Nick Khouri: Michigan fiscal policy

0:00:01: My name's Barry Rabe, I'm a professor here at the Ford School and Director of CLOSUP, The Center for Local, State, and Urban Policy. We're very pleased to be partnering today with The Ford School to offer this policy talk on the issue of Michigan Fiscal Policy, looking back and also looking to the future. I'd also like to thank our co-sponsors for sharing in today's event, helping us promote, the Center on Finance, Law, and Policy, the Office of Tax Policy Research. We will be taking questions from the audience at the conclusion of the talk. Beginning around 4:35 or 4:40, we will begin questioning as we often do here, question card. So, you have cards in front of you. Give some thought to those and we will be collecting them. My colleague, Stephanie Leiser, and some of her students from her graduate course in Public Budgeting will be reviewing these and managing the Q&A process. And for those of you who are joining us online, watching online today, you're invited to post your questions via Twitter using the hashtag policy talks.

0:01:14: It is always an interesting time in the state to think about the fiscal condition. This is a state that has known good times and bad times over the last half century and beyond. And what an interesting decade we have been through, what an interesting period of time the Snyder years have been in the fiscal condition in the State of Michigan. And with that, we begin to think about inevitable transition with elections to come this November, changes in leadership and all of the rest. And so, we are especially delighted today to welcome... Actually to welcome back, Nick Khouri to the University of Michigan campus. Mr. Khouri was appointed by Governor Snyder in April of 2015 as the 46th State Treasurer by Governor Snyder with responsibilities in the treasury office that really span a wide set of responsibilities linked to the collection, the dispersal, the investment of all state monies. It's putting him in really a unique position to think about these past years and the fiscal life of this state, and the years and issues and experiences going forward.

0:02:23: Prior to his current service, Mr. Khouri served elsewhere in government and also in the private sector. Held a number of posts at DTE Energy in Detroit, including senior Vice President for Corporate Affairs. Prior to that, he worked in the public sector, previously serving as Chief Deputy State Treasurer, Chief Economist with the Senate Fiscal Agency at the Federal level at the Congressional Budget Office. He holds a graduate degree in Economics from Michigan State University, but we're particularly delighted to welcome him back as an alum, mindful of his bachelor's degree in Economics from U of M. It is my great pleasure to introduce the 46th Treasurer of the State of Michigan, Nick Khouri, welcome.

[applause]

0:03:09: Thank you very much. Thank you. Good afternoon everyone. It is a pleasure to be here. Thank you for the invitation. I do try and do this as often as I can, just because I enjoy it so much. But what I enjoy most about it is hearing what you have to say, both your questions and your comments and your criticisms, and your compliments, too. I know it's more interesting for you.

[laughter]

0:03:32: I get few and fewer of the latter, but I know it's more interesting for you, but it's definitely more interesting for me. So I'm gonna talk a little bit at you. I thought this was a college class, so I had put together slides, which I usually don't do. And I'm gonna go through a few slides, but as you're thinking, I wanna spend more and more time talking about what's on your mind, and I'll tell you what's on mine. I guess, just a little bit about me. I have done State and Local policy for a long time. I also spent half of my career in the private sector, too. But I do have the honor of working in Treasury at Michigan and working for the legislature in Michigan 20 years ago. Stepped outside of Lansing and then I came back 20 years ago... Came back just a few years ago to finish my career. So, I do have a perspective on how things have changed in Lansing, be happy to talk about that. I think the short-handed answer... Oh, by the way, I do digress sometimes. So if I'm digressing like this, just give me one of these.

0:04:31: But some things have really changed in the last 20 years and some things haven't changed in the dynamics of Lansing, in fiscal policy. The thing that hasn't changed is the fundamental questions we ask all the time, everyday. What's the appropriate size of government? What's the appropriate allocation of resources? Government is defined as so many things in our life, as unlimited desires, unlimited needs, unlimited resources. So, this endless debate we have about, what's the best... What's the appropriate size of government? Where should we be spending our money? And just where I spent a lot of my time is, what's the best way to raise that money, what's the appropriate tax structure? And so, those issues continue to debate, just like I stepped in a time machine and went back 20 years ago.

0:05:12: There are other issues that... They are the same, but there're different terminology and I'll talk a little bit about one of the responsibilities of an appropriate tax system has evolved with this changing economy. Those debates are still happening. 20 years ago it was what do we do about lawyers and doctors? These days, it's what we do about the virtual economy and how do we continue to evolve once we define what it is. And then, there's a whole... I wasn't gonna go this long on this issue, but... And then there's this whole issue of things, the dynamics have changed. Part of it is term limits in Michigan, that wasn't here then, it is now. It has changed the dynamics of the discussions.

0:05:49: But that isn't what I'm here to talk about today. What I'm gonna talk about today, I decided is, not dive very deeply into anything, but I'll be happy to talk about something in more depth. I decided to spend a few minutes just giving a broad overview of where the state economy is right now and then put it in some perspective, what's that mean for the State Budget, both on the expenditure revenue side, talk a little bit about local governments because I've been spending a lot of time in local governments in Michigan and their fiscal health, and then end with some of the things everybody's talking about in Lansing. I do feel a little inhibited because there's a lot of people in this audience like my friends, economists from RSQE, that know a lot about these topics more than I do. But then I fund their budget so...

[laughter]

0:06:35: At the end of the day, I think they're gonna agree with most of what I say. [chuckle] I'm just kidding. But there are many people in this room that know about some of these specific topics much more than I do. And I hope during the question and answer period or the complaint period, we get into some of the details. So that's what I'm gonna talk about, is that okay?

0:06:54: Yes.

0:06:54: That okay? That okay? Okay. And I did say it, I do this maybe once a semester too and my internal ratio, as in the ratio of people who fall... Students who fall asleep versus stay awake, and so my target is 80%. So if I can hit 80% today, I'm doing well. Let me go through some of the slides, just to make it interesting. The first one is just talk about treasury, and the only reason I bring this up is because I'm willing to talk about anything you talk about. This is all the stuff treasury does. We advise the Governor and the Legislature, when they listen, the Legislature on State, Local Tax Policy broadly. We're responsible for providing the administration's forecast of the budget. We're responsible for collection and administration of all state taxes, about 24 billion. You can measure it different ways, but what I'm gonna talk a little bit about, but we collect a lot of taxes, and that's a big part of the job. Along with all the other stuff, we're a big production shop. We do five million individual income tax returns a year, we do 350,000 business taxes every quarter, so a lot of my time is talking about operational issues, not policy issues. I'm the sole fiduciary for a $70 billion pension plan, which is scary.

[chuckle]

0:08:06: We are responsible for the monitoring, the assistance, the intervening with local government and schools, financially. Well, I don't talk about educational performance, but we're responsible for the fiscal health at the end of the day. We help students, if you get a MET or MSBP, we do that. The overall relationship with Wall Street issuing debt, we don't issue equity, obviously, we're a government, but managing the day-to-day cash flow, managing long-term borrowing for the State. Again, the only reason I mention that is during the question and answer period, when I run out things to say, we can talk about any one of those areas. It just doesn't have to be State and Local Tax Policy.

0:08:48: But let me just talk a little bit about the state economy really quickly. These are, as you know, the best of all worlds almost, nine years out of the recession trough, the state's labor force is improved dramatically, both absolute and relative terms, you see, during the bad days. I'm gonna get to the half-empty, this is the half-full. Clearly, the state's labor market has improved both absolutely and relative to the rest of the nation. You can see the US at the bottom, but we tapped out at almost 15% during the recession. We're down to 4.5% now more or less. And so not only in absolute terms, but in relative terms, we've had a tremendous improvement in our labor market.

