Budgeting In Downturns

SEARCH BLOG: MICHIGAN

Last Thursday, I wrote critically about the Michigan state budget. The essence was that despite a chronic economic malaise in this state, the government feels entitled to increase spending. This proposition was challenged in the comments. What should be cut and when?

Rather than get into a debate about the merits of individual programs... which should be a key component of the budgeting process... I chose to respond this way:

I spent three decades in the automotive industry and saw both good and bad times several times. In several of my jobs, I prepared executive budgets. Obviously, in good times, the budget process was far simpler than when faced with declining revenues and calls for increased spending. Not once during economic pullbacks did executives express reluctance to curtail spending in non-critical areas. Of course, it was up to the executives to provide direction regarding what was "critical" versus "important."

When I look at the state budget http://mich.gov/documents/budget/Budget_Book1_223972_7.pdf , it is obvious that there is a reluctance to limit the "critical" expenditures. Our state executives are not willing to face economic realities. These economic realities include:

• declining population
  http://www.census.gov/compendia/statab/tables/08s0012.pdf
• declining employment
  http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LASST26000005&data_tool=XGtable
• declining house price index
  http://www.forecast-chart.com/house-price-michigan.html

among others. Yet the governor talks about "investing" in our future... translate that into spending money not available.

When one looks at the state budget, one is struck by the disconnect with economic reality:

2004 $39.4 (bil.)

2005 40.4 ________ 2.5%

2006 41.3 ________ 2.2

2007 41.9 ________ 1.4

2008 43.6 ________ 4.5

2009 44.8 ________ 2.8

Rather than "biting the bullet" as everyone else must do, our governor has pushed for expanded state government. This is unconscionable. It is the result of chronic failure to plan and act effectively over the past 5 years. The problems facing the state should be no surprise to the governor, but the budget seems to reflect surprise. We need to spend more because we have problems!

No, we need to examine our assumptions about where and how money should be spent. There are several programs that are "money pits" where there are no discernible changes on the improvement side. An old saying is, "If you do what you've always done, you'll get what you always get." It's pretty obvious that the governor feels that continuing to spend more money when the economy is bad is the appropriate state response to problems. Perhaps it is time for the governor to recognize the new environment and quit trying to drain a piggy bank that has already been broken.

What would I do? First of all I would never have allowed the 2008 budget increase. That goes against all good business sense. Secondly, I would never have allowed the 2009 budget increase. At a minimum, the 2009 budget should not exceed the 2007 budget. Set the bar at the appropriate level and let the departments figure it out. There are too many in the state legislature that obviously feel they are entitled to increase their pet budgets regardless of the situation. They serve no one but themselves.

If Michigan is to recover and attract... and hold... businesses, it must display good business acumen. So far it has done none of the above.

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