Analysis: Michigan Legislature No Slouch at Fiscal Malpractice

In Monday's Wall Street Journal, the invaluable Steve Malanga of the Manhattan Institute describes some of the gimmicks used by state governments to deceive taxpayers (and bond buyers) about the magnitude of their unsustainable spending and liabilities ("How States Hide Their Budget Deficits," WSJ, Aug. 23, 2010). New Jersey in particular is called out for long-term borrowing to avoid spending cuts required to close a current-year "deficit" and the use of "pension obligation bonds" (POBs) to hide the unsustainability of government employee benefits.

Michigan has flirted with both these abuses, and the Legislature may actually be on the verge of passing a bill authorizing a form of "POBs" to bail out local politicians and unions who have overpromised on retiree health benefits: The House has already passed House Bill 4075; on the other side of the Capitol, Senate Bill 927 has been reported out of committee with a recommendation that it pass, and is pending on the floor. SB 927 is sponsored by state Sen. Mark Jansen, R-Grand Rapids, who is among the names often mentioned to become the next Majority Leader.

Both bills would allow local governments that meet minimal solvency standards to borrow ("sell bonds") and invest the proceeds in the stock market, where presumably their money managers' expertise would earn sufficient returns to pay both the interest on the debt and some of the future retiree health benefits.

Malanga describes how both New Jersey and California played this game in the past - adventures that ended in tears and only deepened the red ink threatening to capsize those states. Actually, Michigan dodged a bullet back in 2006 when Gov. Jennifer Granholm vetoed an earlier version of the current bills, reportedly due to a tiff with Oakland County Executive Brooks Patterson. The governor will almost certainly sign either of the two current bills should they reach her desk.

Michigan has also played the borrow-to-dodge-the-deficit game — described by Malanga as "like borrowing on your credit card to pay off your mortgage" — and is flirting with doing so again this year. The prior offense was committed in 2007, when the state borrowed $415 million against future tobacco lawsuit settlement revenue to avoid a current-year mismatch between desired spending and expected revenue. The same gimmick — misleadingly called "securitization" — is also being used to provide marketing subsidies to the tourism industry ("Pure Michigan" ads).

And they may do it again: Earlier this summer, MIRS News reported that House Democrats were actively talking about using the credit card to close a desired spending shortfall in the coming fiscal year. At first, Senate Majority Leader Mike Bishop, R-Rochester, flirted with the idea, but came back the next day to diss it. The "Stimulus II" public employee and teacher union bailout bill passed by Congress earlier this month has caused such talk to recede, but not disappear: MIRS again reported on July 28 that, although borrowing was "not part of our plan," according to Bishop, he "did not necessarily throw the idea off the table, either" in the words of the Lansing newsletter.