zalqflfl?

NERSlTY LIBRARIES

Mllll‘ni‘l‘lllll llg‘f' W1) Will

 

 

 

 

 

 

\

 

\\

 

3 12930 LIBRARY
Michigan State

University

 

 

This is to certify that the

dissertation entitled
BUDGET CUTBACK:

AN EMPIRICAL TEST OF BUDGETING THEORY
IN CONDITIONS OF FISCAL STRESS

presented by

Susanne Rockne Morris

has been accepted towards fulfillment
of the requirements for

Ph.D. degree in Political Science

 

X Zcr LN [Cu/«W

//' Major professor

I

Date May 16, 1988

 

MS U is an Affirmative Action/Equal Opportunity Institution 0- 12771

 

 

PLACE IN RETURN BOX to remove this checkout from your record.
TO AVOID FINES return on or before date due.

 

DATE DUE DATE DUE DATE DUE

 

i E 3 $ 7
FEB (4354s '
.fli

‘v

 

W01

 

1204 01

 

 

 

 

 

him .0. 2‘: 23392 :2:

0,?!

1?

 

 

Ira. 2; ms)

 

 

 

 

 

 

 

 

MSU Is An Affirmative Action/Equal Opportunity Institution

 

BUDGET OUTBACK: AN EMPIRICAL TEST OF BUDGETING THEORY

IN CONDITIONS OF FISCAL STRESS

By

Susanne Rockne Morris

A DISSERTATION

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Political Science

1988

ABSTRACT
BUDGET OUTBACK: AN EMPIRICAL TEST OF BUDGETING THEORY
IN CONDITIONS OF FISCAL STRESS
BY

Susanne Rockne Morris

In the 19708 and early 19803 a combination of
increasing expenditures and declining revenues created
varying degrees of fiscal stress for many governments in the
United States. Budgeting under such conditions was thought
to depart from behavior predicted by established theory,
incrementalism, which had been developed in periods of prior
economic growth and stability.

This research provides an empirical test of the
applicability of incrementalism, to the budget process when
changes occur in financial and political stability and
growth is lessened. It assesses the response of budgetary
-decision makers under conditions of cyclical and protracted
fiscal stress.

Michigan state government budget data from 1963 to 1984
is used as an extreme test of the propositions. During this
period, a volatile state economy and varying political
constraints forced state policymakers to withdraw from
spending commitments through executive order which, in
effect, re-cast the budget thirteen times.

The analysis focuses on expenditure decisions made for
twenty-five categories of the general fund general purpose

budget. This section of the total state budget is

Susanne Rockne Morris
considered to be unreserved and therefore subject to
annual negotiation.

The research design is cast in two stages. The first
tests through time series four variations each of two
established quantitative expenditure models. The second
develops findings from source materials and in—depth
interviews of political actors.

The linear model is found to hold for the greater part
of the state budget but not for the most volatile budget
categories. Contrary to expectations of critics of
incrementalism. the fair shares dimension also holds and
marginal change is the strongest predictive feature of all
the quantitative model variations.

As predicted, there is some breakdown in the annual
cycle: funds were reprogrammed but payment schedules.
however partial, tended to hold firm for tested categories.
.Centralization of budgetary roles did occur, but the
abandonment of power by some players was neither uniform nor
consistent. "Politics of avoidance" was apparent. The role
of the budget clearly changed from a tool for planning.
management and control to a destabilizing force in itself.
The state's increasing reliance on structural constraints to
balance the budget is questioned. TWenty—elght tables and

figures plus a chronology of events are included.

ACKNOWLEDGEMENTS

Although much research in the social sciences seems to
be a monkish enterprise, the reality is such that little
could be done without the assistance and cooperation of many
others. This study is no exception. Among them are:

° Jack Knott, the chairman of the committee supervising this
dissertation, whose skills as a scholarly critic
contributed so much to the focus and shape of this study.
His insistence on a fully fleshed out proposal helped make
the later development of the dissertation manageable,
especially important when it had to be done at some
distance from the university.

° Cleo Cherryholmes, also a committee member and guidance
committee chairman, whose love of the philosophy of
science gave my study of research methods such rich
context. His teaching style remains my model of
excellence.

° Charles Press, whose research and instruction permitted me
to find scholarly context for work I had been doing in
state government for a number of years. His continuing
academic vigor remains a source of inspiration and
reassurance for those of us who returned to graduate study
at mid-career.

' Jeffrey Hill, who graciously agreed to join this effort at

iv

a stage late in the project in order to take over from a
departing faculty member. His collegial counsel and love
of good reason made the department a better place in which
to work.

David Rohde, formerly chairman of the department, whose
managerial style made it possible for me to teach,
research, and administer a graduate program with sanity
and joy. His productivity as a teacher/

administrator/ researcher are inspirational.

Allen Brierly, now a faculty member of the University of
Miami, who suggested the formulation of the linear and
fair shares models variations and who patiently introduced
me to the eccentricities of the main frame Time Series
Processor. I am especially grateful to him because he did
this when he was pressed to complete his own doctoral
dissertation research.

Leo Kennedy, Director of Research for the Legislative
Service Bureau, Lansing, who provided me with invaluable
leads and advice for this project on countless occasions.
His continuing encouragement, professional expertise

and genial helpfulness made this study so much more
tractable.

Ron Graber of the Michigan Department of Management and
Budget and past president of the Michigan Capital Area
Chapter of the American Society for Public Administration
whose assistance was so critical to me in collecting the
basic budget data and in securing inside views of the

cutback process.

° The many observers both inside and out of Michigan State
Government who kindly consented to be interviewed for this
project. Their candor and hours of interview time which
they granted from often incredibly busy schedules are
gratefully acknowledged.

° Good friends and colleagues: Lynn Croxford, Doug Drake,
George Orban, Charles Ostrom, Ron Langley, Ira Polley,
Lynn Lehle, Margaret Gilkison, Lana Stein, Gaye Benson,
Ruth DeHoog, Diane Wall, Dianne Long, Christine Bailey,
Nancy Radtke, Harriet Dhanak, John Valenti, Joyce Burrell,
Karen Albrecht, Iris Dunn, Rhonda Tiedt, and Hal and
Sheila Hepler. Their assistance and encouragement helped
so much along the way.

° My former students and internship advisees who taught me
so much. Their observations and experiences provided many
useful insights.

° My parents, who loved learning, and my greater family,
who knew the joys and sorrows of politics. They
nurtured my interest in the workings of government, and

‘ Bob, always supportive as we saw this project last "just
one more week". With him the adventure continues.

I thank them all.

vi

CONTENTS

Tables
Figures

I. Introduction
The Research Question: Does Contemporary
Budget Theory Hold Under Conditions of
Fiscal Stress
The Importance of the Question

II. Review of the Literature
Incrementalism, the Received View
Corollaries of Incrementalism
The Attack on Incrementalism
Why Incrementalism May Still Work
Summary

III. The Research Design
Introduction
About the Data
Stage One
Stage Two

IV. The Research Setting: The Michigan Case
The Budget
The Budget Process: The Cycle
How the Budget is Distributed
The Events Which Shaped the Budget Process
in the Outback Periods

V. The Findings: The Linearity Argument
The Analysis
The Initial Findings
More Extreme Tests
Summary

VI. The Findings: Fair Shares and Marginality
Introduction
The Initial Findings
A Closer Look at the Shares
Program Vulnerability
Marginality
Summary

vii

ix

Xi

21

43

101

137

VII. The Findings: Other Dimensions
Introduction
The Annual Cycle
Budgetary Roles and Centralization
The Role of the Budget
Summary

VIII. Summary and Conclusions
Introduction
What Has Been Learned: The Experts' View
What We Learned: The Results of the Study
Questions Raised: Implications for
Political Science, Public Policy and
Public Budgeting

Appendix A. List of Abbreviations Used in Tables
and Figures

Appendix B. A Selected Chronology of Events
Surrounding Michigan's Fiscal Crises:

1963-1984

References

viii

188

227

245

246

268

TABLES

Supplemental Appropriations as a Percentage
of Total Appropriations in the GF/GP Budget

Executive Orders Implementing Budget
Reductions 1963-1983

Comparison of 1983—84 Appropriations
1983-84 Appropriations

Comparison of GF/GP Expenditures
Michigan Personal Income 1950-84

Linear Model. Coefficient Estimates for
State Expenditure Totals 1964-1984

Volatility Index: Percent Change in
Appropriations by Department

Linear Model. Coefficient Estimates for
Capital Outlay Expenditures 1964-1984

Linear Model. Coefficient Estimates for
Debt Service Expenditures 1964-1984

Linear Model. Coefficient Estimates for

Department of Management and Budget
Expenditures 1964-1984

Linear Model. Coefficient Estimates for
Department of State Expenditures 1964-1984

Linear Model. Coefficient Estimates for
Department of Labor Expenditures 1964—1984

Linear Model. Coefficient Estimates for
Department of Commerce Expenditures 1964-1984

Linear Model and Variations: Comparison of

Statistical Significance of Reported
Coefficients

ix

56

6O

65

67

70

75

109

114

119

121

123

126

129

132

135

Fair Shares Model. Coefficient Estimates for
Departmental Expenditures 1964-1984

Rank Order by Department of Average
Expenditures (1963-1984), Average Executive
Order Reduction (1970-1983) and Ratio of
Reductions to Expenditures

Average Executive Order (1970-1983) by Average
GF/GP Expenditures (1964-1984)

Fair Shares: Relative Position: Average
Expenditures v. Average Cuts

Linear Model. Coefficient Estimates for
Departmental Expenditures 1964-1984

Percentage Change in Appropriations: 1980-1984

Linear Model. Coefficient Estimates for
Departmental Expenditures 1964-1984

House and Senate Joint Resolutions Involving
Some Limitation on the State Budgeting Process

Payouts to Institutions of Higher Education
School Aid Fund Payouts

Comparison of Paired Rejected and Approved
Executive Orders

141

147

148

153

155

157

167

180

190

207

I‘J

FIGURES

Budgetary Behavior as a Function of Environmental
Conditions

The Michigan Economic Cycle and Certain State
Fiscal Actions

Volatility Index: Percent Change in
Appropriations by Department

95

115

Chapter One
I. Introduction

In the late 19709 and early 19805 a combination of
increasing expenditures and declining revenues created
varying degrees of fiscal stress for many governments in the
United States. Increasing expenditures were, in part,
attributable to changes in federal programs and an unusual
degree of inflation but also to the economic recession which
produced substantial unemployment and thereby increased
social services costs. The recession also contributed to
loss of tax revenue and, in part, to the citizen tax revolts
which also diminished government revenues. The result for
some governments was a degree of fiscal stress unmatched
since the Depression of the 19308.

The effects of this fiscal stress were thought to be
reflected in three different types of governmental response
(Nagel 1980:8): changed output in many kinds of services,
’increased interest in efficiency and productivity, and
substantial budgetary cutback. While all of these responses
are interrelated in varying ways, it is the latter which
primarily interests us here.

II. The Research Question

Budgeting is a central topic in political science,
public policy and public budgeting. Cutback in
budgets as a test of budgetary theory, particularly

incrementalism, is the focus of this study.

2
III. The Importance of the Question

Budgetary cutback is an interesting problem for
several reasons. The first is the theoretical concern.
Compared to some other subfields of public policy analysis,
budget analysis has benefitted from relatively well
developed theory and incrementalism is its dominant
expression. Incrementalism assumes conditions of economic
growth and stability. During the late 19703 and early 19805,
these conditions were not evident in various parts of the
United States. This situation has led some scholars to
question the utility of this theory. Bozeman and Straussman
(1982) and Schick (1983), for example, have argued that
budgeting behavior in a cutback era is substantially
different from budgeting under economic growth conditions
and, therefore, alternative conceptualizations are needed.
This is an argument also made by Caiden (1984).

The second reason has to do with the nature of the
'budget itself. According to Wildavsky (1975:5), budgets are
"attempts to allocate financial resources through political
processes to serve differing human purposes." Viewed this
way, budgeting is much akin to politics itself. When we
review the dynamics of the budgetary process, we are asking
some fundamental questions about the political system.

In this analysis of budgetary behavior in a cutback
situation, we are essentially looking at organizational
response to substantial environmental transformation and
uncertainty in a particular functional area of government:

budgeting. The lessons we learn from this analysis may

provide additional insights into how our political system
responds to marked change generally, i.e., in a cutback
situation do politics change. Cutback, as opposed to
growth, affects public policy in what way? Are some
policies affected more than others?

In a cutback situation, the availability of resources
becomes much more tenuous and problematic than is the case
in "normal" times. The level of commitment to existing
policies would seem inevitably to alter as attention to the
budgetary emergency becomes more necessary. Under such
conditions the interrelationships between budget
constraints, particularly in political units which must
maintain parity between expenditures and revenues, and
policy imperatives will change and such change calls for new
analysis and interpretation. Furthermore, there is major
concern about the way in which the policy making as well as
‘the policy implementing agency sustains innovation under
budgetary recession.

Another reason speaks more directly to public policy
concerns. The decisions implicit in the budget and the role
of the budget in governance directly shape the content and
scope of public policy. Or, as Nagel (1980:8) observes, how
governments do, can and should deal with scarce resources is
a perennial problem in public policy.

The fourth reason concerns the lack of research in this
area. As noted by Lowery (1983:118), aside from the largely

prescriptive literature on cutback management, there has

4
been little research on the fiscal implications of and the
political and managerial responses to fiscal limitation.

This study seeks to test existing budget theory under
the altered conditions of economic recession and
political/administrative uncertainty. As will be seen, an
aspect of this analysis involves an assessment of the
impact of rules and other structural constraints on
budgeting and their interaction over time with changes in
financial and political stability and economic growth.

The purpose of the research is to enlarge our
understanding of budget theory and to provide enhanced
explanations and perhaps predictions of political and
managerial behavior under conditions of fiscal stress.

The study addresses this issue focusing on several
research questions:

1. What is the response of budgetary decision makers
under conditions of cyclican and protracted fiscal stress?
[For example, can patterns of behavior be identified which
are associated with particular stages of fiscal stress
and/or with roles of the decision makers?