0:09:31: And this follows, I'm gonna talk a little bit about it, this follows the lost decade that everybody talks about, that in Michigan... I'm sorry if this is a Michigan-specific discussion, but that's what I do for a living. If you're interested in other states, we can talk about that because many of these themes are common throughout the industrial midwest at least, but this... We'll get into other things. But in Michigan, we had a reduction employment, almost every year for 10 years. I think, and you guys can tell me, but I think that's unprecedented. It is for Michigan, I assume for any other state, we've had sharper recessions, but this long, drawn-out restructuring of losing employment every year for a decade is, I think, unprecedented. It certainly felt unprecedented. So we've come out of the trough, doing gang busters, certainly.

0:10:20: And so we're actually at the point now where the debate is very little about labor demand, people are, where are the jobs? And it's now about more labor supply, it's more about training and talent. I'm gonna talk about that at the end, but it's a real focus now of everybody. So these jobs are available now, at least during this part of the cycle. How do we get the employees trained and ready to take the jobs that are available right now? And so that in itself is an indication of where we are in this cycle, and hopefully, how we've improved since the lost decade, that people are talking about filling the jobs that are available, not there aren't any jobs available.

0:11:00: Personally, we don't need to get into this, just this measure of the wealth of, at least, one measure, per capita personal income, wealth of the state, we've had a dramatic run compared to the rest of the nation, a stronger run from the recession bottom 2017. Depending on the time period, we were number one, one quarter, number 10, so we've had great run since the recessions bottom, either in the labor force or in income. We've also had this diversity, people talked about for years about diversification of our employment base. This chart... It's just a summary, but we've had this shift away from manufacturing over the last 10 or 15 years. It wasn't so much voluntary, it was the restructuring of the auto industry, but certainly you see the fall off in employment in manufacturing. You see, it's 18.9%, 14.1%. Manufacturing was the number one sector in Michigan forever. It's now number five. Manufacturing is the number five employment sector in Michigan.

0:12:02: And so it's rotated out, and it's rotated out to these other sectors. It's not just retail. It's professional business services, healthcare services, they pay relatively high. You can see, average wage. I think this is 15, no, the average wage is 17, you can see, we're rotating to the sectors that are relatively high wage. Hopefully it's gonna do two things, one, increase, continue to increase the standard of living overall, but hopefully give us some protection during the next recession. We'll talk about that. Now some of this is from productivity, within the manufacturing sector in the US, but also in the State of Michigan. A couple of tidbits I always love. Since recession bottom... Tell me if I'm wrong. Since the recession bottom, production in the auto industry in Michigan is up. It's up 100%, employment is up 20%. You can see the productivity improvements within manufacturing.

0:12:58: Another titbit I always love, and I'm gonna read it to you. This is from McKinsey so who knows if it's right. [chuckle] But in 1990, the big three, 250 of revenues, 250 billion of revenues, 36 billion market cap, 1.2 million employees. In the big three in 1990. Fast forward to 2014, it's a little old, but 2014, the big three, the silicon companies, the big three high tech companies in 2014, they had 247 billion of market cap. I'm sorry, 247 billion of revenues, about the 250 of autos. They had a trillion dollars market cap, they had 137,000 employees. About the same revenues, about the same importance.

0:13:42: If you look at the Dow now, it's dominated by the high tech, 1.2 million employees back in 1990, and now it's 137,000 employees in high tech. So it's part of this productivity restructuring that we've seen in Michigan over the last few years. That's the good news. We've had a great run from the recession bottom. If you take a broader view, including this lost decade, we are a smaller state. Here, you just see the change in employment, lost about 800,000 jobs, in the recession, we gained about 500,000 jobs back, we've gained about 60%. And also the change in labor force during the recession, during the lost decade, not the recession. We lost 300,000 jobs. We've gained only 84,000 jobs. We've had a great cyclical run. We're not back to where we were prior to the lost decade. In the labor force, of course, we talk all about demographics, discouraged workers, but the point I wanna make is that we've had this... Nothing new. We've had this relative shift, downward shift in the Michigan economy. It's nothing new, you look back, 40s and 50s, we were 10% above the national average per capita.

0:15:01: Kinda took a shift down during the 70s, you don't remember, but I do, during the 70s. And the Japanese invasion, and we took another shift down in the 80's, 2,000, when we had a severe recession in the early 80s. And now, again, we've just taken another shift down and now we're 10% below the nation. Although we've had a great cyclical bounce, we've had this deterioration relative to the rest of the nation in the size and wealth, relative wealth of our state. And the reason that's important, 'cause now we're done with Economics. How was that? Was that okay? This shows one measure of state government, $32 billion. We spend about $56 billion in Lansing each year. About 20 billion is federal dollars that flow through transportation, Medicaid. We raise about 32 billion, and you can see here, by this measure, it's essentially been flat since 2000. In nominal terms, in real terms, obviously, it's gone down. The old cliche is true, "You don't get the government you deserve, you get the government you can afford."

0:16:06: And so we've had to painfully, slowly adjust our budget in our fiscal policy towards this changing relative deterioration in the economy. A big part of that... Part of it is policy-induced, people are deciding what's the appropriate size of government, but also part of that flatline on the top is just a response to the changing economy over the last 10 to 20 years. Another way to measure it. So, this is... Another way to measure it is our general fund which we have the most discretion over. This includes all dedicated revenues. Not federal revenues, but dedicated revenues. The general fund has been $10 billion since 2000. In nominal terms, it's been flat. Let's talk a little bit about revenues. Again, I wanna get to question and answer period.

0:17:02: This'll just give you a snapshot that... Of the 36, here we measure 38, again, we included some miscellaneous. 38 billion we, really at state, are dependent on three taxes, they represent 85% of our taxes. Our income tax raises about $9.8 billion, our sales and use tax rate is almost $10 billion, and then the property tax raises about 14 billion. Transportation, we raised some dollars, that's mostly Federal Mass, but we raised $2.5 billion locally in transportation and then we match it with federal dollars to leverage that. And then everything else is all other. Within that all other is corporate income taxes too. We have a corporate income tax now, raises about a billion dollars a year. We also, non-C corporations pass through corporations with the LLCs, all those.

0:18:02: They probably pay another couple of billion dollars a year that shows up in the personal income tax. Offsetting that, we gave about 700 million in credits this year for things we think are good. You create jobs and you get a credit. Batteries were my favorite. Film was probably my favorite. We always have this debate among, what was the dumbest credit we've ever done and it's always a competition between batteries and the film credit. But anyway, that number was a billion dollars a couple of years ago, so it's gone down. So within that, all other is about $700 million of tax credits.

0:18:39: Now, we've got to be a little careful of that because one of the rules, one of the etiquettes of policy making that people don't always honor, is, you gotta be careful judging what policy makers did when you weren't there because a lot of these things were done in the pressure of a recession, in the lost decade. So people were making decisions that you look back and say, "Well that was dumb". But you don't know the pressures they were under then. But certainly some of the credits that were given away we're still haunted by, and we're gonna be haunted by from a fiscal perspective for a decade.

