflation. So they have cranked up the printing presses and are expanding the money supply at a truly unprecedented rate. We have collapsing banks, collapsing industry, a collapsing economy, a collapse in debt, and a collapse in consumption. Eventually, people (and, more importantly, foreign governments) will stop buying US Government bonds as they see that annual deficits of $2 trillion are unsustainable. Then what?
“Stimulus” plans will fail. Hoover/FDR stimulus plans in the 1930s only extended the length and depth of the depression. The Bush/Obama stimulus plans will do the same.
Folks, the government corn will run out when we all realize that nothing can be done to stop the natural correction of the economy.
Posted by: GRPundit on Monday, 19th Jan, 2009
Bailout GM Now!
We must bail out Ford, General Motors, and Chrysler because they are far too large to fail. This short video does an excellent job of explaining how it will all work:
Posted by: GRPundit on Wednesday, 12th Nov, 2008
More Jobs NOT Coming to Michigan
Today Volkswagen announced that they will not be building a new car factory in Michigan. They opted to Tennessee instead. According to the article:
Chattanooga won the site because of incentives and tax breaks offered by Tennessee and better infrastructure, the person said. Alabama was a close second while Michigan had been out of the running for some time, according to the person. (Emphasis ours)
Does this surprise anyone? With Michigan’s newly-formed business tax mess, the strangling environment of unionization, and a dismally-performing public school system, no wonder jobs, people, and businesses are not choosing Michigan. When will Lansing wake up and tackle the real economic challenges in this state?
Just for fun, we compared state population growth in the United States with state tax burden levels. The top 20 states that had the highest population growth between 2000 and 2007 are below:
State Percent Rank
Growth
Nevada 28.41 1
Arizona 23.5 2
Utah 18.5 3
Georgia 16.6 4
Idaho 15.9 5
Texas 14.6 6
Florida 14.2 7
Colorado 13.0 8
North Carolina 12.6 9
Delaware 10.4 10
South Carolina 9.9 11
Washington 9.7 12
Oregon 9.5 13
Alaska 9.0 14
Virginia 8.9 15
New Mexico 8.3 16
Tennessee 8.2 17
California 7.9 18
New Hampshire 6.5 19
Montana 6.2 20
Below are the 20 states with the lowest tax burdens:
State Tax Burden Rank Alaska 6.58% 1 New Hampshire 8.01% 2 Tennessee 8.49% 3 Delaware 8.75% 4 Alabama 8.83% 5 Oklahoma 9.00% 6 South Dakota 9.02% 7 Texas 9.30% 8 Wyoming 9.46% 9 Montana 9.74% 10 New Mexico 9.80% 11 North Dakota 9.90% 12 Florida 9.96% 13 Oregon 10.03% 14 Nevada 10.09% 15 Idaho 10.12% 16 Missouri 10.12% 17 Virginia 10.20% 18 Georgia 10.27% 19 Arizona 10.34% 20
Surprise! 14 of the 20 states with the lowest tax burdens are in the top 20 states for population (and job) growth. Conversely, the five states with the highest tax burdens are in the bottom 15 states for population growth.
For your information, Michigan is number 45 in population growth between 2000 and 2007 (1.3%), and has the 14th highest tax burden in the United States. That was calculated before last year’s gigantic tax hike, so I’m sure our state has climbed up the list since then.
Discuss this post (and other topics) in the GR Pundit forums.
Posted by: GRPundit on Tuesday, 15th Jul, 2008
Michigan Economy Update
The latest House Fiscal Agency revenue consensus report paints a grim picture for Michigan. Here are a few important bits of information:
Although the US has gained more than 480,000 jobs over [the last year], employment in Michigan fell by more than 78,000 jobs.
That’s right – Michigan has had a net loss of over 78,000 jobs in the last year alone. What’s the total damage? According to page 6, Michigan has lost a total of 474,000 jobs since 2001.
It’s time to get serious about fixing our state. Taxes need to be cut dramatically. Right to work legislation must be passed to attract new employers. The nickle and dime “job creation” that the Michigan Economic Development Corporation claims is a corporate welfare joke. The only way to turn this state around is to make it attractive to employers. With the choking union-dominated atmosphere and choking tax rates, Michigan will continue to bleed jobs.