2. How does the role of the budget change under such
conditions? Analysts have typically argued that budgets
serve three major roles: planning, management and control.
These roles, thought to be equally important, are played out
in various stages of the budget cycle. Do these roles
change when uncertainty and resource availability become
increasingly problematic? And, to a lesser extent,

3. To what extent do rules and other structural

constraints shape budgetary decision making as financial
instability and economic decline worsen?

4. How do decision makers and political institutions
integrate such change, if any, i.e., what sort of
organizational learning takes place?

In addressing these questions the research may provide
a fuller understanding of budgetary behavior and the role of
the budget under other than growth conditions. Budgets
typically are viewed as means for planning, management, and
control. But budgets are also powerful communication tools
in the policy-making process (Wooldridge 1984). They tell
us a great deal about our policy preferences as well as our
capacity to govern our affairs.

The study provides the field of budget research
systematic exploration of the obverse condition under which
theory has been developed to date. For policymakers and
(practitioners the findings provide theoretically grounded
explanations and perspectives under which cutback activities
can be undertaken and evaluated in the future.

With the issue identified, we now turn to the experts.
What have they had to say regarding incrementalism, its

legacy and limitations. That is discussed in Chapter Two.

Chapter Two
Review of the Literature
I. Incrementalism, The Received View

Until recently incrementalism has been the predominant
theory of budgeting. It is best represented in the work of
Wildavsky (1965) and Davis, Dempster and Wildavsky (1966).
This theory has been interpreted in the context of decision
theory, particularly those models emphasizing bureaucratic
rules and organizational routines (e.g., Allison 1971:78),
although other decision models have also been associated
with the budgeting process (see, e.g., Hoole, Handley and
Ostrom 1979 and Natchez and Bupp 1973 and Padgett 1980).
Incrementalism is based on the work of Simon (1957) and
Lindblom (1959) and has been used to test budgetary decision
making in a variety of contexts at the U.S. federal (e.g.,
Davis 1971 and 1974), state (Sharkansky 1968), and local
levels (Crecine 1969), as well as elsewhere.

As applied to budgetary theory, the concept of
incrementalism has incorporated a variety of uses (Padgett
1980:355, LeLoup 1978). One use emphasizes the change in
marginal adjustments to the previous year's budgetary base.
The base is accepted. Changes in the increment are never very
great and are made through a complex set of negotiations
between the executive and legislative body. As Bozeman and
Straussman (1982:510) note, this approach pays less attention
to the specific impact of fiscal and tax policies, broad
policies of the executive, structural constraints such as
balanced budgets and mandated outlays, and other

6

7
» environmental and economic factors.

Another use refers to the linearity of decision rules
which is also the use addressed by the various quantitative
goodness of fit models which have been developed to explain
the budgetary process.

A third use has referred to the concept of fair shares
which informs budgetary decisions. This notion reflects
attitudes of some decision makers that agencies ought to
receive some appropriate share of the total amount available
to the system.

A fourth use has referred to the roles of the budget
decision makers and to the assumption that these roles are
defined, that the players do not change very much and that
they take a fairly narrow view of their roles. Executive
departments will try to expand their budgets, the budget
office will try to guard against expansion, and legislative
committees will act to endorse that expansion because it
'means more services for constituents while vowing to hold
the line. Redundancy is available.

Undergirding all these uses is the assumption of a
certain stability in the budgetary process. Budget making
is a predictable process.

According to Wanat (1974), some of these usages of
incrementalism, e.g., the marginality, fair shares, and
budgetary roles applications are more useful for description
than explanation. He argues that only the linearity usage
has true explanatory power.

In 1975 Wildavsky introduced an expanded theoretical

8
framework of the budgetary process. It was based on
research that he as well as others, e.g., Wildavsky and
Caiden (1974) had undertaken here and abroad since the
introduction of his earlier work.

Briefly, Wildavsky argued that budgets could be studied
from several different standpoints. They could be analyzed
in terms of their size or in view of the political
institutions and structures which produced them.
Alternatively, budgets could be analyzed from the
perspective of the values and elite norms incorporated in
the choices reflected in them. One could also study budgets
in view of the relative resources which are available or, in
terms of the predictability of the financial environment in
which decision making regarding budgeting takes place.

In Wildavsky's view the last two are key. Wealth and
predictability control all other variables. By wealth,
Wildavsky means economic resources such as gross national
product. Predictability is the certainty or uncertainty
about likely demands for spending compared to available
economic resources. These independent variables determine
patterns of budgetary behavior. The following figure
summarizes the patterns identified by Wildavsky and
integrates as well findings of Meltsner (1971) and Crecine
(1969) which can be said to amplify the Wildavsky framework

as it pertains to municipal budgeting.

00p"!‘ .l-'Ill'-'.'I

.mugaxaxu

not?» we mcRIIMLWOLaoM
Myzwrmxm Homauco

Lsom
ucoavc: Loom +oezcjo-.;# moorsL m.#umv3m

‘I'.I‘-II'II 0% I-I‘.|'I!‘u'l':‘

.moaazflxm uuukmeLfiuusLafiu

#zawLoara 0L! fioHBx
woodmwuwv so maratm
emetquM me #UMQIM onuwwd
Uafiarcunota ismyewvomcz
uoanavzmaxw so HOLyiou
thL3¥Loru so woven

nequu n: when wacwbot URPMWAOZH

XIII'JIII‘UI'IUII’-Q‘I.'IU‘UIlI'I'I‘t'lI.

"mufimeLuuusLazu

m:«¥omb:m Wchzwm

woosam owaLouowzou m:
uUufinoaom
£+v mu fists” .LH fluc~nb|¢

'i-’:l‘-.‘ .--'I..l'!‘ o'-".v.

urfl wo.o hauaxwxw

.hefildaunmaau asusavfla: "ontaom

I'!I.'I"-I.I|"lu'-l..l"e‘

bemoan op

#iorouaaaw ox«~ veaoch
yuozme eta¥au£oaro Luau

once:

newwwycebw Lu“: Rota“

Canaamqso £U&et 0v
mamusmflucm ezwoeLauwzmxvc

"as too «Usauatovuntagu

acwyomunm Aeyietcuaaaw no of!

Giavrmfljm UDCOBUM w HN&CU:ULU£H As WSM¥ICLO¥Hc

wocoszOSOO

oumau n: Duo:
wcoz£L930m Hairpin m:

uuoaarsxw

mzwyamflnm “avioIOLucH

sauna:

m c o ....+ flute u

a. m

0L3mmm

:«a¥L0u::

canaaaaze um mUiavzavex
ULNLR Lana Low ctouceu
Eton sbmynHuwmou
use osavnuoxo ceezyon
befiawaomac «coaumuoo
than uneazita we
:mmLaI :« mace omcoLQ
ouch
mstowuan so IUiQ¥douum
aluot mLavcmflra between

unvaaumLc¥ueLa£Q

 

"Il’l‘

£wfl£LTU

assassnauu«u.ta

dracwizozwzsm mo zea¥uc3m m we LGRSGLUm mtmywmuam

10

As we can see, Wildavsky builds the older theory into
the broadened framework. In this framework, incrementalism
is now seen to be a pattern which is found in relatively
wealthy political systems in which there is a fair ability
for policy makers to calculate the likely flow of revenues
and expenditures based on past experience. There are now
several added dimensions of incrementalism which must be
considered. In addition to the four previously mentioned.
we now have

5) the notion of an annual budget with timely payments

and programming of funds,

6) the use of the budget for longer-term planning, and

7) a relatively decentralized decision process.

For Wildavsky, this pattern is found in most of the
great post-industrial nations and in the United States at
the federal level and in most states.

In putting incrementalism into this broadened
'framework, Wildavsky partly rebuts the charges of critics
that incrementalism ignores the impact of fiscal and tax
policies, executive preferences, structural constraints and
other environmental factors because these factors will
determine availability of resources and, to some extent, the
predictability of their availability.

Putting incrementalism into this broadened framework is
also useful for another reason: it answers the attacks of
critics (e.g., Wanat 1974, Padgett 1980, and Schick 1983:3)
who have observed that incrementalism in some of its uses is

not so much a theory as a description of budgetary behavior,

ll
i.e., it lacks explanatory and predictive power. For these
critics, incrementalism says little about which variables
are likely to trigger such activity, only how it proceeds
once set in motion.

This broadened framework provides the basis for testing
linkages between resource availability and predictability on
the one hand and the marginality of the increment. The
framework may also suggest why budgets sometimes have annual
cycles and why budgets may be used for long-term planning.
It does not provide the necessary or sufficient conditions,
however, for explaining the predisposition of budget makers
to award fair shares and to play certain roles. Nor does it
explain why budget making tends to be a decentralized
process. Although these patterns have been associated with
incrementalism, they derive from other factors in the
political system.

II. Incrementalist Corollaries

An alternative perspective of budgeting which is
sometimes advanced is found in the argument that the most
important independent variables are the rules or
constitutional and statutory requirements under which budget
decisions must be made (see, e.g., Schick 1980:27-30, Likens
1978, and Shepsle 1983). Chief among these are: a) the
requirement in some political units for a balanced budget,
i.e., that expenditures not exceed revenues; b) spending
limits such that expenditures not exceed a certain
percentage of some previously established level, c)

entitlements, d) transfer payments, and/or e) that the

12
budget be internally balanced so that certain programs
continue to receive given percentages of monies
appropriated. There are other requirements as well such as
funding of employee pensions, repayment of general
obligation debts, statutory division of tax receipts, and
special use restriction of other tax collections. In this
view, structural limitations more than any other variables
determine budget outcomes.

Wildavsky (1979:90) suggests that such rules are
responses to previous uncertainty and thus are tangible
accumulations of previously resolved conflict. The rules
continue to be observed so long as they reflect an
underlying moral consensus.

Given this insight, we can argue that the rules
perspective is really a corollary to incrementalism. The
rules become the base which is accepted. Although in
incrementalist theory the base is conventionally thought of
as a sum expressed in monetary terms, it must be understood
that implicit in the sum are agreements and procedures which
determine the nature of the base and which need not be
rejustified each year. Where this view does differ from
conventional incrementalist theory is the requirement that
the base must be recalculated, if not rejustified.

Thus, we have an additional dimension of incrementalism
which must be taken into account. This is the dimension of
the rules or structural constraints.

A further perspective on incrementalist budgeting is

found in a rather interesting analysis of Michigan's fiscal

13
crisis. Brazer (1982) argues that much of the State of
Michigan's recent fiscal stress derives from two key
independent variables: financial unpredictability deriving
from the national economic recession and elite norms which
he sees expressed as a determined effort by political
leaders to reduce the scope and size of government programs
in Michigan. Although Brazer's theory is more concerned with
interpreting the causes of the recent fiscal crisis, we can
recall that these are variables which Wildavsky says can
also be used to explain budget behavior and outcomes. But
Wildavsky also suggests that elite preferences will be
translated into availability of resources, i.e., these norms
will determine, in part, how much revenue is available to
the state. Therefore, Brazer's argument cannot be seen as an
alternative theory of budgeting. What Brazer's argument
raises, however, and what Wildavsky's framework does not
resolve, is which factor is more important in limiting
'availability of resources: the downturn in the economy or
elite preferences translated into tax policies. This is a
matter of empirical inquiry that goes beyond the scope of

the present study.

III. The Attack on Incrementalism: Its Inadequacies in
Explaining Budgetary Behavior in a Cutback Period
Is incrementalism applicable to the cutback situation?
Policy analysts who have studied the behavior of those

involved in the budgetary cutback process say that

14
incrementalism is insufficient and inappropriate to explain
what is going on. Their concerns relate to several of the
conceptual usages previously identified:

a) Marginality. In periods of cutback the focus of

 

budget policymakers turns from the increment to the base
(Bozeman and Straussman 1982:514, Schick 1983:2). There is
more interest in zero-based budgeting (Hammond and Knott
1980:63; O'Toole 1984:21) and attempts are made to
re-negotiate the base.

b) Fair Shares. Budgeting becomes more redistributive
rather than distributive or proportional as is the case in
growth periods (Schick 1983:23). Fair share, therefore,
becomes less important.

c) Budgetary Roles and Centralization. In periods of
cutback the role of the executive fiscal agency becomes more
important (Bozeman and Straussman 1982:511). Negotiations
between the individual departments and the legislative body
become less important (Knott 1981:77).

In some cases, interest on the part of policymakers in
negotiating may disappear altogether. In a study of
budgeting practices in the City of Oakland, Meltsner (1971)
found that instead of negotiating, policymakers faced with
scarce resources practiced "politics of avoidance."
Although the search for additional revenue was constant,
efforts were made to obtain it from the least politically
costly sources in order to avoid conflict. Furthermore,
elected officials tended to rubber stamp the decisions of

the bureaucracy which, therefore, maintained effective

15
control over the budget. And the bureaucracy kept the peace
partly by deliberately underestimating revenue and
overestimating expenses.

In an analysis of recent federal budget cuts, Behn
(1985:159) found that negotiation stalled for a period not
only because no one wanted to accept cuts. No one wanted to
be associated with proposing specific cuts. It was "'...a
minuet in which no one wants to really dance.'"

d) The Role of the Budget. Schick (1980:127) argues
that budget-related planning diminishes in a period of
fiscal uncertainty because of the sense that events are out
of control. Similarly, Caiden and Chapman (1982:118) found
in an analysis of California's response to the passage of
Proposition 13 that there was no commitment to facing budget
problems and no systematic response to the budget crisis.
Walker and Chaiken (1982) found a lack of innovative
response to fiscal contraction in use of the budget.

Schick (19802127) also argues that use of the budget as
a control instrument increases during a period of fiscal
stress as does Alexander (1984:2) who sees the role of the
budget shifting from an instrument of legislative control
over the executive branch to one functioning as a
stabilizing instrument to accommodate uncertainties arising
from changing legislative priorities and a shifting economy.