0:19:18: Now part of this, this just shows that our relative tax burden has declined, measured here since 2010. But there has been a decline in our relative tax burden. This becomes part of policy decisions people were made on the appropriate size of government. That's what's happened here, we've gone from 80th highest to 30th highest. Now except for the property tax, we're out of the top 20 in most of our major taxes. So let me just talk about, not so much a rainy day' fund. I'm gonna talk a little about it now because part of what we're focusing on now is avoiding what I call the yo-yo effect of fiscal policy. Times are good, you cut taxes, you increase spending. Times are bad, you respond by increasing taxes and cutting spending. What we're trying to do is think more over a longer time period, which is how you sell fiscal policy both spending and tax policy with the thought to the next five years at least, at least not the next 12 months. And so we are talking about what... At least, not elected people so much, but policy makers are talking about how do we get prepared for the next recession because the next recession obviously will come, who knows when it will be.

0:20:37: So we're talking a lot about how do we deal with long-term liability so we get a chance to attack those now? How do we set aside our reserves? How do we make sure the budget is fundamentally balanced now? Because it's easy to balance a budget on paper. It's much, much harder to really balance the budget. It doesn't take long to realize how you could balance the budget on paper and fundamentally, structurally, not be balanced. You pull ahead revenues, you push expenditures out, you tap reserves. So really we need to take this opportunity now with the wind at our back to get prepared and think about what happens during the next downturn. And so, again, we've attacked long-term liabilities, we've put aside money into the rainy day' fund, we're almost a billion now. It won't last long but it at least gives us breathing room when the next recession hits. But you always gotta be careful here, it's like planning for the next hurricane. You can do all the planning you want... It's like what Tyson said about boxing, "You do all the planning you want till you get punched."

0:21:41: And then you don't really know 'cause each recession is different. We've been through a lot, but I've been through too many of them now. You never know when they're gonna happen. Now I do feel bad. Our ability to forecast macro economy is limited past a few months. You never know when it's gonna happen, and when it happens it hits harder than you think. Revenues drop faster than you think and expenditures increase faster than you think. I've been through there, I've walked through a recession and the Governor would say, "You've gotta bring revenues down by $200 million." You go in the next month, it's another $200 million. Then you go in the next month, he says, "When are you gonna stop? I don't wanna see you anymore." So you can't absolutely plan for it and insulate the budget from the next recession, but you at least need to think about it and get prepared as much as you can.

0:22:37: Okay, I'm gonna talk about local government. Are you guys okay? It's okay? Do you need a break? [laughter] Okay, I'm gonna talk about local government, Michigan mostly, just because that's what I'm interested in. We have this disaggregated structure in Michigan, many states don't. We have 1800 local units of government. Not only townships and counties, a lot of people don't have townships, but we got all these special authorities, got transportation districts, so we have 1800 local units of government. We talke about the fiscal health of local governments, the answer is, "it depends." It really does vary by geography, by size, by function.

0:23:21: It's not just urban areas, some of our... Fiscally, the districts that are struggling the most are up in the UP. It's not lot of people there but relative to population, there's many areas in the UP that are struggling even more than some of our urban areas. So it's not urban-rural split, but it is in pockets throughout the state. Local governments really are dominated... Tax policy, you learn and... I learned from Harvey Brazer, who most of you don't know, but the usual efficiency and fairness and horizontal equity, there's also simplicity which is really important but diversity.

0:24:00: And local governments in Michigan fail the diversity test. They are heavily reliant on the property tax. So there's this total property tax. Local government's generally, it's about 12 billion of property tax, 1.2 billion of revenue sharing which we can talk about they always complain about. 500 million of local income tax, there's 20 cities and then 500 of miscellaneous. So local governments are heavily dependent on a single revenue source and that revenue source has particular constraints to it, constitutional statutory constraints. It doesn't respond real well to changing economy for a variety of reasons we can talk about.

0:24:42: So while governments are doing, local governments generally are doing well, we got 4.5% unemployment, we're selling 17 million units. It's covering up a lot of problems, the old Warren Buffett, "You don't know who's swimming naked until the tide goes out." I'm very concerned when the economy slows, many many problems, financially, that the local governments are gonna surface and the worst time to try and solve a problem like this is during the crisis. The old cliche is "Today's problems are yesterday's solutions", absolutely happens in fiscal policy, at the federal level, at the state level, at the local level.

0:25:21: During a crisis, you make these decisions because you're in a crisis that come back to haunt you. Now is the time to get our arms around this. I'll talk about, I don't have a solution, but I'll talk about the framework of a solution in a minute. This is revenue sharing. I just put this in 'cause they always complain about revenue sharing. Revenue sharing has taken this wild ride over the last decade from way high 1.5 billion down to 900 million really, and then back up. So it has been whipsawed local units of government, their second leading revenue source. Another issue that's really hitting some local governments, not all, but some, is this unfunded liability on pension and healthcare. It is at the state level, it is at many states level, look at Illinois, compared to Illinois we're doing great, compared to Chicago. But we've gotta come to grips with this at the local level. I know there's this question of justice and what retirees need and deserve. That's not what I'm talking about although it is what I'm talking about. What I'm talking about is the unfunded liabilities continue to grow and their ability to service that is not growing at the same pace. For some local units, their obligations for pensioner's healthcare and retirees, eating up 20% of their budget and growing.

0:26:41: So other areas that they should be spending money on continue to decline because it's pushed out by this rising obligation. Some of it is demographics. Obviously the labor force is getting old. Some of the urban areas, Flint for example has five retirees for every active worker. Some of it is being driven by healthcare costs. Healthcare costs are going up depending on how you measure it, 6% or 7% compared to couple of percent inflation. Some of it is being driven by market returns, 'cause you put a bunch of money aside and you hope the investment earnings offset inflation and the way it works is when you have a couple of bad years, it takes a while. So part of it is market returns and part of it is we collectively made bad decisions. We thought good times would last forever so we gave benefits. 13th Check is my favorite which is whenever you had excess money, you gave it to people. The problem with that is the way you run a pension plan is you need the good years to offset the bad years 'cause you're gonna have bad years. If you give away the good year all the time, you don't have any cushion for the bad years, but again it wasn't anything... Well, it was mistakes made at the time because it seemed like the good days would go on forever and in fact they're not.

0:27:47: So we're talking with local units of government now, about what do we do about this? We're trying to be a little agnostic as to how you do it, but there's not a lot of options here. You put more money into the fund. You put more money away, you cut benefits, you raise taxes. There's nothing else, there's no real magic. So we're being a little agnostic about what they should do that's a local decision, but clearly they gotta come to grips with this. They have an obligation to the people they're making promises to be able to fulfill those promises into the future, while not destroying the rest of local government. So I'm gonna talk about that a little bit more, but I'm running out of things to talk about. So I'm gonna talk... I didn't know I was supposed to talk about an hour. I never talk for an hour. I didn't know that until I came in. So I'm stretching it out as long as I could. Let me talk a little bit about looking forward, I got a couple of slides. First just talk how we see the world most because we're still in our SQE's view of the world, but we see continued expansion over the next couple of years which is gonna be critical 'cause most of our budget decisions now.

0:28:53: We're trying to get ready for a recession, but the base forecast is continued expansion. One of the things I want to point out is, this is a general fund. The money we have that has most flexibilities, $10 billion a year. It's not dedicated to anything. It's not formally dedicated to anything. We expect about a 3%, kind of a normal... Forecasters always say 3%, but we expect about 3% in revenue growth, but it's already been called for. Because we've dedicated that towards additional transportation and additional tax relief on the individual side. So we're really gonna face a couple of years now. It's not a surprise that was the decision back in the day is to dedicate for a couple of years revenue growth towards transportation. And so we're gonna be facing flat available revenues at the general fund for a couple of years. School Aid Fund is a different pot of money, it's sales tax and so we're gonna have a regular growth in the School Aid Fund. Federal tax reform, the original request when someone called and said, "Would you come and talk to us." They said, "Would you talk about federal tax reform." And I realized I didn't have a lot to say about federal tax reform.