Posted by: GRPundit on Tuesday, 1st Jul, 2008
Minimal Reforms for Massive Tax Hike
The taxpayers of Michigan traded minimal reforms for a massive tax hike this past weekend. A new 6% service tax will apply to the following services:
Astrology services
Carpet cleaning
Consulting services
Investigation, guard and armored car services
Janitorial
Commercial landscaping services
Baby-shoe bronzing
Bail bonding
Balloon-o-grams
Coin-operated blood pressure testing
Check room services (coat checks)
Concierge services
Dating services
Social escort services
Fortune telling
House sitting
Coin-operated locker rental
Palm reading
Party planning
Porter services
Psychic services
Rest room operation services
Shoe shines
Singing telegrams
Wedding planning
Wedding chapel services (not churches)
Scenic transportation services
Skiing services
Tour operator services
Personal care (except hair care, including manicure, pedicure, etc.)
Security system services
Mini-warehouse and self-storage unit services
Business service center services (e.g., hire out payroll service)
Investment advice
Consumer-buying services
Discount-buying services
Genealogical investigation
Social introduction services
Numerology services
Pay telephone services
Personal fitness training
Personal shopping services
Coin-operated photographic machines
Phrenology services
Packaging and labeling
Specialized design services
Passenger and ground transport services
Courier and messenger services
Document preparation
Of course, the income tax also increased from 3.9% to 4.35%. What did we get in return? Two reforms, although they are important, they are not worth the tradeoff.
First, the Michigan Education Association (the teacher’s union) runs its own health care plan called MESSA. MESSA health care is, by some estimates, 20% more expensive than market-rate health care plans. Part of the problem is that, for those familiar with how health care works, MESSA premiums are the same for single individuals and families. Most health plans today cost employers more based on whether the employee is single, married, or married with children. With MESSA, it doesn’t matter, school districts get charged the same family rate, regardless of the employee’s status. This translates to much higher costs. The other factor increasing costs for school districts is the fact that MESSA is just repackaged Blue Cross coverage, with a premium attached simply because it is union-run. Basically, MESSA is a money-laundering scheme for the teacher’s union.
The bill that passed the legislature this weekend would require MESSA to publish its claims data, so competing health care plans could quote school districts their rate for the same plans. Previously, MESSA has vigorously opposed this because they will do anything to maintain their stranglehold on healthcare coverage for teachers in Michigan. In fact, the teachers union frequently threatens school boards with a strike if they attempt to bid out health care coverage, even though it is illegal for teachers to strike in Michigan. One MEA bumper sticker shows how militant they are – it reads “You’ll get my MESSA card from me when you pry it from my cold, dead hand.”
You understand why the union is so militant about protecting MESSA? Because it is a union cash cow. Now the legislature has finally stood up and made it easier for school districts to make sure that taxpayers get the best deal by allowing for competition in health coverage. Unfortunately, it only allows school districts to bid out care, it doesn’t require it. This means that local school boards will still have to deal with union threats and potential strikes if they want to do the right thing.
Second, reforms to the state teacher retirement system were enacted. This is a very long-term reform because it will only effect teachers who start working after July 1, 2008. However, it is an important reform because it will increase the time in service requirements for teachers to be able to get health and pension benefits in retirement. Currently, teachers can work as little as five years to get free health care for life. Unfortunately, the reform does not include a phase-out of the defined-benefit plan. Nearly all other state workers have been transitioned to a defined-contribution plan, much like a 401(k), which is sustainable and a bigger benefit to retirees. The current defined-benefit plan will continue to be unsustainable and extremely expensive. This issue will have to be dealt with again in the future, so this bill just put the pain off on future legislators.
And that’s it! We get those two watered-down reforms in exchange for more job-killing taxes. Only two local legislators voted in favor of the tax increases – Mike Sak and Robert Dean, both Representatives from Grand Rapids. We have heard rumors that the Michigan Taxpayers Alliance will target Robert Dean in their recall efforts. We wish them luck.
The good news is that the media is full of stories of ticked off Michiganders today. Lots of people are talking recalls, not just the MTA.