There have been other reasons offered for the
inadequacy of incrementalism as an explanation of budgetary
behavior in a cutback period:

e) Different Processes Emerge. Repetitive budgeting

16
(Wildavsky 1975:12), a process somewhat different from
incremental budgeting, comes into use. Executive orders
which mandate budget cuts can be construed as repetitive
budgets. (The role of mid-year appropriations changes is
not well defined in budget theory, was explicitly ignored in
the early models (e.g., Davis, Dempster and Wildavsky
1966:532), and has only recently come to be addressed
(Hoskins 1984).)

Similarly, a variant called revenue budgeting
(Wildavsky 1975:12) may be found. Incrementalism has also
been found to be less useful in describing budgetary
behavior in American cities where officials have to cope
with inelastic sources of revenue (because that is what
state policies have provided them) and, therefore, they have
little room for maneuvering. These political units cannot
raise revenue to keep up with inflation and service needs.
Therefore, budgeting becomes almost entirely oriented to
'short-term control, a maintenance activity. Cities are able
to predict fairly accurately what their revenues and
expenditures are likely to be; they simply never have
sufficient revenue. Crecine's (1969) comparative study of
budgetary practices in Cleveland, Detroit and Pittsburgh
found decision making to be dominated by the revenue
constraint.

f) Prior Budgets Disappear. Incrementalism has been
found to be an inadequate explanation of budgetary behavior
in poor countries because there is no real budget from the

previous year against which to calculate the current year's.

17
Budgets tend to disappear and they are fragmented (Caiden
and Wildavsky 1980:66).

Thus, in summary, we find that incrementalism as a
description and explanation of budgetary behavior in
conditions of fiscal stress is inadequate because interest
shifts from the increment to the base, budgetary outcomes
are less proportional and more redistributive. The budget
may be passed repetitiously or disappear altogether.

Instead of negotiating budget levels, policymakers may avoid
conflict and turn to the bureaucracy for decisions.

Contrary to expectations, the budget may be used less for
long-term planning and more for short-range control. The
process becomes more centralized. The arguments against
incrementalism, however, have not addressed the linearity
argument.

IV. Why Incrementalism May Still Work

On the other hand, there are reasons to argue that
'incrementalism, up to a point, will still govern budgetary
decision making in a cutback era. One reason is that
cutbacks are likely to be viewed as temporary. May and
Meltsner (1981), studying the response of organizations to
California's tax cutting Proposition 13, found that managers
looked on the perceived crisis as part of the usual business
and made it part of the budgetary routine. There was also a
tendency to rely on budgetary quick fixes.

Another reason incrementalism may still work is that if
the cuts are not substantial, cutbacks are likely to be made

in the fringes of discretionary spending areas. This avoids

18
conflict for program managers and policymakers. We see this
approach in the program budgets in some political units
where program managers are asked to describe program
activity at a continuation level (i.e., at 100 percent of
current budget), and at a slightly decreased level (e.g., 90
percent of current budget). This tendency to deal with the
problem by tinkering at the margins is one response
identified by Caiden and Chapman (1982) in their analysis of
local government response to Proposition 13-generated
revenue losses in California and echoes the May and Meltsner
findings noted previously.

In other cases, decision makers will attempt to retain
fair shares in some form by recommending across-the-board
cuts. Maintenance of fair shares is one means federal
lawmakers used to maintain the coalition needed to pass the
recent cuts in social security programs (Behn 1985).

In addition, there is some evidence (e.g., Lipson and
Lavin 1980) that the strength of the political base of the
program is crucial in determining which programs are cut (or
saved). This suggests that negotiation is not abandoned even
in times of fiscal stress, a finding also observed by
Crecine (1969).

Incrementalist budgeting has always been viewed as a
decentralized process. Some researchers (e.g., Levine and
Rubin 1980:15) argue that fiscal stress fragments authority
even more.

Finally, some observers note the increasing importance

and greater impact of structural constraints on the

19
budgetary process during times of fiscal stress. Crecine
(1969), for example, found that an important characteristic
of the budget process in the cities he studied was the
importance of rules, e.g., the need for a balanced budget
and the need for uniform wage policies.

To the extent that efforts are made to maintain the
prior commitments and rules which constitute the base,
incrementalism may continue to be applicable. This is so
because, while the focus of budget policymakers turns from
the increment to the base, it is not done with intent to
re-negotiate, but to recalculate. The structural
constraints assume more importance because they take
precedence. They must be served before other discretionary
choices can be made.

V. Summary

In this chapter we have reviewed the arguments
concerning incrementalism: its genesis, place in budgetary
theory and its alleged weaknesses in periods of fiscal
stress. We identified the chief criticisms leveled against
incrementalism under such conditions: that the focus of
decisions changes from the increment to the base and that
outcomes are more redistributive, that the budgetary process
becomes more repetitive and centralized, and that the
classic parallel functions of the budget (planning and
control) become distorted as interest in control surges and
planning subsides.

We also looked at the opposing view and found that

incrementalism may still be useful in analyzing budgetary

20

behavior in a cutback period because decision makers may
view their fiscal crisis as temporary and go about business
as usual or rely on quick fixes, across the board cuts, and
tinkering at the margins. It was suggested that this may be
especially inviting if the cuts are not to be substantial,
there is some evidence that negotiations between the
executive and the legislative body will continue, that the
role of the more entrenched bureaucracies will continue to
be influential in reaching cutback decisions, and that
stress will fragment authority. Finally, the rebuttal
suggested that while interest may turn from the increment to
the base, it may be because the base must be served first
rather than re-divided.

The following chapter presents a strategy for

evaluating these arguments. It is the research design.

Chapter Three
The Research Design

I. Introduction

The study involves a two-stage analysis of the argument
that incrementalism is an inadequate model to explain
budgetary behavior in a cutback era. In stage one, tests
are made of the linear, marginality and fair shares
dimensions of incrementalist theory through quantitative
analyses of budget appropriations based on the work of
Davis, Dempster and Wildavsky (1974), Natchez and Bupp
(1973), and Hoole, Handley and Ostrom (1979) among others.

The second stage explores in depth the response of
budgetary decision makers to changing conditions of resource
availability and uncertainty. Hypotheses are drawn in part
from Schick's work (1980) which is a conceptual framework
similar to Wildavsky's (1976) but which explicitly addresses
and formulates hypotheses concerning behavioral response in
~adapting budgets to resource scarcity. Attention is focused
in this stage on the dimensions of incrementalism which
emphasize the annual cycle, budgetary roles and the
centralization issue in the budgetary process, and the role
of the budget itself.

Data is drawn from the Michigan State Government
experience for the period, 1963-64 through 1983-84. During
this twenty-one year period, state government had to recede
from previous spending commitments thirteen times. And in
three of those fiscal years, i.e., the period covering FY
1980 through mid—1983, the State of Michigan reduced state

21

22

spending by more than $2.6 billion. In constant dollars,
spending in FY 1982 alone was the equivalent of a drop of
21.5 percent compared to FY 1979, in some respects the last
"normal" year before the most recent fiscal crisis began.

Although Michigan has not been alone among the states
in facing fiscal crisis and is like 49 of the 50 states in
needing to maintain a balanced budget (Yondorf and Summers
1983:16), the state has been exceptional in having to manage
such severe and continuing cuts. A 1981 survey of fiscal
pressures in the fifty states found that Michigan had been
the most seriously affected (Comparative State Politics

Newsletter 1981:1,16).

 

The Michigan experience is selected, in part, because it
represents an extreme case which is potentially a crucial
test of the budget theory propositions. According to
Lijphart (1971:692), this sort of theory-confirming or
theory-infirming case study is enhanced if the case is
extreme on one of the variables.

Michigan data is also selected because the level of
professionalization within the legislative and executive
branches is relatively high compared to other states.
Therefore, we may assume that the quality of information
developed and secured during the time period reflects state
of the art analysis within the states and that inability to
forecast revenue falls was not a product of administrative
or technical incompetence. In addition, Michigan data is
also selected because, as the nation's tenth largest and as

an industrialized, urbanized state, Michigan has developed

23
the full range of programs customarily found in these more
complex socio-economic systems.

Finally, Michigan data is also chosen for accessibility
to this researcher. Having been a legislative staff member
in the mid-19703 and having maintained contact with many
individuals in the Michigan legislative and executive
branches through activities with professional associations
increased the likelihood that information about budgetary
decisions would be available to this researcher if such data
were available at all to anyone outside the budgetary
process.

II. About the Data

Data was drawn from the State of Michigan General
Purpose-General Fund budget for the twenty—one year period
beginning with fiscal year (FY) 1963-64 through FY 1983—84.
This period begins and ends in growth but incorporates three
cutback periods: 1970-71, 1974-75 and the most recent and
most severe, 1980—83.

General Purpose-General Fund budget data was used
because it is the part of the total state budget which is
subject to the discretion of the executive and the
legislature. This amounts to about one-half of the total
state budget. The other half is earmarked by constitutional
or statutory requirement for specified purposes or programs
(Cutts 1982:48).

Although budgetary data for the State of Michigan is
available from several sources, an attempt was made to

compile data as much as possible from a single source, the

24
Executive Budggt. However, for two years, 1969-70 and
1970-71, appropriations data was taken from a different
source, Detail of Current ngrations of the Executive

Budget. This alternative source was used because Executive

 

Budget data was not available for those years. At that time
the State of Michigan was in the process of adopting a
program budgeting system and the reporting format was
changed. Also, for the period 1969-70 to 1983-84, prior
year (actual) expenditures were not reported in the

Executive Budget and were therefore taken from a separate

 

publication of the Michigan Department of Management and
Budget, "General Fund General Purpose Expenditures."

Two types of budgets are in the data set: 1) the
general budget adopted for each of the twenty-one fiscal
years in the time period under consideration, and 2)
"cutback" budgets which are reconstructions of the fiscal
year budget based on the executive orders of the Governor
~which implemented spending reductions. There are thirteen
cutback budgets in the data set. They represent
three-fourths of the executive orders which were actually
issued during the twenty-one year period, as five were not
approved by the legislature. Thus, the data set consists of
thirty-four budgets.

The data set comprises three categories of information
for twenty-five administrative and funding units for each of
the twenty-one fiscal year budgets. These are
recommendations of the governor, appropriations approved by

the legislature, and reported expenditures. For the

25
cutback budgets, appropriations and expenditures are
reported, but gubernatorial recommendations are not for
reasons discussed in Chapter Five.

The twenty-five administrative and funding units
include the following nineteen executive branch departments:

Attorney General
Civil Rights

Civil Service
Commerce

Corrections

Education

Executive Office
Labor

Licensing and Regulation
Management and Budget
Mental Health
Military Affairs
Natural Resources
Public Health

Social Services

State

State Police

Treasury

Also included are the two other branches of state
government, the legislature and judiciary; the two major
funding categories for education, higher education and
school aid; and debt service and capital outlay.

The data set does not include values for items which
appeared intermittently in various budgets throughout the
period. For example, data is not included for the
Department of Transportation because that unit is largely
maintained with special purpose funds, although occasionally
general purpose monies have been appropriated to the
department for special projects. Similarly, no attempt was
made to include values for the budget stabilization fund

which has received line item attention in several budgets.

In building a data set with comparable categories

across the twenty-one year time period, some

adjustments had

to be made to account for reorganizations in state

government which occurred during that time.

In 1963, the

State of Michigan adopted a new constitution which created

some new units and consolidated a number of others into

nineteen departments.

reorganization act of 1965.

Much of this was implemented with the

A further but smaller

reorganization occurred in 1973 with the creation of the

Department of Management and Budget. These 0

changes are summarized in the table below:

rganizational

Departments Separated Out in Data Set

 

From
(line item)

 

Conservation,
Recreation &
Agriculture

Administration
(budget unit)

Executive Office
(budget unit)
Administration

Safety & Defense-=:::::::::::

Public Welfare-MMINN_

To

(department) 1

 

When Created
or absorbed)

 

Agriculture
Natural
Resources
Executive
Office
Management &
Budget
Military Affairs

State Police

E’;;L;,;:-Social Service8
Commission on Aging

Mental Hygiene

Fair Employment

Practices Commission

Mental Health

Civil Rights

1965

1965

1965

1973

1965

1965

1965

1963

General Government:
State Treasurer
Revenue Department
Tax Commission
Tax Appeals Board Treasury 1965
Municipal Finance
Commission
State Board of
Equalization

Auditor General

Commission on Inter-
governmental Legislature 1963
Relations

Corporations 8
Securities
Commission
Insurance Department
Liquor Control
Commission Commerce 1965
Public Service
Commission
Banking Department
Economic Development

State Universities
& Colleges

Junior & Community Higher Education 1966
Colleges

Employment Bureau

Labor Department

Labor Mediation Board Labor 1965
'Workmen's Compensation

Board

various items for
professional &

vocational boards Licensing & 1965
Athletic Board of Regulation
Control

Data pertinent to any department or fund in existence
in 1983-84 was separated out in the older budgets and
grouped appropriately. For example, budget items grouped
under the heading of Conservation, Recreation and
Agriculture in the pre-1965 budgets were separated to

reflect the current departmental alignments for Agriculture

28
and Natural Resources. Similarly, items in the General
Government category for State Treasurer, the Department of
Revenue, Tax Commission, Tax Appeals Board, Municipal
Finance Commission and the State Board of Equalization were
grouped under the Department of Treasury.

The higher education figures do not reflect changes in
organization but rather in budgetary reporting. Until
1966-67, reporting for junior and community colleges on the
one hand and state colleges and universities on the other,
were reported in separate sections of the executive budget.

This extrapolation affected about half (14 out of 25)
of the administrative and funding units in the data base,
but was primarily concentrated in the first two budget
years. The principal exception was the separation out of
Budget Office items from the Executive Office into the
Department of Management and Budget. This extrapolation
affected seven budget years. Three cutback budgets
affected by that extrapolation were similarly adjusted, but
the adjustments were minor because only one of the executive
orders implementing budget cuts during that period actually
affected the budget unit.