0:30:03: So that's why I changed the topic. But Michigan's Tax Code like so many other states, like almost all states, are tied to the definition of federal taxable income, adjusted growth income on the individual side, for a variety of reasons we're kind of tied at the hip. Not always, there are always areas where we say we don't want to go where the feds do. But generally, when they change things it automatically affects our direct revenues. It affects us indirectly, obviously, if it has impact on corporate investment, we talk about that, you can tell me [0:30:33] ____, you can tell me whether reduction... Massive reduction in tax rates are gonna increase corporate investment, so there's all these indirect impacts on the economy, but I'm just talking about direct impact on our budget, and it turns out it's really complicated. It took a team a month to go line by line, by federal tax reform and then line it up with our tax reform. But it turns out we're going to get some revenue increase. The real impact was, they kind of eliminated, I say kinda, we talked about that, but they kind of eliminated the personal exemption, which is a big part of Michigan's Tax Code.

0:31:06: So unless we had done something, no one would take a personal exemption in Michigan and that would have increased revenues by $1.5 billion. No one wanted to do that because, it was an unintentional impact. So we had this long debate about how we offset that so we came back and after much debate we increased the personal exemption, restored it. So there are all kinds of provisions, I don't think you wanna get into the details but if you're interested in the details of tax implications, I'll be happy to talk about it. But issues of loss, timing of loss, corporate loss recognition and expensing of some inventories, all these things played in and we thought in addition to the personal exemption it would have raised individual income taxes by 60 million and corporate, CIT, corporate income tax, by 100 million. If you gotta pay tax, 100 million's a lot of money. If you're part of the... But generally, we raise $38 billion a year, so it wasn't a big issue and we think we offset most of that through our changes in the personal exemption. We can talk more broadly, I can give you my opinion but it's just my opinion about federal tax reform. Everybody has their own opinion and I'm sure some people in this room have studied it deeper.

0:32:16: So we can talk about generally what we think about the economic impact of federal tax reform, but I just want to touch on the direct impact to Michigan. So let me talk a little bit just at a high level what everybody's talking about. The first is, at a high level, just sustaining the progress we've made over the last few years, it has been hard work, we've done it with a growing economy, so obviously it helps to have the wind at your back. There's a lot of work that's been done and so we need to do everything I've just talked about, both thinking about fiscal policy over a longer term than the next year, thinking about what happens during the next downturn. Since, I think this is part of a budgeting class, there's just a couple rules of thumb that I've learned that make for a good state local budgets. Federal is a whole 'nother thing.

0:33:09: But first is having a multi-year budget is absolutely critical, absolutely critical, absolutely critical, multi-year budget. Force management to focus on the longer term than just the next year. Some people, they always say, "Well, who know's what's going to happen especially the longer term?" Yeah, that's not the point, the point is the discussion, you know a forecast is gonna to be wrong, but it helps you focus on the implications of your decisions today, two or three years down the road. The second, kind of rule of thumb, now I'm stretching out, do you notice? I'm stretching out the time.

[chuckle]

0:33:43: The second rule of thumb is be very clear about one-time revenues and one-time expenditures. This is the most common mistake I've always seen in my career, is that especially during economic expansion, you take a pot of money that really is one time, it's not gonna be there and you build it into your base expenditures and so what happens, you wake up in a couple of years and you found out you made commitments that you can't meet, so have the discipline to understand what are one time revenues and what are ongoing revenues, spend the one time revenues on one time spending. And that will really help you manage throughout the cycle. A couple of other things, this diversity and revenue stream is really, really important for governments, state and local governments, we're not exactly meeting it as much as I would like, we've talked about that at the state level and we talked about that local, so finding a diverse revenue source that can help manage throughout the cycle is important.

0:34:40: And then the third is constant focus as a policy person, you need to talk to the policy makers, the elected officials, about this concept of intergenerational equity. It is so easy to either, kick the can down the road or it's so easy to make short-term decisions that have short-term benefits and long-term costs. It's a million different areas. It's pension benefits. If I have a problem today, I give additional pension benefits instead of wage and salary increases in a local labor agreement and then 10 years later you find out you're underfunded. It's issuing debt, issuing debt appropriately for long-term assets that meets our definition of intergenerational equity. But issuing debt for operating expenses doesn't make any sense, sounds commonsense, but it happens all the time. My favorite is we do these deficit elimination bonds in Michigan which is issuing debt for operating purposes that was undertaken three years ago, even worse. So really focusing on, as a policy maker, helping elected officials understand this idea of intergenerational equity. So that's my budgeting advice.

0:36:02: Focus on multi-year budgets because that forces it. The other thing is to understand capital, 'cause governments do a poor job of understanding their capital, both having maintenance versus new investments and understanding the shape of their capital. They just do a really poor job generally. And then one-time revenues, one-time expenditures, intergenerational equity. That's the first bullet. The second, addressing long term strategies while maintaining [0:36:26] ____ tax system. It's a really big debate we're having now. I've often found, and I've been in this area a long time.

0:36:35: This idea of should taxes be higher or should taxes be lower? I think it's a wrong question. I think the question is how do we create a set of policies that increase the standard of living for all Michiganians. So, it's not taxes higher or lower but it's what are you getting for taxes and so how do you mesh both the spending side and the tax side. And I think that's a much more interesting place to start and practically what is happening now is we are having the debate about where do we want to selectively increase spending. Infrastructure is a big one, roads and sewers and water, and other infrastructure gets a little technology and all that kind of stuff. But, infrastructure generally is a big area. People are talking about where do you invest and how. Education has always been a topic. How do we invest more in our educational system and get more outcome, more equity for the dollars we spend. Economic development has always been a topic. We had a big debate last year about economic development incentives.

0:37:34: That's a whole different debate. But anyway, this question now of where do we need to spend more and then how do we do it and maintain a competitive in both the fair and effective but a competitive tax system. So, how do we balance those two things? How do we spend more while still maintaining some of the progress we made in the tax system? That's the second law, a big thing we're talking about. The third I've already talked about is more of a tax thing. How do we keep... Since we're so dependant on three main taxes, how do we make sure our tax base and our tax system continues to evolve as the economy evolves. And again, I've been struggling with this, this iCloud thing since I got back. As transactions move from, "I go buy a book to I go buy a disc that has a book to, I do this thing in the cloud that I don't even know what it is." We can't even define it and as tax policy people, the minute we set it in statute, it changes, and so then we missed it all. And as I said, it's one of our three pillars. There's so much of my job is just pure math. We have a constitutional amendment, it's just simple math, simple arithmetic. We have a constitutional amendment to balance the budget.

0:38:45: If we have a deterioration of one of our taxes, we either raise another tax, which is okay or we cut spending which is okay, but we can't do anything. We gotta pick one of those options. So as the sales tax continues to deteriorate, as a state we need to come to grips with what do we do about that. Every state is dealing with that. Every state, every time I go to a conferences that's a big topic. And then local governments. I've kind of beat that to a pulp. That's really the topics we're talking about. This is kind of a... Oh, wait a minute, I've gotta do it. Sorry. This is kind of put in the way we put it together in a pamphlet. Talent, we talked all about that. There's a big debate going on now and it's interesting to find because a few years ago, the whole debate was, "How do we get people into higher education to get a degree? Because as you all know, the long-term economic earnings is increasing [0:39:42] ____. It's focused. It's shifted now to, there's a lot of jobs that are available that are really great, middle-class jobs that have a good career but we need to get people trained, whatever the skill trade is. How do we get them trained? How do we get them interested? And then how do we match those with employers that need those?

