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The morning after

*In the early hours of Monday morning, our lawmakers prevented a state government shutdown with a deal that left both sides bloody. However, all it bought us was time: a final agreement on the state budget remains to be sealed.*

The deal which allowed a 30-day interim or "continuation" budget to get the Governor's signature involved two measures to increase tax revenues: a temporary increase in the income tax rate, which will begin to roll back after five years, and and extension of the six percent sales tax to a range of "discretionary" services. In return for allowing the tax bills to pass and giving a few votes to the (mostly Democratic) supporters of the bills, legislators who opposed tax increases (mostly Republicans) insisted that some of their priorities pass as well. One bill will encourage local governments and school districts to create employee pools to negotiate for better health care rates; the very controversial part of this bill was its requirement that current health insurance carriers release claims history data for groups of 100 or more. About half of all public school employees are currently insured through MESSA, the non-profit spinoff of the MEA, the state teachers' union. This provision is interpreted by both sides as a slap at the MEA, though proponents also argue that school districts will be able to negotiate for better insurance rates with this information. Much less discussed were bills which changed how teachers earned credits for retirement health care coverage, but these were also part of the agreement.

The deal was clearly an exercise in tit-for-tat: Democrats got a few votes, and some political cover, from Republicans in the effort to increase the income tax; the bill to expand the sales tax to a number of services hit directly at business groups, one of the Republican party's core constituencies. In exchange, Republicans got to score points with their base by taking on the MEA, and forced Democrats to vote for bills that would assuredly anger that reliable supporter of Democratic candidates. This pattern extended even to the wee hours on the Senate floor, when an angry Democratic Senator refused to support a motion to give the services tax bill immediate effect (necessary to stop the hours-old government shutdown) unless an equally vulnerable Republican member put themselves on the line as well. Sen. Glenn Anderson (D-Westland) changed his vote only after Sen. Roger Kahn (R-Saginaw Twp.) voted yes (after apparently receiving some assurances from Gov. Granholm on local issues).

None of the measures work miracles. The revenue bills essentially acknowledge the gap between spending pressures and state revenues that has been growing for years. According to the non-partisan Citizen's Research Council, the legislature has been cutting budgets for seven years, and has used up $8 billion in one-time resources in an effort to paper over the problem without increasing taxes or making drastic cuts. The services tax will raise about $600 million in its abbreviated first year (about $200 million of that going to the School Aid Fund); the income tax increase will bring in about $760 million this fiscal year. (Current law neutralizes the effect of an income tax change on its contribution to school aid.) Together, the two tax increases are still about $400 million short of covering the projected $1.7 billion deficit for this year. As a result, cuts, reduced spending increases, and other economies must still be part of the mix.

The health care and retirement "reforms" won as part of the deal will also have an indeterminate effect. While proponents say detailed health cost information will allow districts to negotiate for lower health care rates, opponents say this will only allow districts with younger employee pools to band together and be "cherry picked" by health insurers, leaving other districts to pay higher rates for their older employee groups. They also point out that this sort of pooling was already allowed, so the real intent of the bill was to take a slap at MESSA. Whether and how these changes save any individual district money will depend on future negotiations at the local level, and it is particularly unclear whether the measure will reduce health care costs in education overall.

Changes to the state pension system for teachers will also have a largely delayed effect. Employee contributions to the system will increase, taking some pressure off the system in the short term. In the longer term, the system will save money as more restricted benefits take effect for new retirees. Retirement health benefits will require ten years of service, up from five, and the portion of the premium paid by the system varies from 30% with ten years of service to a maximum of 90% after 25 years of service. These changes only take effect for teachers retiring after the end of this school year.

While a budget deal is still in progress, press reports indicate that legislators are looking at a 1% increase in K-12 school funding, instead of the 2.5% increase originally proposed by the Governor which would have allowed school spending to keep up with inflation.

Political backlash to the budget deal was predictable, with business groups gearing up to repeal the services tax, anti-tax groups threatening recall efforts against lawmakers who voted for the taxes, and MEA activists threatening to retaliate against Democrats who voted for the teacher health care and retirement changes. In a radio interview this week, Gov. Granholm concluded that "everyone had to give" and "when nobody is happy, a happy medium has been reached." The Legislature, meanwhile, is still licking its wounds.

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