While the extrapolation was done carefully and
comparisons made with other budget documents, particularly
the Detail of Stgte Opergtions and Local Benefits:§udggt for
the fiscal years ending June 30, 1964 until this publication
ceased to be produced in 1971, it is possible that this has
produced some error in the data. As explained above,

however, the impact is relatively small.

29

Although we have incurred some risk in this process,
the data set produced is comparable in time-span to the sets
developed to test the early incremental models at the
federal level. In addition, it incorporates all of the
budgetary experience up to 1984 of the State of Michigan
under its current constitution.

This period also has been selected because the time
period under study encompasses several different
administrations with somewhat differing policy commitments.
Comparing budgetary behavior across several administrations
may permit identification of key political variables which
influence budgetary decision making. Clark and Ferguson (as
reported in Hansen 1983:231) found many differences among
Republican, Democratic and reform city governments in their
responses to fiscal stress.

Summa y. Thus, in a cutback period, we would expect
the budgetary process to be relatively less linear than in
-growth periods, and more redistributive. We are likely to
see a greater degree of centralization with less negotiation
between executive and legislative authorities, more
importance attached to the executive budget agency, and to
structural constraints. The process is likely to be erratic
and repetitive. The role of the budget shifts from
long-term planning to short-term ad hoc control.

In other words, we would expect to see changes in the
budgetary process affecting at least six dimensions of
incrementalism: linearity, fair shares, marginality,

budgetary roles and centralization, annual cycle, and the

30
role of the budget.
III. Stage One
Having reviewed the methods by which the data was
gathered and organized, we now need to look at the specific
hypotheses and how they are operationalized. That is the

focus of this section.

H1. Linearity. The linear model is an
inadequate explanation of budgetary behavior in
periods of fiscal stress, i.e., there is no
relationship between expenditures totals and the
total appropriation as a fixed percentage of the
prior budget in a cutback period.

 

A direct empirical test of the model first developed by
Davis, Dempster and Wildavsky (1966) as interpreted by

Hoole, Handley and Ostrom (1979) is made:

at = b At_1 + at (1)
where E = expenditure total
b = a fixed percentage of the prior budget
A = the total appropriation
e = the error term

Inclusion of the error term in this equation was
originally justified by Davis, Dempster and Wildavsky
because the model is not a deterministic one but is
stochastic, i.e., the model makes allowance for the effect
of random or unspecified influences from the environment.

It was argued then that even the most routine budget process
is subject to some stochastic disturbance. In the case of
fiscal stress the inclusion of the error term becomes even
more important.

This model is tested with three groups of data:

31

1) The mean percentage change for each of the 25
department/fund categories over the twenty-one year period
under study is calculated. The department/fund categories
are grouped by deviation from the mean. The regression
model is then tested using data from the extreme groups on
the far side of the mean by comparing them with all groups
taken as a whole.

The size of the error term for both sets are compared.
It is anticipated that the group with the larger budget cuts
would reflect a larger error term than the average group,
lending credence to the hypothesis that the linear model is
less useful in explaining budgetary cutback decisions than
in periods of budgetary expansion.

2) The model is tested by comparing all values of all
departments for the twenty-one regular budgets with all
values of all departments for the thirteen cutback

budgets.

Hz. Fair Shares. The fair shares model is an
inadequate explanation of budgetary behavior in periods
of fiscal stress, i.e., there is no relationship
betWeen an agency's expenditures and a fixed percentage
of the total budget for the system in a cutback period.

 

This second measure is the model developed by Natchez
and Bupp (1973) (as interpreted by Hoole, Handley and
Ostrom, 1979):

3t 8 b Pt_1 + et (2)
where E = expenditure total
b = a fixed percentage
P = the total budget for the system

e a the error term

32

This model is based upon the "fair share" or prosperity
argument. In this model, budget decisions are seen to be
reflections of attitudes that agencies ought to receive some
appropriate share, i.e., a fixed percentage, of the total
available to the system.

This model is thought to be especially useful in
analyzing zero-sum conditions such as declining or constant
budgets (Hayes 1975, Gist 1982). One reason, of course, is
that in periods of cutback, budgeting is thought to become
more redistributive rather than distributive (Schick 1983:

23) because:

H23. Retrenchment is directed at the most vulnerable
parts of the budget such as discretionary programs
like libraries and museums, maintenance, and
administrative overhead (Schick 1980: 127), and

sz. Those programs with the strongest political bases
are least likely to be cut (Lipson and Lavin 1980),
i.e., redistributive in the sense that the powerful
get richer and the weak get poorer.

It is also argued (Gist 1982: 871) that this approach
provides a bridge to research which focuses on the broader
policy consequences of budget allocations.

In this model, the shares or expenditures of each
department in the regular budgets are compared with the
shares received in the cutback budgets. Comparison is made
of the goodness of fit for the combined budgets which are
captured in the simple model with the regular and cutback
budgets which are evaluated in the complex model. This

tests the argument concerning redistribution.

The subsidiary hypotheses require differing analyses:

33

a) Line-item budgets of three departments representing
highest, mean, and least cuts are inspected and compared
across the thirteen cutback budgets. It is anticipated
that the discretionary parts such as maintenance and capital
funding will show proportionately deeper cuts as the
departments in this distribution show increasing cuts.

b) We would expect that:

° constitutionally established units such as the
legislative and judicial branches, would
receive proportionately smaller cuts compared
to the executive branch.

° executive departments headed by elected
officials such as the attorney general and
secretary of state would receive proportionately

smaller cuts.

° executive branch departments such as mental
health and social services which serve less
organized and less affluent groups would receive
proportionately more cuts.

In testing these models, the analysis needs to confront
the issue of the repetitive adjustments, or in this
particular policy issue, the numerous executive orders
mandating budget cuts. For the purpose of testing these two
hypotheses, each executive order will be treated as
restructuring the annual budget which it, in effect, amends.
Therefore, each order is interpreted as constituting in the
revision a new budget, just as a substantive amendment to a

statute creates a new law.

34

This position may be justified under the following
assumptions because:

1) the executive orders are subjected to joint, albeit
truncated, action of both the executive and legislature and
are handled in much the same way the original appropriations
are treated (Legislative Service Bureau 1987:8).

2) in reviewing the proposed budget cut, an implicit if
shortened review of the entire budget takes place.

3) the orders are analyzed in the order in which they
occurred, and

4) there is nothing in the assumptions of the
statistical analysis which requires sampling at specified
intervals, only that the data entered reflects comparable
decision points.

In testing these models, the analysis also needs to
confront the issue of the gubernatorial line item veto.

This is a power provided governors in over eighty percent of
the states, including Michigan, but which is not permitted
the President of the United States. Since most of the
budgetary models were developed with federal-level data, the
issue of the line item veto does not arise.

Since, in Michigan, the legislature does have an
opportunity to override the line-item veto (provided the
bill is repassed by a 2/3 vote of the members elected and
serving in each house) we argue that the appropriation as
finally reported to the State Administrative Board, the body
charged with allotting the monies appropriated to the

various branches and agencies of government, and reported

35
in subsequent executive budgets is the appropriation as
signified in the equations.

It is also arguable that the analysis needs to consider
within-year departmental requests for allotment revisions
and legislative or administrative transfers. That will
await further research.

Each of these models are assessed by goodness of fit
and comparisons are made within subsets of each model and,
in a more limited fashion, across the two, i.e., across the
linear and fair shares models. A sophisticated
falsificationist approach after the work of Lakatos (1970;
see also Tucker, 1982) is taken. The size of the
correlation coefficient and of the error term for the
cutback budgets are compared to values reported for the
regular budgets. It is anticipated that the goodness of fit

for the cutback budgets will not satisfy predicted levels.

Ha. Marginality. Marginal change to the previous year's
‘ budgetary base is an inadequate description of

budgetary outcomes in a period of cutback, i.e.,

expenditures will not be closely associated with a

fixed percentage of the agency's budget for the prior

year.

Operationalizing this hypothesis requires two
different tests:

a) Magnitude. The test for degree of change is the
same as the test for Hypothesis 1, but attention is focused
on the change in the size of the regression coefficient and
its standard error. We would expect the marginal

coefficients in the cutback budgets to be smaller and to

have a greater error term compared to those of the regular

36
budgets if the incremental model has less predictive value
for the cutback period.
b) Interest in base. Testing this part of the

hypothesis requires analysis of three subsets of questions:

H3b1. In periods of cutback the focus of budget
policymakers turns from the increment to the base
(Bozeman and Straussman 1982: 514, Schick 1983:2).

If this is the case, we would expect to see
statistically significant base changes in the linear model.
This would be especially persuasive if the significant base
changes are accompanied by smaller marginal changes.

We would also expect to see increased demand for
zero-based justification for programs (O'Toole 1984:21).
Here, analysis focuses on the most recent and severe cutback
period. Interviews are conducted with key executive and
legislative figures to determine whether:

° Management plan documentation requirements changed
during 1981-83, a period characterized by several
cutback budgets, compared to the pre-recessional
period to require additional program explanation.

’ Briefing papers prepared for legislative
appropriations subcommittee hearings during the same
period contained additional program explanation

compared to prior years.

We would also expect:

Habg. The response of budget policymakers to follow a
discernible path, proceeding from an initial stage of
disbelief in which there is an attempt to maintain
business as usual (May and Meltsner 1981) or to resort
to quick fixes, followed by later stages in which there
is more serious concern with the base.

37
Here, analysis also focuses on the most recent and
severe cutback period. Content of selected news reports
from major Michigan newspapers and news services, together
with interviews of key policy makers, are the primary
documentation for data analysis.

Finally.

H3c. As the attention of policymakers becomes more
absorbed in the base, we would expect the role of
structural constraints to take on increasing
importance.

Operationalizing this aspect of the hypothesis is
somewhat more problematical. As Caiden (1984:116) observes,
interpretations of what constitutes the base vary
considerably especially when actual figures for preceding
year expenditures are unknown and there is disagreement
about how much and whether to factor in a percentage for
inflation.

Nevertheless, if we regard the base as a collection of
rules or constitutional, statutory and procedural
requirements which are or may be intervening variables
affecting budget decisions, we may find the following
measures useful:

° We would expect to see attempts to secure
constitutional protection of program budgets and
fund allocation.

‘ We would expect to see greater use of certain
procedures such as unit voting rules to secure

passage of budgets.

Behn (1985) notes that the adoption of

IV.

38
all-or-nothing voting procedures was one means by
which Congressional leaders managed to keep the
coalition needed to secure passage of federal
budget cuts in 1981. The anthropologist Malinowski
(cited in Marz 1978) also discusses the importance
of rules and ritual in times of uncertainty.
The need to serve the primary rule in state
budgeting, the constitutionally mandated balanced
budget requirement, would be increasingly evident
through a larger number of executive orders to
implement budget reductions.
Where special funds and allocations are protected, we
would expect to see greater incidence of judicial
activity and advisory opinions concerning attempts to

circumvent such protections.

Stage Two.

In this stage we explore further dimensions of the

response of budgetary decision makers to changing conditions

of resource availability and uncertainty. In this stage of

the analysis, focus is also on the more recent experience.

H4,

Annual cycle. There is no timely relationship
between authorization of expenditure and actual
programming of funds. Payments and transfers to
operating units become erratic.

This is operationalized in two ways:

a) A time index of payment transfer to key funds such

as the school aid fund is developed and comparison will be

made between the periods 1977-79, a growth period, and

39
1980-83, a cutback time. It is anticipated that the 1980-83
period would show considerable volatility compared to the
earlier period.

b) Wildavsky's framework predicts that in periods of
cutback there is greater incidence of repetitive budgeting.
In other words, the annual cycle is interrupted by the need
to recast the budget. The incidence of executive orders
mandating expenditure change in the cutback period is
compared to the incidence of such orders in the growth

years.

HS. Budgetary Roles and Centralization. There is no
relationship between expenditures and the roles
traditionally exercised by budget decision makers in
a cutback period.

Evidence from the literature is divided on this
question and presents something of an interesting crucial
test. On one hand, Levine and Rubin (1980:15) argue that
under stress, the strategies of budgetary politics weaken

central control just when it is needed most. They say
scarce resources fragment authority. One the other hand,

Bozeman and Straussman (1982:511) say that in periods of

cutback the budgetary process becomes more centralized.

Operationalization of this hypothesis requires several
different measures:

a) If the budget process becomes more centralized we
would expect to see the role of the executive fiscal agency
become more important. In such a case we would expect to

find:

° more directives on various aspects of the budget

4O
process emanating from the executive budget office.
complaints in the press and elsewhere of unilateral
decisions being taken by the fiscal agency.
negotiations between the individual departments,
lobbyists and the appropriations committees
assuming less importance: there are likely to be
fewer hearings and, for those that do occur.
briefer hearings.

Individuals serving legislative liaison
positions in the various departments are likely to be
told to channel their communications through the
executive fiscal agency.

Statements by legislative fiscal agency personnel
that they routed their inquiries on proposed
expenditures to executive fiscal agency personnel
rather than to departmental program managers as they
would do in normal periods.

Statements by program managers that they were

reluctant to assume any greater involvement in the budget

process.

Statements by lobbyists that legislators were less

interested in listening to their positions.

H6-

Role of the Budget. In a cutback period there is no
relationship between expenditures and traditional uses
of the budget for planning, management and control.

Operationalization of this hypothesis also requires

several different measures:

a) Schick (1980:127) argues that budget-related

41

planning diminishes because of the sense that events are out

of control. If this is the case we would expect to see

decreased and/or delayed completion of management program

documentation for forthcoming budgets, particularly during

the period April 1—August 1 when such activity normally

takes place.

b) Caiden and Chapman (1982:118) found no commitment to

facing

crisis.

budget problems and no systematic response to budget
If this is so, then we should find:

incidence of "creative accounting" procedures

reported in the press and elsewhere.

incidence of quick fixes such as use of special

purpose funds to balance the budget reported in the

press and elsewhere.

statements from national bond rating agencies that

the state is not facing fiscal responsibilities.

no changes in overall fiscal forecasting

procedures, budget monitoring and program management

documentation.

no overall fiscal policy changes such as tax

innovation or disengagement from identifiable

expenditure programs.

discussion in legislative appropriations committees

centered on remediation rather than reform.