Michael Lafaive, of the Mackinac Center, put it best in an editorial in the Detroit News today:
“The state Legislature has kicked Michigan while it is down. Government is going to take another $1.48 billion out of the hands of residents and private job providers when they can least afford it — and do so with a new tax on services, too.
Michigan is already ranked 50th among the states in economic growth. It has the highest unemployment rate (7.4 percent), and our per capita income growth is well below the national average. By one measure, people are moving out of Michigan in near record numbers. And the bad news just got worse.
Lansing’s political class has pushed its service tax nose under Michigan’s economic tent. Next year, if new revenues do not flow into the treasury at anticipated rates, or if the cost of state government rises, it will be easy to add even more businesses to the 23 now on the state service tax hook.
We should fear for Michigan’s future. All the cheerleading by government officials won’t overcome the fact that it is more expensive to work, live and invest in the Great Lakes State.”
Recall 2007!!
Posted by: GRPundit on Tuesday, 2nd Oct, 2007
Freedom Rang Across Michigan for 258 Minutes
Our state government shut down this morning at 12:01 am and remained shut down until 4:18am, when two Senate Republicans broke ranks and voted in favor of $1.5 billion in tax increases. Freedom rang across the land for 258 minutes, but alas, the politicians relented and voted to destroy more jobs by raising our state income tax to 4.35% from 3.9%, as well as adding a 6% sales tax to services.
Michigan, the land of the one-state depression, will get even worse. $1.5 billion extracted from the populace and added to the general fund budget is an increase in spending of 18% in one year. That’s right, Governor Granholm has increased spending 18% in one year.
We’ll have more detail on the vote and the associated reforms later today. We are also attempting to confirm that those who voted in favor of the tax hikes will be recalled.
Posted by: GRPundit on Monday, 1st Oct, 2007
Make Michigan Attractive to Business Again
The stunning inability of Michigan’s politicians to talk about the 8,000 ton elephant in the room continues to amaze us here at GR Pundit. Michigan’s economy is suffering a “single-state” recession for one primary reason – the United Auto Workers union. Why? Michigan’s economy is/was so heavily dependent on the domestic auto industry that any disruption in that industry would surely affect the entire state. The United Auto Workers, along with the management of Ford, Chrysler, and General Motors, conspired over the decades to build extremely lavish and unsustainable benefits packages for unionized employees. However, there was a problem. Toyota. Japanese carmakers entered the market with superior products at lower prices. Suddenly, the domestic big three are completely unable to compete. Here’s the rub: they are being prevented from competing because they simply can’t reduce labor costs enough. The UAW is standing in the way of the necessary and painful reorganization that is required to bring the domestic auto industry into line with foreign car makers.
While the politicians in Lansing debate how best to tax businesses in Michigan, we notice the deafening silence on the issue that is truly the destroyer of Michigan’s economy – forced unionization. This past Saturday’s Wall Street Journal had an excellent editorial by Larry Reed of Midland’s Mackinac Center. He outlines the case for ending forced unionization. The concept is called “right-to-work,” which means that anyone is free to join a union or not. Today’s law in Michigan states that if you join a company with a union, you are forced to pay dues.
We only need to look south, within our own United States, to see the contrast between a heavily unionized state and a non-heavily unionized state. Alabama, which is seeing new car factories being built like crazy, is the exact opposite of Michigan. In fact, according to the editorial, “If current trends continue, Alabama will eclipse Michigan in per-capita income in just three years. With base pay and bonuses, and especially when the cost of living is factored in, nonunion workers in many auto plants in the south are better off than their union counterparts in Michigan.” That’s a powerful statement.
Michigan needs to pass right-to-work legislation immediately. Another interesting point, according to the editorial, is that, between 1970 and 2000, right-to-work states created 1.43 million manufacturing jobs, while non-right-to-work states lost 2.18 million jobs.
The politicians can tinker with taxes all they want, but nothing will substantially change until the real labor environment in Michigan changes. Car factories are being built in the south, while car factories and manufacturers are shuttering in Michigan.
Posted by: GRPundit on Tuesday, 19th Jun, 2007