0:40:01: So, this whole idea of talent has become a big thing. Education, we've talked about it forever. Here's one little titbit. It gets back to this pension issue. So, we run the investment, the pensions for teachers. 10 years ago, I looked it up. We were contributing $970 million, 2006, to Teachers Pension Plan. This year it's $3.5 billion, $970 to $3.5 billion. For a variety of reasons, I'm not saying we should stop that. I'm just saying if conditions were different, that's another $2 billion we could have put into the classroom. So, anyway, people are talking about education, people are talking about infrastructure, people are talking about local government and then effective government is where I spend a big part of my time. I'm done, right? I'm fired at the end of the year by the way which is I'm okay with that. And it's time... It's time to let the next generation of policy makers handle these things and tackle these questions. I'm fine with that and I think they'll do fine. I think you'll do fine. What am I talking about? You're the next generation of policy makers.

0:41:14: I think you'll do fine. I think, just focus on the basics. Focus on the policy, not the politics. Take a longer term view of what's required and not just a short term view. At least in Michigan, and other states too, but at least in Michigan build on some of the successes that we've had the last few years kind of right sizing the budget and the fiscal policy in Michigan, and that's where you guys can disagree with me, that's good. But build on the successes we had. But, take these challenges on. It's easy to punt on these challenges and take it and deal with it next year. But, there's two problems with that. One is the problem always gets worse. Whatever the policy problem is, the longer you delay, it's always harder to solve.

0:42:02: The hole gets bigger, the losers more offset the winners. So the sooner you can take these issues on, the better it is, the easier it is to solve. And just as important as I started this talk today, we're at a real upswing in the economy. These are the best of all times. Unemployment rate is 4%, 4.5%. We should be addressing these issues now with the wind in our back. We shouldn't wait till the next crisis to try and address these issues. We need the will, we need the foresight, we need whatever it takes to address these issues while we still can and we have some flexibility. Now that's part of our job as the technical policy makers, technical policy whatever we're called, to bring these issues to the attention. It's part of the actual people who vote. I don't vote, no one voted for me, but it's partly our responsibility to frame these questions so that it's easy for them to understand, it's easy for the general public to understand and to take some of those harder decisions now because of the greater good down the road. It's not easy, but it's possible.

0:43:07: Progress is made like any large organization, especially governments, made to react slowly and that most of the time is a good thing, but you can make progress in this area and I don't know what you guys are gonna do for your career, but I think done right public service is by far the most interesting career, most meaningful career you can do. I've done both, private sector is great too. I am digressing, but there's this mischaracterization of both sides, everybody in government thinks private sector is just profit maximizing assholes and that's not true. They're concerned about the long-term community because they know that's what impacts their bottomline. But people in the private sector think people in government go home at 3:00 and they're incompetent. Neither one of those characterizations are true. Sometimes they're true, but generally they're not true. You can make a career in both sides, but don't overlook government. I think you can make a big difference. I'm almost done. So in what level of government? I worked at CBO for a little while and it's good because you're dealing with really big stuff and you're a really really small fish in a really big pond.

0:44:22: Unless your first job is the secretary of treasury, but generally it's not gonna be that way. So in state government, you get your arms around issues. Now sometimes you're dealing with issues you think, "Is this how I'm spending my day?" But still you get more of a direct impact on policy in state government and local government is even more so. Politics becomes more personal the more local it is and sometimes the hardest jobs are the school board and the road commission because there's much more ownership on the part of the local constituent. So let me just end by... I wandered a bit today, I apologize. I wanna hear what you have to say. I wanna hear criticisms too because that's what makes this thing interesting is criticisms. But what I really wanna leave you with is that if you have a desire to work in government, you should follow it, you should do it, whether it's federal state or local. It's not gonna pay as much.

0:45:24: All my responsibilities, I pay less than I paid my first year MBAs at DTE. But there are other advantages to working in government. I hope you pursue it and if I can help, come and talk to me afterwards. So that's all I have to say. I'm sorry if I took too long or too short. I was kinda making it up as I went along. Now, it's your turn.

[applause]

0:45:51: Thank you.

[applause]

0:45:57: So I was gonna ask for a projector and... But some of you know what I'm talking about? We used to handwrite on those slides and put it in our projector, we don't do that anymore.

0:46:13: Thank you very much again.

[applause]

0:46:15: Thank you too, twice.

[applause]

0:46:19: I'm Stephanie Leiser. I teach the course that we're hosting on budgeting and financial planning. So now we're gonna open it up for the Q&A portion. And we've got Jason and Emily going around. I know you've seen them collecting the little white cards. So if you have questions you wanna ask or things that come up during the Q&A, please just wave at them and they'll come get your card and we have Stuart Hammond and Morgan Beeler, two of my other students who are going to ask the questions. So we will turn it over to them at this point.

0:46:51: Great. Thank you Mr. Khouri.

0:46:52: Call me Nick.

0:46:53: Nick [chuckle] alright.

0:46:55: You know my real title is honorable by the way. Honest to God. Honorable Nick Khouri. If I could only get my wife, I've tried for three years, she refuses to call me that.

0:47:08: Alright. My name is Stuart Hammond. I'm a first year Ford student.

0:47:14: Hi, I'm Morgan Beeler. I am also a first year MPP and I'll be asking you the first question.

0:47:20: Sure.

0:47:20: So thanks for being here.

0:47:21: My pleasure.

0:47:22: So the Citizens Research Council is pushing for local government services to be regionalized at the county level. With state revenue sharing going to counties for those services. From a state perspective, what do you think about these proposals?

0:47:40: A couple of things. I was on the board for Citizens Research Council forever. I love their motto and this was 100 years old. The right to criticize a government comes with the responsibility to know what the hell it is you're talking about. That's one of my favorite mottos. So this issue of local government, for the three years that I've been here, I've been pitching this story, and I haven't really gotten much traction yet. But, I do think we need to take on the fiscal structure, the fiscal framework of local units of government in Michigan. We need to do it now when the economy is... I think it's in three buckets, and we ought to attack all three buckets. We need... I'm gonna get to your... I got your question here, and we're gonna get there in a minute, I promise. We need to attack all three buckets. One is the unfunded liabilities we talked about, because that continues to grow. Second, is the efficient provision of services. We need to make sure we're doing...

0:48:29: And again, locals always get upset. I'm not saying there hasn't been a lot of efficiencies over the last few years because of the reduction in revenues, there has been. We need to find other ways to continue to provide more efficient, more effective services to our constituents. I'll talk about that in a minute, because that's where the CRC comes in. And then third, we gotta talk about, "Do we have a stable revenue base that will support local governments?" Not give them all the money they want, but support governments over the cycle. So, I've been trying to talk about all three areas at once. It's hard to attack one without the other because all three are so interactive. I've had some success, but certainly not as much on all three.

0:49:05: So, CRC; let's talk about the middle one, "How do you provide effective services?" We have a disaggregated system. Let me give you a... CRC used this as one of their examples too, is property taxes. It's our biggest revenue for us; it's $14 Billion. We do it in a more disaggregated way than almost any other state, we have 1800 assessing local units of government. And at the same time, the system has become much more complex over the last few years, for a variety of reasons. We're phasing out something called personal property tax, we have more credits, we have a proposal. So there's... And at the same time, all the high level assessors are all retiring. We only have 145 top level assessors in the entire state. For a variety of reasons, I'm trying to talk more and more about, "How do we do a better job of administering the local property tax?" The easiest way, and this is where the CRC came in, is they said, "We'll just aggregate at the county level." For years, people have said, "We don't even need townships." Yeah, maybe.