In order to test these hypotheses interviews are

conducted with major executive, legislative, and interest

group figures. Although these individuals are identified

initially by the positions they occupied during the period

42
1977-1984, it is expected that some will have changed
positions during that period and thus will be able to bring
some comparative perspective to their observations. In
addition, it is expected that some will have occupied these
or related positions prior to 1977 and their longer view
will also enrich the analysis.

The virtue of this research design is that it builds on
established theory and incorporates quantitative as well as
qualitative tests of the data. Its most conspicuous
weakness is that it tests data drawn from a single state and
thus lacks overall comparative quality. However, by using a
longer time frame and drawing on the entire state general
fund general purpose budget comprising more than a score of
budget categories, many useful sub-comparisons can still be
made.

The following chapter takes us from the archive and our
research design to the field. Here we will look at the
.research setting, that complex reality where theory is

formulated and tested.

Chapter Four
The Michigan Case

In the previous chapters we presented a problem for
budgeting theory which is implied in cutback practices.
Chapter One outlined the problem and presented an argument
why this question might interest political scientists. A
summary of pertinent budgeting literature, particularly the
principal attack on incrementalism and some rejoinders as
they pertain to the cutback problem, followed in Chapter
Two. Chapter Three described a strategy for researching
this question.

In this chapter we turn to the research setting, the
environment which spawned interest in this particular
research problem. That environment is state government in
Michigan, the Great Lakes State, the union's eighth largest
by population (Lane 1985:642) and home of the automobile
capital of the world.

As we suggested in the previous chapter, in many ways
Michigan is an extreme test of the propositions, a very
good case study for cutback budgeting.‘ While the federal
government, among others, merely slowed the growth of
programs in the early eighties, Michigan actually reduced
spending. Expenditures were lower in 1982 than they were in
1979.

Wildavsky says that lack of resources and uncertainty
of their availability fundamentally affects budgetary
behavior. Michigan experienced both, but particularly the
latter, in large doses.

43

44

Besides these. however, Michigan has a rather large
number of restrictions on its distribution of public money.
These present an interesting magnification of the influence
of structure on budget cutbacks and may tell us something
about their utility. At a time when pressure is mounting to
adopt similar constraints at the federal level (but evidence
from abroad suggests that loosened constraints may be a
better alternative--Schick 1988), examining the Michigan
response is especially appropriate and timely. Our analysis
begins with the basic document, the budget.

I. The Budget

According to Michigan law, a state budget is "a
financial program to deliver state government services"
(MCLA 18.1304). As a preeminent scholar of state budgeting
explains, a state government budget is "a financial plan
reflecting the dollar costs of state program activities for
a given fiscal period. The budget shows the monetary input
required to provide specific services and to accomplish
various goals and objectives as relates to public policy"
(Howard 1973). In Michigan, the state budget is "a complete
financial plan and encompasses all revenues and
expenditures, both operating and capital outlay, of the
General Fund, special revenue funds, and federal funds
for the twelve-month period extending from October 1 of one
year to September 30 of the next." (Legislative Service
Bureau 1987:1)

Historically, Michigan has been legally obliged

to budget the spending of its revenues since the passage of

45

the Budget Act of 1919. Adopted as part of the "Good

Government" reform movement which energized public

administration in the early part of this century (Press and

VerBurg 1983:7-9), the Michigan response came after the

famous Taft Commission Report of 1912 which identified the

need for a national budget but before Congress finally
passed the Budget and Accounting Act in 1921 (Hyde and

Shafritz 1978:iii).

A. State Constitutional and Statutory Requirements (1)

Like all state government budgets, the Michigan budget
is developed according to a mixture of constitutional and
statutory mandates and court opinions interpreting them.

These mandates tend to structure the budget in ways that,

over the years, have become more and more tightly defined.

Chief among the Michigan requirements are that:

° the governor submit an annual budget to the legislature
(Michigan Constitution of 1963, Article V, Section 18),

° surpluses or deficits in any year must be part of the
budget of the following year (Article V, Section 18),

° the general budget must be passed by each house of the
legislature before any supplemental spending may be
approved and part of it must contain an estimate of
revenues (Article IV, Section 31),

° the budget must be balanced as proposed by the governor,
as approved by the legislature, and must remain in balance
during the fiscal year such that if anticipated revenue
levels are not realized, corresponding mid-year spending

reductions must be made (Article V, Sections 18 and 20 and

46
Article IV Section 31),

° total spending levels proposed in the budget may not
exceed certain limits and must be internally balanced so
that local units of government continue to share a fixed
percentage of whatever revenues are available generally
throughout the fiscal year (Article IX, Sections 26-28).
(2) and

° any change in the formula establishing state spending
limits must be approved by a vote of the people (Article
IX, Sections 26-28).

In addition, there are other limitations: revenues from
sales taxes (four percent) are largely reserved for local
units of government, with only about 25 percent available to
the state General Fund. The sales tax can only be raised by
a vote of the people (Article IX, Sections 8, 10 and 11).
The income tax is a flat rate. Any "graduation as to rate
or base" is prohibited (Article IX, Section 7).
‘Transportation-derived revenues such as gas and weight taxes
are restricted for transportation purposes (Article IX,
Section 9). Any long-term borrowing must be approved by a
two-thirds vote of each house of the legislature and a vote
of the people (Article IX, Section 15). Short-term
borrowing , i.e., that which would be repaid by the end of
the fiscal year, cannot exceed 15 percent of the previous
year's unrestricted revenues (Article IX, Section 14) (3),
(4).

Still further limitations exist including

constitutional protection of the public employee pension and

47
retirement systems funds which precludes their use for
financing other "unfunded accrued liabilities," (Article IX,
Section 24). There is a provision which guarantees (but in
practice is never fully tapped) the Civil Service Commission
funding up to one percent of the previous year's state
payroll. By statute, there is required funding of the
Working Capital Reserve Account (Michigan Compiled
Laws--MCL-- Section 21.451) and the Budget Stabilization
Fund (MCL 21.401). More will be said about the stabilization
fund later.

Finally, there are structural constraints which shape
budgetary implementation, particularly cash-flow. One of
the most significant is the disparity in timing between tax
collection and state payments. School aid payments, for
example, must be made on the first day of the fiscal year
(October 1), but payments for some taxes are not due until
October 15. Therefore, when reserves were short, Michigan
has resorted to short-term borrowing to cover the cash gap.

B. Federal Requirements

Another important feature of the state budget are those
federally supplied funds which become part of the total
state budget. The distribution of those funds is also
mentioned below in Section III of this chapter. The point
to be made here is that most of the federal funds coming
into Michigan are targeted for specific purposes and may not
be used to other purposes (House Taxation Committee 1983:1).

0. Summary

This description summarizes the limitations which were

48
in place at the end of the study period, the fiscal year-
1983-84. They include two major constraints which were
implemented toward the end of the period under
consideration: creation of the Budget Stabilization Fund in
1977 and passage of the Tax Limitation Amendment in 1978,
both of which resulted from prior pressures on the budget in
the recession of 1974—75 and its policy outwash.

It is apparent from the outset that structural
constraints are built into the process. They shape the
overall size of the budget and control the disposition of
shares vertically between the state and its constituent
local units and horizontally among some of the funds and
departments. They dictate to some extent the timing and
process of budget development. And, as we shall see, they
are critical factors in shaping the response of policymakers
to fiscal crisis.

II. The Budget Process: The Cycle

In the view of one legislative research unit, creation
of the state government budget is "one of the most important
activities performed by the legislative and executive
branches of Michigan government each year" (Legislative
Service Bureau 1987:1). It is also, as one veteran
legislator has observed, "a year round activity" (Jacobetti
1986:97).

A useful way to conceptualize the budget process, one
found throughout the budgeting literature, is to describe
budget building as a cycle. That approach will also be used

here.

49

A. Development of the Executive Budget

Although, as previously noted, the fiscal year in
Michigan runs from October 1 through September 30 of the
following year, development of the budget for that fiscal
year actually begins about eighteen months prior to October
1 (House Fiscal Agency 1986, Legislative Service Bureau
1987). At that time the Department of Management and Budget
(OMB) develops economic assumptions and fiscal forecasts for
the governor who uses this information in discussions with
the OMB Director and executive staff regarding prospects for
the budget and corresponding policy implications. On the
basis of this information, DMB issues guidelines and
instructs the various agencies of state government to begin
work on their section of the budget.

During this time, units of the legislature,
particularly the House and Senate Fiscal Agencies, are
preparing their own forecasts and comparing their analyses
'with that of DMB. And the various committees of the
legislature are reviewing programs of the state agencies in
a continuing, but varying pattern of oversight.

What the agencies begin to do is to prepare management
plans. These are the building blocks of the overall budget.
Management plans are based on a review of current
operations, future plans and program objectives within each
department. They include descriptions and justifications of
programs, identification of resources needed to sustain
those programs, and information about program performance

over the past five years and projected levels of activity

50
for the pending budget period.

Most importantly the management plans rank programs
according to priority. The ranking identifies each program
by name and shows how many employees and dollars are needed
to sustain it. There is a parallel list which shows the
cumulative effect in terms of needed manpower and money to
sustain each added program. The approach here, of course,
is to provide decision makers information on what aspects of
a department's program would be cut if a reduction were to
be made (Office of the Budget, n.d.). Those familiar with
the budgeting literature will recognize this as a modified
form of zero-based budgeting. (See, for example, Hammond
and Knott 1980).

Once the management plans are developed and submitted
to the OMB, budget analysts review the plans and hearings
are held to learn more about the proposals and their
budgetary implications. Comparisons are made with revenue
'estimates. There are on going consultations among staff of
the various departments, the legislature and DMB's Budget
Office. This phase lasts about six months and by October an
interim budget is prepared.

By this time the governor begins a series of meetings
with department directors to discuss the implications of
their budget proposals. More hearings are held to review
the interim budget recommendations. Legislative fiscal
agency personnel attend these meetings and report their
observations to members of the appropriations committees of

the House and Senate. The governor's decisions are conveyed

51
to the Director of DMB who then discusses these developments
with the departments and prepares a final budget
recommendation for each.

By early December the governor makes final decisions
about budget limits for each department and work begins on
drafting the governor's budget message which, according to
law, must be submitted to the legislature within ten days
after the regular legislative session begins on the second
Wednesday of January. The budget message of the governor
typically follows in a very short period the State of the
State message which provides the policy backdrop for the
budget particulars yet to come. The budget message, in
turn, is buttressed by the Executive Budggg, a document
about as large as a telephone book of a mid-size city.

B. The Legislative Response

The executive budget proposals, like all proposed
legislation, are translated into bill form and introduced
'into the legislature for discussion. They are usually
introduced in both houses (5) and in each case by a member
belonging to the political party of the governor. (6) By
convention, about fourteen bills are introduced, one each
for the largest departments and funds, one for the two
public safety departments (State Police and Military
Affairs), one for what are considered the three regulatory
units (Labor, Commerce, and Licensing and Regulation) and
one for the general government units including the
Judiciary, the Executive Office, the Legislature, Treasury,

State, Management and Budget, Attorney General, Civil Rights

52
and Civil Service.

During the months of late winter and early spring, the
legislative appropriations subcommittees hold hearings on
the budget proposals (7). The general form in which they
are first presented is gradually modified with detail as
legislative fiscal and legal staffs expand and check
information in the proposals (Legislative Service Bureau
1984:6) (8). Representatives of all agencies including
those from the DMB are called to testify, agency
representatives to justify their program requests and DMB
personnel to explain overall budget and revenue projections
as well as the governor's policies. Once subcommittee
recommendations have been made, they are transmitted to the
full appropriations committee for review. Generally, the
subcommittee recommendations are accepted by the full
committee.

Once passed by the appropriations committees the bills
'are subjected to floor debate in both houses like any other
bill. Both houses must pass the bills and the
recommendations of the appropriations committees are usually
not changed much in floor debate. During this time,
however, DMB may revise the governor's recommendations to
accommodate new information or resolve political pressures.
These changes become part of the legislative debate and may
result in changes in the bills at any point prior to their
passage. Disagreements in the House and Senate versions are
resolved in a conference committee and its report must be

adopted by both houses.

53

The consequence of this particular bill process means
that the budget proposals receive their most critical review
in the appropriations subcommittees where the effects of
member seniority and tenure combine to ensure that
subcommittee members, particularly the Chairpersons, become
well-informed specialists, sometimes even advocates, in
their policy subfield. This process also means that the
conference committee becomes the forum where the final
disputes are really resolved.

In Michigan the legislative rule of thumb is to try to
pass the package of budget bills by July 4, but this is not
always realized. However, once the bills have been passed
by both houses they are forwarded to the governor who may
approve, veto, or use the selective line-item veto mentioned
previously. During the period 1974-1983, the governor
vetoed, on average, line items in thirty percent of all
appropriations bills passed by the legislature (Legislative
'Service Bureau 1987:5). Of course, vetoed items may be
subjected to a legislative override but that occurs rarely
in Michigan politics.

It is also important to note that the budget bills by
constitutional mandate must be taken care of before the
legislature may consider any appropriation bill for items
not in the budget except for supplemental appropriations for
the current year's budget. By legislative rule, any bill
containing or implying an appropriation must be referred to
the appropriate appropriations committee. In recent years.

the appropriations committees have considered about ten

54
percent of all bills introduced (Morris 1979:19-21).

The effect of this process as described so far means
that in normal times, the governor and the governor's
deputies in the executive branch have most control over the
budget in its formulation stages and the legislature in its
adoption. This is no great surprise as this is the way the
system was designed to function in budget building. It is
important to keep in mind, however, as analysis later turns
to the process of budget renovation.

