About a year ago, Michigan Treasurer Doug Roberts announced that the state was in "a terrible fix" in terms of its cash situation.
Michigan and its auto-dominated economy were suffering through a lingering recession. The state's AA general obligation rating with Standard & Poor's Corp. had been placed on Credit Watch with negative implications in January 1991, when the fiscal 1991 state budget faced a $1.4 billion deficit.
The rating is now off Credit Watch but has been assigned a negative outlook because of agency concerns over the state's cyclical economy and proposed property tax cut plans, including a $1.3 billion, five-year reduction proposed by Gov. John Engler.
Still, Mr. Roberts is more upbeat today than he was a year ago.
The treasurer, appointed when the Engler administration took office in 1991, points to the fact the state balanced its budget without a tax rise and acted to improve its cash situation.
This week, the state's AA rating from Fitch Investors Service, A1 rating from Moody's Investors Service, and AA rating with a negative outlook from Standard & Poor's were affirmed as the state sold $248 million of new GO debt.
Problems remain, including auto plant shutdowns and the draining of the state's budget stabilization fund. Michigan has fewer one-time revenue measures to turn to in the future.
Mr. Roberts spoke last week with Chicago bureau chief Karen Pierog about the challenges for his state.
Q: The recession hit the Midwest later but harder than it did the rest of the country. Do you see indications of a recovery in your state?
A: There are clearly signs that the recession is easing in Michigan.
The single most important sign from a state treasurer's point of view is revenue. May will be the third month in a row in which revenue coming into the state has been positive, and by "positive" I am looking at the area of 4% to 5% over the same month a year ago. We're really pleased and in fact we think we've turned around.
There were two numbers that, in my opinion, still needed to improve in order to confirm the recovery in Michigan -- increasing auto sales, which we had not seen nationally, and the increase in total employment.
We are forecasting a very modest recovery in Michigan. [Officials of the Engler administration and the House and Senate fiscal agencies] had a meeting and we agreed the revenue [growth] number for fiscal year 1993 is 6.1%.
Now 6.1% is a good number relative to what Michigan has been experiencing over the last couple of years. But it is a very, very modest number if in fact we're going into an economic recovery . We're looking for a modest recovery, and that, I think, is consistent with a modest revenue forecast for fiscal 1993.
Q: General Motors has announced it is closing five plants over the next three years. That means 9,100 people out of work, and more shutdowns are expected. How do you see the situation?
A: In my judgment, the impact on Michigan of these announcements is more severe than previous plant closings. And I'm particularly talking about the one that's gotten most of the national attention, which is the Willow Run closing [in Ypsilanti, Mich.]
Many people in Michigan, including myself and many members of the administration, believed, in fact, the decision was going to go the other way. That is, in fact, Willow Run was going to remain open. So the expectation was clearly dashed. I think it is very serious to Michigan psychologically.
It is my hope that the Willow Run decision will be a wake up call to Michigan and that we begin to recognize that we have to change in Michigan in order to keep jobs and create more jobs. And one of the things I believe Michigan needs to do at this point is reduce its property taxes. There will be a major initiative of the governor [to cut property taxes on the November ballot].
Q: Why is that so important?
A: Property taxes are out of line in Michigan. In my judgment, it's clearly a deterrent to the homebuilding industry in this state. It's clearly a deterrent to investments in general and in plant equipment.
And I can emphasize that Michigan is paying for the high costs, by pointing out that in the 1980s Michigan did not grow in terms of population. That means we lost two congressional seats. Where the nation grew by 10%, Michigan didn't grow at all.
There has not been one month in the last 14 years in which Michigan's unemployment rate was equal to the U.S. average unemployment rate. Every single month for 14 years we've been above the U.S. rate. That indicates we must make a fundamental structural change in Michigan and this is an important step. It's not the only step but it's certainly an important step.
Q: The rating agencies are worried because the Engler proposal would have the state reimburse local governments for lost property tax revenues. What are your thoughts on that?
A: I can understand their concern. But I think Michigan has been paying for high property taxes with high unemployment. At the moment Michigan's unemployment rate is 2.2 percentage points higher than the national average.
That equates to around 85,000 jobs that don't exist because our unemployment rate is higher. The human factor is the single most important issue. But, independent of the human factor, it is a financial issue in terms of people working, paying taxes.
The governor was quoted several times that he wants to increase the amount of taxes that are paid, not the rate, but increase the amount of taxes by having more people employed and more business working in Michigan.
Q: But how can the state afford to fund a property tax cut?
A: We phased in a property tax reduction over five years. We did it so we could manage the budget of the state over that time. We believe if we achieve just the rate of growth that we have experienced in the decade of the 1980s -- around 5% -- over the period of time of the five years, we would need half of the rate of growth to pay for the property tax cut and half of the rate of growth can be used for increasing nominal spending for state government.
I think this proposal is very realistic. In addition, this is a long-run economic argument for Michigan and is clearly worth the long-run positive benefit: to, in fact, reduce the tax that, in my opinion, is the one that is most out of line with other states.
Q: Due to cash flow problems, the state borrowed $500 million in the short-term market in March 1991, and then in December another $700 million. Do you expect to continue going to the short-term market?
A: I expect to be in the market again. These are one-year notes. The current issue of $700 million will be paid off in September. We will probably be back in the market in the fall of 1992 to borrow again for a year. The exact amount has yet to be determined. In my opinion, it is prudent cash management.