0:50:10: I have been in consolidation discussions for 30 years. When I... I was at a... We had our educational task force couple of months ago, and there like 30 people and all these educators, and they said, "We got too many school districts, we need to consolidate school districts." I pointed out, I believe it was in the same room with a different cast of people and the same recommendation, consolidate school districts, then we had 565, now we have 563. So after 20 years, we had a consolidation. So, if you make a conceptual argument of, "We need to consolidate services at the county," that's fine, but you run into local control here. Michigan has a really strong, especially in the rural areas, local control, and rightly so. So the question is... And CRC kinda provided some of the services that they thought should be consolidated. The question is, "How do you retain local control, at the same time you get the economies of scale of many of the service provisions?" So, I'm a big fan of consolidating areas without consolidating districts, so some functions are done at the aggregated level.

0:51:20: I don't think this idea of consolidation is a... It's not a philosophical issue, just like outsourcing versus insourcing, is not a philosophical issue; it's a practical issue day by day, sometimes case by case. Sometimes it makes sense, sometimes it doesn't. So, the moral of the story is, we are looking for ways for locals to jointly get together. Not necessarily... CRC said, "Well, the county should do all this stuff." I'm just saying, there can be organizational arrangements where we can get some of the economies of scale and still keep local control. I'm a big fan of... Some people hate it, and I hate it sometimes, but special assessment districts, where as long as locals... The worst thing is... I live in Plymouth Township, and Plymouth City has excess capacity in their sewer or water system, and Plymouth township goes out and builds, and there's no coordinated planning. If we can force some kind of at least planning, and then give them local taxing authority to fund that joint, I'm a fan of that. But I haven't made any progress, and my clock's almost out, so that's you guy's job.

0:52:26: So it's a long winded way of saying, some of the stuff CRC talked about, everybody's been talking about forever; and it's great, good idea, but I'm less interested in what makes conceptual sense and more what we can make sense to move the ball forward that's actually... We can implement. That was a long winded... All my answers won't be that long, I promise.

0:52:47: So the next question, what are your thoughts on Michigan's municipalities courting big businesses like Amazon, with huge tax break packages?

0:52:55: Well... Maybe I'm old fashioned. I really think... I think the appropriate tax rate is zero. Alright? I think the appropriate tax rate is zero. I think we have taxes because we wanna support services that we all decide. This idea of using the tax system to, "We're gonna create a new industry, we're gonna create a new business, we're gonna attract somebody from here," I think is a fool's errand. I think, the problem is for every dollar you give away, 70 cents is for behavior that would happen anyway. And you don't know what 70 cents is, and what the 30 cents is. And so, that's the problem with using the tax system to do good things. I view the tax system as a necessary mechanism to raise the dollars we want, because we wanna fund our spending. So I'm not a real fan of tax incentives. Having said that, we just passed a big package last year that, it became a joke, "Well, the treasurer hates it; but let's pass it anyway." So, you don't always win, and that's fine. No one voted for me.

0:54:00: But I just think generally these big incentive packages are losers. And I know the academic literature always talks about, always comes out as that they're losers. But Alan Blinder had this quote, a clip from a long, long time ago and I saw this in today's Wall Street Journal again, but I love it. So, "Politicians use academic research like drunks use a lamp post, more for support than illumination."

[laughter]

0:54:26: I always liked that quote, and it's absolutely true. So, this academic research that says, "You shouldn't do, you shouldn't do, you shouldn't do", has very little impact when there is a company on the line or a stadium on the line, that's a big thing, who's gonna lose the Red Wings. But I just think generally it's self defeating. It's impossible... Not impossible, but it's difficult to avoid, it's difficult to resist. I've seen elected officials, it follows this pattern all the time. You come in, and broad base-low rates, what you learn in Public Finance 101, and it's broad base-low rate and then it gets... You know, missing out... And somebody announces they're going some place else. There always tends to be this, towards the end of a term, this idea that you really can incentivize behavior. I mean you can.

0:55:22: The other thing about government, like everything else, is that... One of the problems with government is the benefits are so concentrated and transparent and the costs are usually diverse, dispersed and not as transparent. So, if you're gonna give a credit to somebody, they really like the credit and you can really see the benefit of the credit. The cost, since we have a balanced budget amendment, somebody else's taxes gotta go up or spendings gotta go down. That's much harder to see. So you can cut the ribbon, that's pretty obvious, but it's hard to really reflect the cost of the overall policy. So, that's why you tend to ratchet it up because the other thing is, the people who get the concentrated benefit, man, they're gonna really argue for that benefit. The people who pay the cost aren't as organized 'cause they don't know. So, if you're gonna get a dollar credit, you are really focused on getting a dollar credit. If you're gonna pay a half a cent more, who do you gonna sell? That's why you tend to ratchet up these things.

0:56:21: So, that's what I think. Other people think different things. The other way to do this job, by the way, I'm retiring at the end of the year. So, no one can come to you and say "Do what I want or you'll never work again" 'cause I can say, [laughter] "Well, I'm done. What're you gonna do?"

[laughter]

0:56:39: Alright, our next question comes from Twitter. What is the minimum amount of acceptable government or maximum amount, depending on one's political proclivities?

0:56:50: Wow. Well, first off I don't do Twitter, so I don't even know whether... I don't even know who that's from.

[laughter]

0:56:56: So, the question is, "What's the maximum or minimum amount of government?" I even don't know how to start with that, because so much of it is value judgement. You learn in Public Finance 101, I hope, is that we can talk about efficiencies, we can talk about the impact on the private economy and try and minimize the impact on the private economy, 'cause the assumption is efficiency in the private economy. So, you wanna minimize the distortions of the economy. But that's not really the issue. The issue is always this value judgement. It's not so much "What do we think the impact is gonna be?" It's really this philosophical debate about size of government. And that comes down as beauty, it's in the eyes of beholder. I mean, I think there is a real risk, especially 'cause I always hear, "Well let the experts decide this stuff." Come on, if this is a value judgement about the appropriate size of government, the experts have even less.

0:57:52: They can help frame the question maybe, and they can talk a little bit about history, but they have less standing to talk about it than anyone else in the state. So, I'm not answering that question. I don't know what it is. Should government be bigger or smaller, I don't know, you decide.

0:58:09: So, there's a follow up from the same Twitter question.

0:58:11: Oh, do I get to not answer again, go ahead. [laughter]

0:58:13: Umm, possibly. What is the right level of taxation or spending?

0:58:18: Well, as I said... Oh, spending is a different thing. I was just gonna say taxes. The right level of taxation is zero, I've already said that. The right tax rate is zero. The question is, you need to raise the revenues to spend what you wanna spend. What's the right... And you can't really argue. People have talked about, it should only be a percent of the economy. We actually have a constitutional amendment that says "The size of state government can't exceed a certain percent of personal income." That's really a blunt instrument really. The question is as I try to say, "It's not should taxes be higher or lower." It's, "Do we have the right spending requirements?" and "Are we spending in the right areas? So, it's not overall size of government. I don't find that as interesting as "Are we spending enough on education? Are we spending it in the right way? Do we need to spend more or less?"

0:59:02: That I can get my arms around. Are we spending the right amount on infrastructure, have we underfunded infrastructure? A lot of our infrastructure in the state of Michigan was built in the 60s and 70s, very little maintenance for a variety of reasons, or not enough maintenance. So, I'm more comfortable talking about, "Should we spend more on infrastructure or less? Should we spend more on education or less?" I don't have a lot to say about, "Is government too big or too small?" Other people have a firm view about that and it tends to be "It's too big", "It's too small". I don't think that's really the meat of the argument. So, there's the second question I didn't answer. Is there any third question you want me to not answer?