In addition, those familiar with the comparative
budgeting literature (see, e.g., Schick 1986, 1988) will
recognize that this budget development process is not the
conventional bottom-up approach seen in many places where
program demands are first factored in by the constituent
departments and total cost is only realized when all
appropriations bills are summed. Instead, it is a rather
sophisticated technique of infusing program driven bottom-up
‘spending needs into a casing of top-down fiscal policy.

This is not to say that this entire process was in place
during the entire time-span of the study. Indeed, as
discussed in later chapters and Appendix B shows, parts of
it were developed at different stages, some in direct
response to early fiscal crises. But most was in place when
the great crisis occurred in the early 1980s.

Once the budget bills are signed into law, DMB reviews
the appropriations and prepares allocations for each agency.
Allocations may be distributed only after approval of the

State Administrative Board, a statutory and largely

55
invisible component of the process composed of the Governor,
Lieutenant Governor, the State Treasurer, Secretary of
State, Attorney General and the Superintendent of Public
Instruction (Michigan Compiled Laws Annotated--MCLA
18.1145).

At this point the budget shifts into an implementation
stage. The fiscal year for which the budget was developed
now begins.

C. Budget Modification

Even though the budget is now a public law and is being
actively implemented, it can still be amended like any other
law. There are rules for that process as well.

1. Supplemental Appropriations

Generally, if extra monies are available or if
unforeseen needs arise and funds must be redistributed.
supplemental budget bills may be passed but they are subject
to all of the limitations and procedures just described. In
'all, the legislature may pass an average of six to seven
supplemental appropriation bills a year (Senate Fiscal
Agency 1985:39-42). During the period 1969-70 through
1983-84, supplemental appropriations ranged from nine to
almost $400 million and averaged about $112 million or about
three percent of the total General Fund-General Purpose
Budget.

As we can see in Table 4.1 the supplemental
appropriations fluctuate considerably over the period. Their
peaks tend to coincide with the recession periods of

1970-71, 1974-75 and 1980-83 when budgetary adjustment were

56

Table 4.1

Supplemental Appropriations
as a Percentage of
Total Appropriations

in the General FUnd-General Purpose Budget

(in millions of dollars)

 

Fiscal Supplemental Total

Year Appropriations Appropriations Percentage
1969-70 9.50 1,516.82 .63
1970-71 76.30 1,767.63 4.32
1971-72 24.90 2,068.74 1.20
1972-73 78.01 2,416.09 3.23
1973-74 14.70 2,822.22 .52
1974-75 42.60 2,965.72 1.44
1975-76 22.44 3,079.87 .73
1976-77 77.10 3,502.55 2.20
1977-78 99.00 3,983.70 2.49
1978-79 24.40 4,263.01 .57
1979-80 205.40 4,817.62 4.26
1980-81 75.00 4,545.13 1.65
1981-82 389.10 4,968.60 7.83
1982-83 392.70 4,940.99 7.95
1983-84 151.10 5,333.30 2.83
Average 112.15 2.79
Source: State of Michigan. Senate Fiscal Agency

Statistical Reports of 1982 and 1985 and
Department of Management and Budget
Expenditure Reports.

57

more likely to be needed. They are a kind of mirror of as
well as integral to the cutback process. Thus they are
another index of the way environmental uncertainty plays
itself out in budgeting.
among the agencies and funds. If redistribution is needed
within an agency, the agency must secure approval of both
appropriations committees and the budget director (MCLA
18.1393). Once the transfer is approved, DMB forwards the
requested allotment revision to the State Administrative
Board for approval. In either case, additional rules and
conditions govern the process.

2. The Executive Orders Mandating Spending Cuts

One of the conditions that may trigger the need for a
supplemental appropriation bill is the executive order
mandating a budget cutback. Executive orders are issued by
the governor generally for one of several reasons. According
to one conceptualization by the Legislative Service Bureau
these are: 1) reorganization of the executive branch, 2)
response to emergencies, creation of and/or appointments to
3) administrative and 4) advisory bodies, 5) quasi-judicial
and other purposes, and 6) spending reductions. It is the
last category, the executive orders which mandate spending
reductions, which interests us here.

As the Constitution of 1963 states, "no appropriation
shall be a mandate to spend". This section goes on to

require that,

58
"The governor, with the approval of the appropriating
committees of the house and senate, shall reduce
expenditures authorized by appropriations whenever it
appears that actual revenues for a fiscal period will
fall below the revenue estimates on which appropriations
for that period were based. Reductions in expenditures
shall be made in accordance with procedures prescribed
by law. The governor may not reduce expenditures of
the legislative and judicial branches or from funds
constitutionally dedicated for specific purposes."

According to comment by the convention which wrote it.
this section was new in the history of Michigan's
constitutional development. It was written to ensure joint
control by both executive and legislature over state
expenditures, but to give the legislature the last word on
fiscal policy (MCLA, Art. 5, Section 20).

Because the balanced budget requirement must be honored
during the implementation as well as during the proposal and
adoption stages of the budget cycle, there are occasions
when the governor must retreat from previously agreed upon
spending levels. That process is also defined in statute
’(MCLA 18.1391) and the procedure resembles the way a
transfer is approved for a spending change within a
department, even though the recommendation may cut across
many departments and funds. The constitution makers clearly
thought that arriving at a spending out should be easier
than securing permission to spend more. Some would further
argue they also recognized that spending cuts are the result
of financial emergencies and some increased power on the
part of the governor to respond promptly to such emergencies

might be reasonable.

When it appears that revenues will fall short of

59
expected levels, the governor must ask the budget director
to recommend budget cuts. According to the constitution,
these may come from anywhere except "the legislative and
judicial branches or from funds constitutionally dedicated
for specific purposes" (Article V, Section 20).

The recommendations can be either "direct or
open-ended" and are presented to a joint meeting of the
appropriations committees. Once the recommendations have
been made the committees must reach a decision within ten
days. A majority vote of the members elected and serving on
each committee is needed for approval. If the order is not
approved, the governor has thirty more days to develop
another recommendation.

Because the appropriations committees can only accept
or reject the proposed spending cuts, i.e., they cannot
amend them as they would a normal budget bill, the need to
negotiate and make preliminary agreements is great except,
'perhaps, in those cases when the executive order is a
deliberate trial balloon. More will be said about this
aspect of the cutback process in Chapter Seven.

Since the Constitution of 1963 went into effect, the
governor has issued eighteen executive orders implementing
expenditure reductions, five of which were not initially
approved by the appropriations committees but which were
ultimately passed after revision and resubmission. These
orders are summarized in Table 4.2.

Although the executive orders are analyzed in detail in

Chapters Five through Seven, some introductory comments are

6()

.ocwao-Ou noaoc eta cw poawkunop oLo arouse OSeaauoxo Leaauw¢LOa Low Russet:
.mLetnmg oucosouoc DQOLDG auw>Lam abwuenmwmos 05¢ 10 Love‘s woodlonooH

o :w poquHHOU use pomaouo«o:a coca use: 30:»

.nuau usoonlocvinnOLuo nouocoow

.wc023uop awakod0u o no oatmeanra we: age RLopLo oSMDDUORo oshnu

 

 

 

 

om. no.3 om.m~ ma. on.~ a~.m o3.r as. m". on. on.“ oa.mm~ nosotnac nmuon-nc moumamfi

oo.om oo.=m~ uosotaam Nmum~-ma nflummafi

oo.an oo.sm~ unsung.“ «mnaaumo Harwmofl

mm. Rn.” om.a om.~ rs. mm. on. av.~ mo. mm. o~.H an.om ensuing: wanam-mo mouwmma

as." am.“ oo.om ma. on.“ au.m oo.~ or. mm. on.” on." oa.mon nosotaac «almouro volume"

mo. mm.a mm.am~ m3. ~r.~ mm.m vo.~ mr. mm. ~3.~ ou.~mr uauuanoa Nmnnolno naummoa

on." oo.o. m~.a~ o~. on.~ oo.r om.~ or. om. oo.r oo.om~ vasotaac "alwmlou saunas"

at. on. mm. an. or.3~ mo. n~.~ rm. am. me. No. or. as.“ am.aon vasotaac ~m:a»-¢o caucus”

cm. on. mm. “A. n~.am ma. n~.3 rm. cm. 33. we. ar. an." ca.m~. voauonou "mu33-¢o Ransom"

m3. we. we. mm. on.» ma. mm. mm. mm. on. m". rm. Rm. om.nm vasotaac omlm~-mo nausea"

mg. «a. "m.“ mg. 33.3 ow. m3. mn. am. am. ou.m~n uosotaac mausolmd «unmkmfl

rm. Na. mr.m ma. ~c.~ ma. n“. m". cm. mm. 3r. om.or~ vouuonou mmIANIoR ”gimme"

om.~n nosotaac mmuro-no Naummmfi

x on. x mm. nm.~ m man. an. a x u a o~.mu vasotaac rmusfi-ma "straws

n u nm.m u yam. . u u u nm.ee nouuoaau vulvo-~a calrkma

ao.o~ vosotaa: unu~ouwo wcufiuoa

Nu." on.mm vasotaac «muoalwo naiakma

om.~ o3. om.~ no.3r vasotaac ouu~«-- «snakes

mas owe me; use nu: mxm am «no can mu no be: ac «so magnum can: toaxaz

nmmeomouou weapon pcsu use acetukoaon aces»

nutosaoe 4o access“: cue

.

xx nmauinwoa mcowvuouoa weapon ocwacOIouarH excuse o>aaouoxw

Nor Cunt»

6].

Ta

ma

Nu

~—

Du

a.m

nouoz

DQ.mH

Dm.mm

om.mm

mm.w

Q~.mm
mo.m~
Do.m~
Do.mN
DD.n~
OH.N~

D~.O

«Imbm

Da.mm

Do.m
wm.m

km.m

mm.m

cm.m~

Du

om.
no.6
we.
a".

mm.v Dm.~

m~.r om.”
Tn.
mo.
mm.

OQ.T

0—. n

on. m

DT.N

ma mmb

Oo.m

O~.
cm.m~
w—.Nu
Dm.T
Oa.n

oa.m

rw.f
0w.”

am.~

umw.

KNN.

 

ON.” om.mo
De. Go.ou
or.“ an.mr
rm. mm.wn
oc.r oo.Nm~
Do.~ or.-
Do." or..~
mu. Yn.m~
Ne. mo.mn
-. ~m.hm
ems. x
mm“. m
pm mmc

 

llllll sax:Isucuusnulalnliunl:Izluilainowsoooaou vcsu use acodeOQoDu

lemme—amomu

«sewuuspam «omens magazozoudtu «Lapse Oiauouoxm

nutqsuou so ncoa_~sx sac

coacsacou .~.r canoe

 

Oo.mN om.w Q~.f mm. O¢.m~ o~.r malnmmu
Dn.~m nulwmmm
OM.NN nuINGmn
Dv.m om.N Om. ma. Dc.” O~.~ walwmmn
mm. OM.O Of.N mm. o~.r~ OO.N TOINEmn
oa.vn «N.f no.N Mn. fa.r~ u~.N nalmmmn
Dm.m~ OD.m Dm.m om. Oc.¢ 96.? monummn
co.w Df.? or.u m6. ON. GO." welumm—
O¢.m~ OT.T or.“ m0. Om.m o¢.« malnoan
ca.mn mm.~ am. Mn. ”7.? GO. nolcmmu
mv.or am.N MM." MN. na.@ :6. anmkmq
mr.mv ~N.N w~.— ON. a~.o mm. nnlmkm—
Oc.- Nclmhmu
V~.@~ mum. qu.~ x u I nulfmo—
TN.DN mNm. nNn.~ m uDo.n I anlrkmn
DQ.Q— walunwm
w¢.rN mo. malnkma
DM.N~ n~tah¢~
ilnzum :m: «I: An: 3:: at: Lents:

.nmnmaoce nacu :« ue: a5em0uou uom0ac 0 acemu0u50dnco5h we u:0tu50a0n 0cu :m uueu 0003mu:m Dame 50050 much .ru

.00cn030 auuc0av0ncsn

050: :euuaw: mo.~o~m use eu 50050 :« ntounmn u:0:05mu0¢ n0oaeuatu ueecum euucam 0:0 n0emeuatw oueum 0cu 000::m

0u0un ocu c0mc3 :0 ncowudtsnne 0mcocu eu 50050 0>munu0x0 hucu :« use 00—n0an nuat0uu0 .0n~¢ .:0uuu0m0 No0“ 500:0502 0cu

050404 nx003 o>«5 0:05 ~05ecoo ecu 0a 00u50>05 coaca :mmeateu ~0m5eu0:5oc:o 0cu 505 “0:34 0u0un 0501 00:54 J53n005b

:« use 0cu we :e«-a: w.mm .cemum000 :u .cemu0u5ean:05h we u:0tu5oa0a 0cu mcw0suucm nomuceoo cuce5c 0ewuau0xe be
n0oae~a50 due 50* nuawozoc u:0:05mu05 0:0 R000: .n0m5ouon 00mwmnn0~u :« nusu uceu500 T.~ 0000~ucm 50050 esmuau0x0 much .m—

.5005e ocuaegueu ecu :« .nucaete 50050~ cw use .00500dae enue comcz :emue0cotteuo5 0 ancemuacm5u:eu
oueun 0:35 ucoto5wu0u noomegatw ~eecum euycam 0:0 n0omeuatu oueum 0cu :05» sea—aw: rm.nmm use eu 00nene5a euue 50050 Much .N—

.ance u50wn:05u 0:0 nu505m 0u 00m—aae nu mo :« :emuun005 0c» .nn

.nmnauoce nwcu :« 0000~uca ue: n0m5eueuou
u0003c .mcanneue5d eu00 caueteuae 0:0 :05u0u5eance5u 505 o:~0:oan :5 n:0«uu:005 50» 00H~00 enne use u0m03c much .o~

.8520. «VJM uzoco eu use
00350: mach .memoaueu mu«::zreu eu u:ozmea 0me 0u0um docmw 0cu :u use e~0t5e$ 0 00u00:0: on". 50050 esuuau0xe each .@

