Capital News Service

of the Michigan State University School of Journalism

Experts weigh new state budget principle

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By NICK MORDOWANEC
Capital News Service

LANSING – A budgeting principle that Michigan may adopt involves paying on the run, but questions abound on how the state might deal with such a change in economic philosophy.

The principle is known as pay-as-you-go, or PAYGO for short. Under that approach, the government would spend money on programs when legislators see fit, based on a specific funding source rather than appropriating and continuing a program in hopes that it will stay successful.

“The appropriations process is the sole province of the Michigan Legislature,” said Craig Thiel of the Citizens Research Council, a nonpartisan organization that researches issues concerning state and local government.

“In exercising this authority, the Legislature – along with the governor – is bound by strict balanced-budget requirements,” he said.

That means lawmakers would have to ensure that planned spending doesn’t exceed the money available, Thiel added.

“The Legislature also can raise taxes. Therefore, in a sense, the balanced budget requirements are a form of pay-as-you-go budgeting already,” he said.

He said a PAYGO-type plan might have benefited, for example, the Promise Scholarships, which are being discontinued in the latest budget. Instead of the state budgeting a specific amount for scholarships, it could provide money based on the number of students who need financial aid over a certain time period.

The PAYGO principle involves numbers more than anything. Since the state functions on a balanced budget to properly meet economic expectations, the PAYGO principle relies on numbers to help meet such constraints.

“The concept is solid: Don’t spend more than you have,” said Craig Ruff, senior policy fellow at Public Sector Consultants, a Lansing-based firm that specializes in research on issues such as health, economics and technology. “The difficulty resides in trying to enforce a PAYGO system in which programs could potentially be cut.”

The federal government tried it in the 1990s, but Congress abandoned it in 2003 because of a big increase in the national debt. However, unlike the state, the federal government does not have to follow a balanced budget year after year.

“There were significant loopholes for the PAYGO system on a federal level, such as the exemption of programs and no appetite to raise taxes,” said Ruff. “If a PAYGO system was still in place in Washington, the stimulus money they have offered during the recession would have to be paid for.”

With PAYGO, it’s the Legislature’s job to decide what it wants to spend money on, meaning that some programs would be favored over others.

“The state brings in $42 billion in total revenue, so spending under that amount is OK if you are on the PAYGO plan,” said Ruff. “An issue would be spending more than the amount in the total revenue.”

Rep. George Cushingberry Jr., D-Detroit, chair of the House Appropriations Committee, said he approves of the PAYGO principle and believes taxes on everyday items like bottled water, for example, could help pay for government programs.

But a PAYGO-like structure might be doomed by partisanship, said Ruff.

One issue, he said, involves Republicans fearing Democrats would take every opportunity to raise taxes. And Democrats would fear that Republicans would try to single out specific areas of government to focus spending on, he added.

Thiel of the Citizens Research Council said, “What I think is being proposed is much more narrow in focus. What is being advocated is more ‘earmarking’ of specific revenues to specific programs and not necessarily a new budgeting process.  Earmarking is being done extensively in Michigan already.”

Earmarking is the practice of reserving revenues from specific sources for specific functions. Earmarking takes two forms: A fixed amount of revenue from a given source or a percentage of the revenue from a given source.

Earmarking is often used when there is a connection between a revenue source and spending. It can help provide stability as lawmakers are aware of the effects of the highs and the lows of financial decisions they make, Thiel said.

© 2009, Capital News Service, Michigan State University School of Journalism. Not to be reproduced without permission.

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