[laughter]

[pause]

0:59:44: Oh, now I've scared them off, they're afraid to ask 'cause I'm gonna be mean.

0:59:49: How do you ensure that the state's investment portfolio is socially responsible?

0:59:53: I don't. I don't, I don't give a shit. [laughter] This is a really important point. I'm a sole fiduciary for $75 billion pension plan, my sole responsibility, that money is for retiree's. My sole responsibility you can tell I have passion about this, is risk-adjusted rate of return, that's it. We need to do good things, we need to support blank, we need to restrict blank, we have all kinds of policy forums to do that and all kinds of ways to do that, we can pass laws to do that. The pension plan, don't believe this bullshit about, "We'll restrict your choices but you can still earn returns", that's a losers game. Number one 'cause it's a slippery slope and the number of treasurers who got thrown in jail because of what they did with the pensions is remarkable. But more important, pensions are risk-adjusted rate of return, that's it. An I know that's gonna piss people off 'cause people love to say, "Oh, we gonna use our pension plan, we're not gonna invest in tobacco."

1:00:49: If you don't like tobacco, pass laws that restrict tobacco. If you don't like tobacco, tax the hell out of them, but pension investments, I have a sole responsibility, and that's retirees, my sole responsibility is risk-adjusted rate of return. You can tell that's been a big debate and by the way our track record's not great. We had studio on Pontiac, they spent 30 million with no collateral because we were gonna create a film industry and it went bust. Focus on the right things, we can do policy in many different areas but not with our pension plan. You can tell I have some passion 'cause not a lot of people agree with that, they think it's 75 billion, "Boy we can change the world." So have I been hard on you? [laughter] Ask a question and I'll just agree with it.

[laughter]

1:01:44: Well, you mentioned earlier a bit about infrastructure. So this is kind of a follow up on that. Can you talk about how or if money is spent equitably for infrastructure projects and villages, townships and cities across the State of Michigan?

1:02:00: Probably not, what I will say is that, we don't really know, it's amazing how little we know about the shape of our assets right now. We don't do a good job of understanding maintenance from expansion of investments, so we don't know how much to spend to really maintain the assets we have. We don't really have a good idea of where we should make improvements to the infrastructure. So I think it's hard to say whether we're spending equitable or not, but certainly I think there are many cases where we've under spent on our infrastructure. Now the legislature just passed a bill, that's a good bill, they put it in treasury which I don't really like, but we're trying to get a state-wide understanding of the shape of our infrastructure right now. That's broadly defined. Because again, the private sector does a little bit better and part of it is budgeting. The private sector, there's an accounting difference between capital investments and current expenses and so you have this forced more or less to look at your capital budgets. Government it's all mushed together.

1:03:05: And so, I think we need to do a better job of understanding where we need to invest. We need to invest in those right areas, then we need to find a revenue source. Equity again, there's always a straight office I was trying to say between local control and local input and some of the economies of scale and providing better. So where you sit on that tends to be... Your position tends to be where you sit, if you're local government with a local road transportation commission. The other thing the way we distribute transportation dollars doesn't make any sense. Everybody knows that, no one wants to attack it 'cause there's so many winners and losers, but we've given away money to road commissions, that have five people. So there is a lot of areas where we need to understand our infrastructure better, we need to make investments in the right spot and then we need to see the right funding source. So I think this debate about infrastructure is one or two top topics people are talking about in Lansing and across the country. And Washington of course is talking about it and they're saying, "God love you, there's no money but increase your infrastructure." So that one I agreed with.

1:04:15: Thank you. In your opinion does the states emergency manager law need any changes? And if so what changes would you recommend specifically in the context of the Flint water crisis?

1:04:27: I don't think we're gonna get to it in eight months. So that's something you can deal with, I do think emergency manager worked in a lot of areas, a lot of areas that came in but the problem was it reported to the treasurer and it's focus was very narrow which is how do we balance the budget? Remember it was only put in when there was a view that the district was about to fall off the cliff and file bankruptcy. So how do you get in there and right size the budget. But to create a sustainable community is more than just right sizing the budget. And so the focus was too narrow, it did what it was supposed to do in most cases, it balanced the budget, but did it really create a sustainable community by improving both human services and health services but also growing economy within a local unit. So I do think that if you're gonna take this on, you need to expand it to have a broader scope. Now that's a lot harder, it's easier to come in and raise revenues or slash expenditures and balance the budget.

1:05:32: By the way this balance budget requirement is not just a technical legal requirement. This is getting back to this intergenerational equity. It is a commitment you have to make, to make sure the next generation isn't paying for spending you're doing today. So this balanced budget idea is an important idea not just a legal requirement but having said that the emergency manager, focusing... We are finance people reporting to the treasurer. We're gonna focus on finance and I think it needs to be a broader idea. The other issue is, it has all kinds of successes of balancing local budgets, but it's hard to create sustainability. I was on the Highland Park Review Committee in 1991. The problem is still there in Highland Park, so we balanced the budget in 1991, but we didn't solve the underlying structural problem, so it keeps repeating over and over again.

1:06:29: Now, some of the solutions are very difficult and deep-seated. Some of these legacy costs, there is a small group of districts that are essentially insolvent, but no one's admitting it right now. And there's a small group of districts that's economic base deteriorated so much you can't see how they can ever provide reasonable services to their constituents. Broadening this to create sustainable community is not an easy task. That's a long-winded way of saying, "We should all work on it, as we should work on everything and there are improvements that can be made."

1:07:04: Thank you. What are your thoughts on a flat versus graduated state income tax.

1:07:10: This is one of these areas where once a year they come and say we need a progressive income tax and equity. It's never gonna happen. How many Constitutional amendments have I worked on? I bet five. One has been successful [1:07:27] ____, four of them have gone down. I don't even address the question anymore. I say, one, we do have a progressive income tax, not as progressive on rate, but we have deductions and exemptions, $40,000 tax-free and pensions and all. It is somewhat progressive in the sense the way we set credits and deductions. But no one is ever in my lifetime gonna change a flat rate in Michigan. We can talk about the advantages and disadvantages all we want, I just don't have enough brain cells to focus on something that's never gonna happen. That's my standard answer.

1:08:04: Thank you. Can you describe the effect of the federal bailout of GM and Chrysler, and how important was the bailout for the state in regard to revenue and jobs?

1:08:15: Wow, that's a big question. That's a Hank Paulson kind of question. There are two issues. They were embedded at the same time, which is a failing of the auto industry at the same time the financial markets were collapsing. So it's hard to pull those two things apart. Certainly you do things when you're in a financial crisis that normally you wouldn't do and this is this whole issue of, "You gotta stop the house from burning", even if you do things you wouldn't normally do or you think they're unjust, but the house is burning, you gotta do it. It's hard to disentangle those two things. And the things they did to support the financial system, I had my own financial issues because I was responsible for the finance of DT Energy, which is a Fortune 300 company, and I saw first-hand the way Wall Street froze, and the impact on the rest of the economy if it wasn't loosened up would have been traumatic. GM was all part of that and Chrysler was all part of that.