.50cu0meu 00~Heu0u 050 u:0tu50000 emocun 0 mcmuu0sw0 nunu "no .0uceu nmcu we u0n0a551 0cu 5cm
.cewu05un5:m:00 ~050:0m uo no «~03 no nze5me5a Umumu0au ue 00u0050u 0503 nuau .n50cue ~050>0n :« no 50050 0>wuau0X0 nmcu :H .m

.33.. 53.59 so: as 2333 63.52.2520 1: 300% 09. Be .885 «5 a: .822: mdnm Soon 3 ~33 2: 0503....
.cewuuwt mum ocuH~0u0u nceuuua005 50cu5aw 50» Band 0u 00xn0 0503 :nuc0zu50a00 nonwucm5a "no we n000c: .50050 nmcu :H .m

rO .uceuue5000 0:0
sequo5unucatpo :« nuou 05eeci0cunnne5ue 0cu eu :euum000 :« 00u00:e: 0503 ucaete u0cu :u nusu 5050050 Umwmu0an
uocu nce0: nacu .50crac 0 00anec n5e0ade xnu50une :0 050:: .cemnum: 0mm 0:050 m—ucmun» eu «oueu nonuue 0cu nmcm5c
coacx sedan“: r.m«m eu ucaeto eu 00uoun 050: nuau 05oecl0cuinne5uo enocu .ucsete uecu oncae0 :ch 050: 0~303 ucou50a eau
ue sequeuou~0u £0305 e carecuuc .50050 0>mu500x0 nucu :5 00u00a05 code 0503 .05000 am 0ue: :« 00cw5um00 050050 0cb .w

.:0muU:005 uneu 05eec|0cu
Inn05ue u:0U50a 01u o 505 use—a 00—0300 eu 0:0 g05uceu 5m0cu 500:: n0m50axo 9530 cu n000c 30:000 00300 euno 50050 each .m

.n50un55u 0:0 nu:05o cum: nanaueco 00.3 $0 honest-x. ecu 50“. 00.53500 no: 00250» uco0 €385,595ch :5 00:3"96 n: .r

.nmna—ece nmcu :« 005o0unzeu u0: no: nscu 0:0 00:«:50u00:: no: ucaeto noueu 0c» .5003 nounMu 0cu we ncucet 530$ Ho:mb
ecu 50w ucou5oa :eu ac n:0R0unmca eu nucoxmoa 0«eu«00: 000005 eu 00u005u0 code no! n00m>50m neuuem we u:0:u5000n 0c» .n

.m0sun nacu :« :euue5o0mnceu eucw :0x0u ue: no: canon nucu .0505050ch .00ucot0uacm no: 50050 ecu uecu
050005 e: um 050cu use .:e«-w: Hm mcaqoueu 500: neunme ecu 50 “cucet 005cu mesa» ecu 500 uu:0:u0~—0 usucmezo5 he owned
u:0050a 0:0 05eeniecuunne5uo Aeseuuu00o :0 0550005 0~003 50050 osmuauoxo u:055:u:eu e uecu 00ueun 50050 05mu300x0 much .N

.cucer 0:0 ac n5e0:0> 0u nuc0taoa 50000 eu cemnnmfceu ~e5uceu 50:0«4 0cu 00u00:0: cane 50050
esuusuoxo much .000::e5 0501 Renae) .meneu duo :« .0:0 e~32504 ac 00u5eteu 050: 020» no m-0u u:0:0ateu ecu :« n03~e>
cuwz vuueu muouocezeu ue: 30: 0:0 50050 0>uu000x0 £000 to o:«::«@0c ecu ue 00mwmuc00m 0necu 050 00u5oa05 muse ueueb .n

~.Y ouceb eu neuez

63
appropriate here. Of the thirteen orders which were approved
by the legislature, the average total cut was about $116
million, almost mirroring the average annual supplemental
appropriation.

The average reductions per budget unit range in size from
$90,000 absorbed by the Governor's Executive Office to the
more than $50 million taken from the Department of Social
Services. The average across all units is slightly more than
$6.5 million.

In scanning Table 4.2, we can see that the reduction
orders either tended to focus on a few units or to cut across
almost all. It is the latter which is most prevalent. Over
sixty percent of the orders affected twenty or more units.

The units which received the most consistent attention were
higher education and school aid. While the modal frequency of
cut per budget unit was eight, higher education was cut eleven
out of thirteen times and school aid, twelve.

A more interesting comparison of the orders which were
initially rejected with the finally approved versions is found
in Chapter Seven. It appears as part of the analysis of
budgetary roles and centralization in fiscal crisis.

D. Summary.

Budgeting is an established part of the policy process
in the State of Michigan. Its nature is cyclical, spanning
parts of three years in its development, adoption and
implementation. As with much legislation, the governor
proposes and the legislature disposes of budgets. It is a

ritual, but the outcomes are not entirely predictable. Like

64
a suit of clothes, budgets once passed sometimes need to be
altered, either let out to accommodate an expanding
political economy or taken in to suit the reverse. The
requirement to budget and the actors and procedures involved
are all shaped by rules which, in turn, shape the budgetary
outcomes. One of these outcomes is the distribution of the
budget which is the subject of the next section.
III. How the Budget is Distributed

Section I of this chapter defined the concept of budget
and discussed the legal requirements which structure the
state budget in Michigan. Section II described how the
budget is developed, adopted and changed. This section will
look at the characteristics of the budget, particularly how
it is distributed.

When most people discuss the budget process, they tend
to focus on that section of the budget which is subject to
annual deliberations of the legislative appropriations
‘committees. In Michigan that section is known as the
General Fund/General Purpose (GF/GP) budget. But that
section is actually only part of the total state budget.

The remainder consists of federal, local and private, and
other restricted funds which, while formally appropriated.
may be used only for specific purposes.

A. The Total State Budget

In 1983-84, the final fiscal year in this study,
Michigan's total state budget was about $12.25 billion
dollars. As we can see in Table 4.3 somewhat less that half

(44 percent) of that amount is attributable to the General

Table 4.3

Comparison of 1983-84 Appropriations

--------- Percentage--------

Category Total Budget General Fund
Human Services 42.71 57.04
Education 27.26 25.34
General Government 10.52 8.16
Regulatory 5.02 2.71
Safety & Defense 1.38 2.67
Agri. & Nat. Res. 2.03 1.75
Other 11.08 1.09
Total x 100.00 98.76
Total (in billions) $12.25 $5.39

Source: State of Michigan. 1985 Statistical Report.
Senate Fiscal Agency, Lansing, Michigan,
October 1985, p. 21.

66
Fund. And, while spending among the functional areas
retains much the same relative rank in both the total budget
and the general fund, the actual percentages differ. For
example, while appropriations for human services (social
services, public health, mental health and corrections) tops
the list in both budgets, a larger percentage (57 percent)
of the general fund goes to these programs than of the total
budget. Spending for human services accounts for just under
43 percent of the total state budget. On the other hand, a
larger percentage of total budget funds (27 percent) goes to
education than general fund dollars (25 percent).

These differences are differentiated in Table 4.4 where
sources of revenue for the appropriations dollars are broken
down among four separate categories. As we can see, the
amount of GF/GP funds which actually sustain the different
budget units varies greatly from zero for revenue sharing to
100 percent for the governor's executive office. The
(Departments of Education and Labor receive most of their
funding from federal sources (91 percent and 76 percent,
respectively), while state restricted funds account for most
of the monies spent on revenue sharing, school employees'
retirement programs, transportation, school aid, and the
Department of State. Overall, federal funds account for
about 27 percent of the total budget, local and private
funds another 1.13, other state restricted funds 28 percent.
and GF/GP the remaining 44 percent.

Missing from the list in Table 4.4 is a category for

GF/GP payments into the Budget Stabilization Fund. This

6'7

Table 4.4

1983-84 Appropriations

-------------- Percentage of 0ross--~~" --“

Gross Local 6 Other
{in mill.ons cederal Private State General
Suogct Unit of dollars) Funds Cunds Restricted Funds Total
Agriculture 38.22 2.71 .11 39.62 57.56 100 00
Attorney General 23.49 14.05 .00 17.13 68.81 9 .99
Civil Rights 10.18 15.81 .00 .00 84.19 100.00

ivil S rvice 13.75 9.70 3.83 24.61 61.86 100.00
Commerce 203.81 30.27 .22 37.82 31.68 99.99
Corrections 268.09 .06 .04 1.14 98.76 10 . 0
Education 443.43 90.88 1.19 1.91 6. 2 100.00
Executive Office 2. 2 .00 .00 .00 100.00 100.00
Higher Education“ 908.45 .27 .00 .00 99. 3 100.00
Judiciary 92.96 8.65 9.20 12.35 69.81 100.01
Labor 394.48 75.93 .00‘ 1.59 1 .18 94.7
Legislature 55.60 .22 .00 2.35 97.42 99.99
Licensing & Reg. 16.47 .00 .15 17.22 82.62 99.99
Mgmt. 6 Budget 163.42 24.10 .00 22.45 53.45 100. 0
Mental Health 641.27 3.70 .54 2.77 92.99 10 .00
Military Affairs 17.34 38.46 .00 4.40 57.14 100.00
Natural Resources 210.64 25.82 3.49 36.37 34.32 100 00
Public Health 225.38 47.45 1.02 6.46 45.06 99 99
Retirement:

School Employees 50.3 3.14 .00 96.59 .27 100.00
School Aid .437 16 2.43 .00 67.55 30.00 99. 8
Social Services 4,096.46 46.70 1.78 .00 51.52 100.00
State 42.57 3.36 .37 73.8 22.39 100. 1
State Police 151.2 8.15 1.34 1. 8 88 54 100.01
Treasury 59.50 .00 1.75 9. 2 88.33 100.00
Debt Service 128.00 .00 8.22 .0 91.7 100.00
Capital Outlay 139.90 30.36 8.47 19.77 41.41 100 1
Transportation 1,158.67 19.59 .96 78.65 .79 99.99
Revenue Sharing 673.43 .00 .00 100.00 .00 100.00
Library of Michiga 23.50 23.94 .3 .1 75.5 100 00
Prior Year

Local Requirement 58.50 .00 .00 .00 100.00 100.00
Total 12,249.15 26.84 1 13 28.04 43.99 100.00

‘Actually .0024.
**lncludes community colleges.

Source: State of Michigan.
Senate Fiscal Agency
p. 21.

1985 Statistical Report.
, Lansing.

ichigan, October 1985,
(Does not include interdepartment transfers.)

68
fund (also known as the "rainy day" fund) was established in
1977 as a means to save money from good economic years as a
reserve against which funds could be drawn in lean years.
Payments into the fund are based upon a formula tied to
actual economic growth (House Taxation Committee 1983). As
the Michigan economy was still in the recovery stage in
1983—84. there was no pay-in that fiscal year (Senate
Fiscal Agency 1985). The fund is discussed in more detail
in the Section IV of this chapter.

Also subsumed in Table 4.4 are payments to local
government through programs administered by state agencies.
As mentioned in Section I, since adoption of the Headlee
Amendment to the State Constitution in 1978, state
government must share about 42 percent of total spending
(excluding federal funds) with local governments as a whole
(House Taxation Committee 1983). In 1983-84 this totalled
$3.58 billion in actual expenditures and included such items
as the $1.4 billion spent on school aid and $160,000 spent
by the Department of State for grants to local units of
government for historical site preservation (Senate Fiscal
Agency 1985:116-123). Headlee Amendment spending includes
the $673.43 million appropriation for revenue sharing found
in Table 4.4.

B. General Fund-General Purpose Budget

As mentioned previously, the General Fund—General
Purpose Budget is that section of the total budget which
contains no reserved or dedicated funds. Theoretically, the

entire GF/GP is negotiable each year. Although some

69
scholars (e.g., Cross 1982:338) have complained that the
GF/GP is an "unreliable guide for analysis" because it
contains some funds which look like user fees and thus are
presumably not transferable from one program to another.
excludes others which some regard as discretionary, and
changes in some respects from year to year. it remains the
centerpiece of analysis for research in Michigan state
government budgetary decisionmaking because it is what the
executive and legislative policymakers have agreed to haggle
over each year. In other words. it retains its virtue for
purposes of political rationality, although it may beg some
aspects of economic rationality.

Table 4.3 shows the general distribution of GF/GP funds
as appropriated for the 1983—84 fiscal year. Details for
each department are found in Table 4.4.

As needs and public policy have changed over the years,
so too has the distribution of the GF/GP Budget. Table 4.5
’is a comparison of expenditures across the twenty—one-year
period in this study.

As we can see in this table, there has been substantial
growth in spending on human services, although its
percentage share of the GF/GP budget actually declined
slightly in the ten-year period. 1963-64 to 1973—74. The
largest force here has been the increase in spending on
social services which accounted for $88 million in 1963-64
and $2.2 billion in 1983-84. followed by corrections, mental
health, and public health in that order.

There is also fluctuation in education, regulatory

70

Table 4.5

Comparison of GF/GP Expenditures

—————————— Percentages——~~—-——~
Category 1963-64 1973-74 1983-84
Human Services 39.64 39.06 59.43
Education 34.66 45.03 25.85
General Government 11.16 8.01 7.31
Regulatory 2.26 1.30 2.83
Safety & Defense 3.04 2.30 2.66
Agriculture &
Natural Resources 2.34 1.50 1.46
Other 6.91 2.81 .47
Total 100.00 100.00 100.00

Source: State of Michigan. Executive Budget for
1966—67, "General Fund General Purpose
Expenditures" and personal communications
with John Cheeseman, Budget Analyst,
Budget Analyst, Department of Management
and Budget, Lansing. MI.

71
affairs. and safety and defense with the latter two showing
an upswing. Education, which enjoyed a ten-percent increase
in the share of the GF/GP during the ten years from 1963-64
to 1973-74, thereafter showed a decline of 19 percent in the
following decade for a net loss of almost nine percent of
the pie over the twenty-year period. The share for safety
and defense, which declined in the 19603 by almost one
percent, rallied to almost 2.7 percent by 1983—84.

