Critics of Growth Projections in House Road Plan Should Be Unnerved by Pension Underfunding

In a recent Mlive column, Tim Skubick says critics of the House Republican road funding plan think it violates accounting principles. “If you are a respectable bean-counter you are loathed to predicate any budget on revenue that may or may not materialize,” he writes.

If this criticism were valid, Michigan’s and every other state’s budget process would be impossible. Budgets are always forward-looking and rely on estimates of future revenue. As the months pass, policymakers adjust the budget to reflect actual tax income. The state revised its budget per updated revenue estimates just four months ago, for example.

Critics also misread the House plan. The legislation earmarks set dollar amounts to roads from the state’s personal income tax. These earmarks on not contingent on growth in state tax revenues.

Nevertheless, projecting such growth is hardly wild-eyed. In just the past four years, state tax revenues (and spending) have increased by $3.5 billion. Recent fiscal agency reports project continued growth.

If critics find budgeting based on future revenue projections unsettling, they should be far more concerned by a much larger threat to future state spending: the grossly underfunded school employee pension system. The state is supposed to contribute $1.9 billion this year to begin catching up on $25.8 of unfunded pension liabilities. The long term plan is to increase this amount by 3.5 percent annually until the underfunding is erased. Every penny is money that won’t be available for other spending needs and desires, so the only way to meet this future cost without impacting current budgets is through new revenue growth.

Maybe the state will get caught up someday, but the only guaranteed method to avoid racking up even larger unfunded liabilities going forward is to close the system right now to new employees. Eventually, the current liabilities would be paid off.

Management of state finances requires making projections of an uncertain future. If that exercise worries those looking for more road funding, they should be tearing their hair out over pension underfunding, which is a far greater fiscal threat than unfilled potholes.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.