1:09:24: Let's say, just take a theoretical exercise, if it wasn't the rest of the world going down, was it the right thing to do? I don't know. Certainly from a Michigan perspective, we can argue about the broader policy, about the role of government to bailout private corporations, or for-public corporations, that fail, and there's all kinds of debate. I'm not gonna get into that debate. But for Michigan, clearly it was easy. It was a clear win for Michigan because the implication... The cost would have been borne more heavily by the State of Michigan if we didn't do anything. The cost of the bailout are more borne by citizens across the country. You can argue about moral hazard, and you can argue about the role of capitalism in government. You can argue all that stuff, but I'm gonna leave that aside. For Michigan, I'm glad they did it. It might not have been good policy nationally, but it certainly helped us restructure the auto industry.

1:10:21: All right, it looks like we've got time for two more questions.

1:10:25: They better be good ones.

1:10:26: All right. We're gonna try here. In the context of the new pension, OPEB Reporting Laws that were passed in December.

1:10:32: Yeah.

1:10:34: When you talk about working with local governments and bringing their unfunded pensions into balance, what do you do if the elected officials just can't agree on how to do that? What type of enforcement authority does the treasury have?

1:10:48: Well, that was the whole debate. We had recommended something with a little more teeth at the back end of it. First, you gotta be transparent, so everybody knows what the problem is. Second, you gotta put together a plan that fixes it and if you can't do it, we will. And the we will part fell apart in the legislative process. Democracy is a messy process. I think we made progress last year. At least a lot of people are talking about it now. There's more reporting and transparency so we have a consistent analysis of what the problem is, and there's still local units that are still required to put together a plan to show long-term solvency of their pension and retiree healthcare. There's progress there, but at the end of the day, short of a financial emergency, there's not much we can do at this point. But, you know the old cliche of "Something that can't go on forever, won't." It's true in this pension area and healthcare area. As the obligations continue to climb, something will be done, and may be done in the next recession, and it may be the wrong thing, but something will be done just because of the necessity.

1:12:00: At some point if it takes 50% of expenditures just to service the retiree and healthcare, something's gonna be done. So, the question is what is the teeth? We have moral suasion, and certainly if that turns into a financial emergency, we have abilities. But outside of that, it's gotta be taken unit by unit, contract by contract.

1:12:32: Thank you. How do you view the relationship between the Snyder administration and the legislature and how can you prevent the yo-yo in fiscal policy, as you call it?

1:12:42: Well, the relationship is fine. So how do you present the yo-yo fiscal policy? Again, it's what I try to talk about, it's really as much as providing the perspective at forcing long term planning, forcing long term forecast, forcing multi-year budgets, forcing this debate between one time revenues versus ongoing expenditures. So it's everything I just talked about that's really high. You start thinking about this fiscal policy over a longer term. And just a recognition that the next recession will happen, and everybody knows it, nobody knows when, but it will happen, and how are we gonna prepare ourselves to deal with some of that. You saw this rainy day' fund went from $0 to $900 million over the last few years. That's kind of the indication. Back in 2010, 2014... 2010, 2012, and then a little bit last year, there were changes to the pension system that reduced that liability. We have an outstanding unfunded liability of the teachers pension plan and state employees but teachers about 50 billion, but we lopped off probably 20 billion of that with changes. There are many areas where the fiscal health is in much better shape now, both this year and going forward. But as I said there are still quite a few challenges to go.

1:14:09: Alright. Looks like we can squeeze in a couple more. So this is kind of fun one.

1:14:14: Good. These have been fun.

1:14:16: What state are you least envious of?

[laughter]

1:14:21: Oh, Illinois by far. [laughter] That's not a hard question. Illinois is a mess. It's a basket case. It is financially whatever, insolvent is better word than bankrupt because it's not so. And it's politically insolvent. Illinois by far is a mess. Is the biggest mess we have. Might be eventually the first jump on state, I think ever, probably ever. So Illinois is the one we don't want. I think Michigan's the one we want. It's our home, it's a great place. So I'd say, we're number one. Illinois is number 50. [laughter] And then you pick the rest in between.

1:15:04: Alright. And this will be our last question.

1:15:05: You said that last time.

1:15:08: You're answering 'em quicker.

1:15:09: Okay.

1:15:10: This time we mean it. Alright. What do you most wish the public better understood about your domain?

1:15:18: About my domain? Just like life, broad public policy issues are always trade-offs. They're never black and white. Anyone who says the answer is easy, it's x, either has a really simple problem or is selling you something. I think, without really thinking about it, I wish people understood that most of these difficult questions are balancing acts between two goods and it's not good and bad. And whatever you choose, you have to understand the consequences but you have to pick the best path. And then, a corollary of that is, as I get older, I live by cliches, but the old cliche is, "Don't let the best be an enemy of the better."

1:16:06: That's also a really important part of public policy. You gotta make sure you're moving the ball forward. But don't get so paralyzed by... There's so much more we could do to at least take the next step, because government is incremental, and it's not a bad thing. Government change is incremental. And so both of those things. These issues are complicated. There's no easy answers. It's black and white. So when you're making a decision, you need to understand, and you need to be sympathetic to the people who are making the decision that they are facing trade-offs and then second, change doesn't come all at once. It's more incremental on the fiscal side. It's more incremental change, but that's okay as long as the tankers moving down the Great Lakes, and you can't move it all at once, but you kinda nudge it each time, and eventually it turns around.

1:17:01: Okay. So I know we've told you...

1:17:02: That's okay.

1:17:03: We even turned it of. We were ready to be done.

1:17:06: No that's okay. Just scream it out.

1:17:08: Well, as everyone knows Twitter always has the last word. So this question comes from Twitter. Over the past several decades the states including Michigan have shed costs on higher education to the federal government. Has that been a good bet for the state of Michigan?

1:17:25: Shed costs on higher ed to the federal government? Okay. They're talking about what. What federal government costs have they been picking up?

1:17:38: I'm unclear. This was...

1:17:41: Unclear. So have we... Let's change the question 'cause this is what everybody, all the professors in the room wanna know is, how come we're not spending more state dollars on higher ed? That's probably what people wanna know. I don't know the federal government. They have research dollars, but traditionally in education, both k12 and higher ed, feds are not as big of players. So should we be spending more on higher ed? Yeah, I guess it's a trade-off. I do think, by the way this is unsolicited, this is not my area, so I'm always a little hesitant to talk about areas I don't know other than when I'm at the family dinner table.

1:18:17: But you guys got a problem, because higher education is fundamentally changing over the next 10 years. And the way we provided higher education 10 years ago is gonna completely look different than the next 10 years, virtual costs, whatever it is, higher education could be restructured and more and more people are talking about, we need to provide more money, but how do we provide more money? So part of that is Public Sector State Support. Part of that is universities gotta to come to grips with that themselves. So there's two things. There's demographics, we're just on the baby boom and overall demographics, you see it in K-12, now they're going down and that's gonna hit the universities.

1:18:55: There is also this, at least short term backlash of maybe a university degree isn't the way to a middle class, maybe becoming a really good plumber is the way to a middle class. And you have this whole technology that's providing a service in a completely different way. So I don't know what the answer is and I don't even know how it's gonna turn out but this is gonna be fundamentally different in the next 10 years. So should the state contribute more? Yeah, yeah, yeah. We have a weird constitutional provision in Michigan that says, depending on how you interpret it, "Give us some money and leave us alone." [chuckle] That's what our constitution says for higher ed. "Give us some money, shut up and leave us alone." I don't know. I don't know.

1:19:43: So is that how we're gonna leave it on that?

[applause]

1:19:49: I don't know if that's how I wanted to leave it.

1:19:53: Well the good news is we don't have to leave it on that 'cause we're gonna have a little reception outside here. And I know that there are several questions that you guys passed up that we didn't quite get a chance to get to but you can perhaps ask them in person. I wanna thank everyone again for coming and please join us right out in the great hall.

[applause]