Michigan’s Defining Moment:
Report of the Emergency Financial Advisory Panel

February 2007

Prepared for
The Office of the Governor

Download the full report (Adobe^® Acrobat format)
(20 pages, about 170 KB)

Download the resources and reference list (Adobe^® Acrobat format)
(10 pages, about 45 KB)

Executive Summary

Governor Jennifer Granholm has asked this panel to “assess the current state government financial crisis and offer recommendations on how best to avoid similar crises in the years ahead.”

Michigan faces a deep financial crisis. First and foremost, it must be recognized as reality that Michigan’s state government confronts significant short-term and long-term financial challenges. Over the next 18 months, state policy makers must face approximately $3.5 billion of services and programs unsupported by revenues.

1. Our state has an immediate crisis in school funding (approximately $377 million shortfall, which equates to $224 per pupil or $6,000 per classroom).
2. Immediately thereafter, policy makers must resolve a nearly $500 million shortfall in the General Fund in the current fiscal year (FY 2006–07).
3. Simultaneously, policy makers face a potential shortfall of $2.6 billion in balancing the FY 2007–08 budget. Revenues to fund current programs will fall short by $1.4 billion. If policy makers fail to replace any Single Business Tax (SBT) revenue (estimated at $1.2 billion in FY 2007–08), the problem escalates to a $2.6 billion shortfall in FY 2007–08. For an entire fiscal year, the SBT generates $1.9 billion in revenue.
4. By this year’s end, policy makers must lay the foundation for the long-term vitality and growth of the state.

A convergence of forces has brought about the most serious financial crisis in many years for Michigan’s state and local governments. This is a structural challenge, not simply the result of an economic downturn. A persistently weak economy, tax cuts, spending pressures, and inattention to essential government reform have triggered the crisis. We will not economically grow our way out of it. We cannot solely cut or tax our way out of it. Fundamentally, Michigan must reform its spending and taxing and must reinvent the way state and local governments deliver services to be more efficient and productive. Government must demonstrate value for every dollar spent.

Our people and communities face economic hardship. That is why our state must make major investments to compete for the jobs of the 21st century and make Michigan a place where we want to live. As policy makers seek ways of handling perilous gaps between resources and demands during this and upcoming fiscal years, we urge them to tackle long-term reforms in taxing, spending, and delivering public services.

The depth and breadth of this crisis—and the fundamental need for investment—demand a comprehensive response. The state must restructure taxes in a manner that would immediately increase revenues.

The crisis demands a shared commitment to a better future for our state.

It demands that leaders lead by engaging the residents of the state in a dialogue to determine what is truly important to their futures and their families.

It demands that policy makers at all levels accept the mantle of stewardship and shed the robes of partisanship.

The way in which policy makers and residents respond to the current crisis will—in large measure—define Michigan for both this and the next generation.

After careful study and considerable discussion, this bipartisan panel believes that Michigan

• needs fundamental reform of both spending and taxes;
• must create a modern tax structure that abandons the focus on the economic system of the 20th century and looks to the developing economy of the new century;
• must end the disinvestment in education and those other assets that define the quality of life that knowledge-based workers seek—cultural offerings, natural resources, and vibrant cities; and
• must develop a fiscal plan that includes a combination of revenue increases, spending cuts, and reform of how public services are delivered.

Michigan is a special place, endowed with the magnificent Great Lakes, excellent higher education institutions, and superb cultural and natural offerings. Our state has the tools to succeed in the new global economy.

It is time for everyone in Michigan to stop blaming each other and move this state forward together.

Emergency Financial Advisory Panel members

• The Honorable James J. Blanchard, former governor
• The Honorable William G. Milliken, former governor
• Dan L. DeGrow, superintendent of St. Clair County Regional Educational Service Agency and former Republican state Senate majority leader
• Don Gilmer, Kalamazoo County administrator and former state representative and state budget director
• Paul Hillegonds, senior vice president of DTE Energy and former speaker, co-speaker, and minority leader of the state House of Representatives
• Frank J. Kelley, former Michigan attorney general
• Sr. Monica Kostielney, president and CEO of the Michigan Catholic Conference
• Dr. John W. Porter, former president of Eastern Michigan University and state superintendent for public instruction
• Douglas B. Roberts, former state treasurer
• John J.H. Schwarz, M.D., former U.S. Congressman and vice-chair of the state Senate Appropriations Committee
• Dr. Lou Anna K. Simon, president of Michigan State University
• S. Martin Taylor, former state department director, former corporate executive, and University of Michigan regent