There is a clear decline in spending in general govern-
ment, agriculture and natural resources, and capital outlay.
In 1983-84, spending for general government captured over 11
percent of the GF/GP and by 1983-84 showed only 7.3 percent.

It should be noted here that the data used for this
table does not quite include the same subcategories used in
Table 4.3, so the two, although similar, are not quite
comparable. The data used to construct Table 4.5 is
discussed in detail in Chapter Four. The data used in Table
4.5 is not corrected for inflation. If it were, the data
would show that there was about a five-percent decrease in
GF/GP spending in the decade 1972—73 to 1982-83.

D. Summary.

The General Fund General Purpose section of the total
budget is that part of the budget which generally captures
the headlines. When newspapers report that the governor is
confronting legislative leaders on budgetary matters, it is
usually this section they are discussing. The GF/GP can be
dissected many ways, but is usually described in functional

categories such as amounts spent for human services.

72
education. general government, regulation, safety and
defense, and agriculture and natural resources. Over the
years, budgeting for these categories has changed and so,
too, has the budget process itself. That is the subject of
the next section of this chapter.

IV. The Events Which Shaped the Budget Process in the
Cutback Periods: 1970—1971, 1974-1975 and 1980-1983

As we noted in Chapters One and Two, public budgeting
takes place in political and economic environments which may
vary considerably in stability and resources. It has been
argued that the combination of those variables tends to
produce distinct budgetary outcomes. We turn now to an
examination of the environment which produced the
exceptional budgetary outcomes which are the focus of this
study.

A. The Michigan Political Economic Environment

1. Fundamental to Michigan's condition is its status as
an industrial state with a highly cyclical economy. No one
who studies the state can escape making that observation.
For example, an analysis by Bryan and Howard (1979) of
unemployment rates in the 50 states plus the District of
Columbia for 1957-1977 showed that Michigan's unemployment
ranged from a low of 3.5 to 13.8, making it number one in
the nation.

a. At the center of Michigan industry is the
automobile. Automobiles have dominated the Michigan economy
for decades. A University of Michigan study in the early

19708 reported that 80 percent of the variance in the

73
Michigan economy could be attributed to changes in the auto
industry.

Although the link began to weaken in the mid-1970s
when a combination of increasing interest rates and fuel
shortages brought about by the international oil crisis (9)
caused consumers to rethink their automobile preferences,
motor vehicles and related products still are a significant
part of Michigan's economy. According to Rosen and Wang
(1983) one in six Michigan workers owe their living to the
auto or related industries.

b. National economic cycles are magnified in Michigan
because of the dominance of high-wage durable goods
industries. As of 1980, although only 22 percent of the
nation's workers were employed in manufacturing, that
percentage was seven percent higher in Michigan. According
to a major study released in 1982 (Brazer and Laren),
national industrial output which slumped three percent in
1969-70, nine percent in 1973-75, and an equal amount in
1979-80, was magnified in Michigan to 16, 18 and 31 percent
respectively.

Slumps in the national economy come to Michigan later,
are deeper and stay longer. For example, when leading
economic indicators showed that the national economy was
going into a period of stagflation in the fall of 1976,
newspapers in the Michigan capital reported that the economy
was good there (The State Journal, October 30, 1976). But
when the national economy was showing a turn~around in 1982

and unemployment stood at 8.5 percent, joblessness in

74
Michigan was 14.9 percent and going higher.

c. Michigan's declining share of the national economic
pie.

Because of the changing structure of the national
economy in which manufacturing and heavy industry is
shrinking and services are expanding, Michigan's personal
income has been steadily eroding. Once among the highest in
the nation, Michigan's share of 0.3. per capita income has
tumbled during the last thirty years to a point now just
below the national average. These trends are summarized in
Table 4.6.

Yet Michigan continues to receive relatively less
federal largesse because of disadvantageous federal
policies. Among the states, Michigan is a net donor to the
federal treasury and shares unequally in federal monies.
Because it is a high wage state, Michiganians send
relatively large amounts of tax dollars to the federal
government. For example, in 1980 Michigan ranked fifth
among the states in contributing federal tax dollars and was
last in receiving assistance. State policymakers say this
inequity arises from several factors. Among them: matching
formulas for federal spending programs are based on per
capita wealth but do not take into account unemployment
rates, cost differentials, tax effort or relative welfare
burden. The national defense build—up which has poured
billions into some states has largely bypassed Michigan,
along with other midwestern and northeastern states

(Hollister 1983a).

75

Table 4.6

Michigan Personal Income 1950-84

Per Capita Percent of U. S.
Year Income Per Capita Income
1950 1,687 113.10
1955 2.172 116.00
1960 2.339 105.60
1965 3,053 110.10
1970 4,131 101.90
1975 6.190 101.90
1978 8.737 107.40
1979 9,574 106.00
1980 10.168 102.60
1981 10,867 99.30
1982 11,105 96.80
1983 11,830 97.80
1984 12.989 99.00

Source: Robert J. Kleine, Senior Economist,
Public Sector Consultants,
Lansing, MI.

76

Other federal policies have also cost Michigan
directly. For example, adoption of the Individual
Retirement Act (IRA) income tax deduction reduced tax
receipts in Michigan for a period just when they were needed
most because the state's income tax is based on the federal
system. (10) Or, adoption of the federal Omnibus
Reconciliation Act which took effect in October 1981, forced
Michigan to reduce its state budget by $50 million.

And, when federal assistance has been available. for
example to shore up the state's unemployment compensation
fund, it has had to be repaid.

2. Michigan's financial market credibility is only
partially controlled by state policymakers. Financial
rating services external to the state play a crucial role in
the state's ability to borrow money on the national market.

3. The population base: its shrinking rate of growth
and some consequences.

In the decade of 1960 to 1970, Michigan's population
grew by 11.4 percent. In the decade that followed, growth
slowed to 4.2 percent. And in the period 1980-82, popula-
tion actually shrank by almost two percent. Out migration
increased and, instead of consisting largely of retirees
heading to Florida and other points south, record numbers of
mid-career workers left looking for better opportunities
elsewhere. Most of this loss was attributed to the state's
stagnating economy (Gorwitz 1982 and 1983a and b).

The consequences of this population decline meant not

only an absolute loss in income and business tax revenue,

77
but also contraction of federal aid which is based, in part,
on population size. It also cost Michigan a seat in
Congress (Gorwitz 1982).

At the time that Michigan's population was shrinking,
its distribution was also changing. Outmigration from the
cities into suburban and exurban areas continued, bringing
with it a redistribution of political preferences wherein
suburban and exurban interests, traditionally more fiscally
conservative, became more dominant (Gorwitz 1982).

4. An aging liberal political establishment under
siege and a disbelieving electorate.

In the post-World War II period, this industrialized,
high—wage, relatively well educated population had begun to
vote for fairly consistently liberal administrations in
state government. As one veteran consultant says,

"From 1948 on, it's impossible for the Republicans

to be elected as mainstream.... You either had to

be (or act like) an independent or a Democrat.

(Governor) Romney played the independent game and

(Governor) Milliken made an accommodation with the

Democrats and took the Republican Party to the left.

There was an aspiration for programming beyond

resource and unwillingness to raise the level of

taxation to accommodate that resource.... So we

have not had a balanced budget for more than a

decade. Milliken made this political choice, hoping

that things were going to improve.

It's sort of like embezzlement. If you were to

interview an embezzler, he's never going to tell you

that he's going to steal money. He says that he's
going to borrow money, nobody will know, and that
he's going to use this money to make money and then
return it. So, in fact, I would say that the

government policy from 1974 to 1982 was a policy of
embezzlement."

Captured in this view are a configuration of forces:

78

° a constituency increasingly interested in expanding public
services and unconvinced that funds are insufficient to
cover everything.

° a legislative body eager to respond to that preference, and

° a much-elected governor, also committed through
accommodation to those preferences, but lodged in a
political party traditionally opposed to raising taxes.
This antipathy toward raising taxes was powerfully
reinforced through recurrent (almost annual) exposure to
various voter initiatives designed to limit government
spending, one of which did succeed in 1978 and markedly
changed the nature of state budgeting in Michigan.

Hidden, however, in this view are undercurrents
arising from the natural competition between the legislature
and the executive. For example, in the spring of 1976.
although it was not an election year for the Senate, law-
makers there twice declined to give the governor's budget
year extension bill immediate effect which meant that the
law would not have been implemented until the following
April, leaving the state seriously in arrears in that fiscal
year. Only the governor's threats to unleash further budget
slashes in social services finally persuaded the Senate to
give the Governor what he wanted. (The State Journal, May
15, 1976).

Also hidden are contradictory views about the
leadership role of the governor, especially of the governor
whose term in office extended for the greatest share of the

time period under study. On one hand there are those

79
who argue that after years in office, the governor simply
tired of being involved and left things to his underlings
who lacked the power to carry through. There are those
scholars (e.g., VerBurg and Press, 1982) who argue that
the governor, enamored of professionalism, turned the budget
process over to the technocrats who could make no political
decisions. Then there is a management view that the
governor, being a skilled executive. believed in delegation
and let his budget officer take care of things. And there
is a fifth view that the governor, a skilled politician,
knew he was in an untenable position and let his underlings
take the heat.

Add to this those demographic changes and the
industrial and financial forces unleashed by a turbulent
economy described above, and we have the setting for a
budget under stress.

B. The Dilemma of the State Response.

As observed in Chapter Two, a fiscal crisis consists of
the following components: 1) inadequate resources to meet
2) spending obligations in 3) an uncertain environment.
There are various options available to a state to deal with
these components. They are interrelated. Exercising one
often means doing something with another.

1) The problem of inadequate resources can be met by
raising revenue through tax increases or short—term
borrowing, using reserves such as equity in various state
funds or capital outlay reserves, substitution, or enlarging

the time period on which the revenue collection is based.

80
Temporary "paper" adjustments can also be made in hopes that
the crisis will go away.

2) Too many spending obligations can be handled by
reducing expenditures. These can either be immediate cuts
in spending commitments, mandated lapses wherein funds
previously appropriated for a particular program are
withdrawn and returned to the general account, wage
reductions, and delayed payments. Here, paper adjustments
can be made as well.

3) An uncertain environment can be stabilized through
a) countercyclical economic measures such as various
development or savings programs, b) political coalition
building to i) sustain the state while the siege lasts and
ii) make needed changes, and c) tactical holding decisions
such as adoption of a kind of budgetary "going rate".

A fourth option theoretically exists. That is to do
nothing, but in Michigan's case, that was not available.
~The constitution required a balanced budget and certain
obligations had to be honored.

Michigan exercised all of these options, some more
enthusiastically, timely, and thoroughly than others. Let
us review them.

1. The Revegge Dilemma.

The tax issue. Although tax increases were least likely
to be discussed openly as a remedy for the fiscal crisis,
the State of Michigan did raise taxes several times during
the period under study: In 1970-71 the state income tax rate

was increased from 2.6 to 3.9 percent in order to counter

81
the revenue depleting effects of a record length autoworkers
strike. Again, in November 1974, income taxes were
increased from 3.9 to 4.6 percent to replace lost revenues
when voters approved a sales tax ban on food and drugs. In
August 1975 the Single Business Tax was adopted, partly to
cover a looming deficit. And again in 1981-82, a six—month,
one-percent income tax increase was adopted together with an
increase in the cigarette tax. When these taxes lapsed in
September 1982, a 1.5 percent increase (from 4.6 to 6.35
percent) in the income tax together with a .25 percent
increase in the cigarette tax was adopted in 1982-83.

These taxes were raised at some cost. The third round
of income tax increases was especially painful and cost the
Democrats control of the Senate in 1984. Even so, some thought
the leaders acted too late. A former House aide said,

"I do know that throughout the 1980-82 period

(the Speaker) went repeatedly to (the governor) a
number of times in my presence so I know it happened
and said. 'Look. don't you think we've cut all we
can cut in the budget here? Isn't it time to go for
the tax increase?‘ (The governor) repeatedly said,
'No, I don't think we can.'

(The governor) took great pride in not raising
taxes and the longer that period became (i.e., his
tenure in office) the more committed he was to try
to get out of office without doing it. If he truly
had that as a goal, I think that was a major
stumbling block to dealing with that situation
earlier.

Over that time period (the Speaker) repeatedly
offered to do whatever was necessary to bring the
Democrats in the legislature along if (the governor)
would consent to work with the Republicans in the
legislature. It simply did not happen until 1982.
Then, all (the governor) proposed, I believe, even
then was a temporary tax and that's what we ended up
with, a temporary tax increase. I know (the
governor) proposed a half percent for the calendar

82

year and we ended up with a one percent for six
months of the fiscal year."

Short-term Borrowing. Michigan continuously shored up
its leaky budgets with short—term borrowing during this
period. This was something the state constitution allowed.
but the framers did not have in mind anything other than
contingency purposes when they permitted it because they
also wrote in a proviso that any borrowing had to be repaid
within the fiscal year.

As resources became leaner with each passing year,
short~term borrowing became critical to cover October 1
payments into the school aid fund, for example, when tax
revenues were not receivable until October 15. Overuse of
short-term borrowing together with the state's declining
credit worthiness eventually caused Wall Street money
lenders, the prime source of such funds. to cut the source

of supply. As the state budget director said, "They have

immense power over this state. If they drop my rating and I .

can't borrow, then we can't pay our bills in October, we
have payless paydays, we have chaos." (The Detroit News.
March 3, 1982)

Michigan reached its nadir in this respect in September
of 1982 when only a letter of credit issued by a consortia
of five Japanese banks permitted the state to borrow $500
million. The banks charged a 12 percent fee.

Tapping the Funds. The State of Michigan used its

equity in numerous funds to get additional revenue during

83
Vehicle Accident Claims Fund in 1970—71 and $50 million from
its Veterans' Trust Fund, $34.6 million from the teachers'
pension fund contingency reserve and other millions from the
Uninsured Motorist Fund in FY 1975-76.

In 1978-79, the state took $25 million from the Liquor
Control Commission revolving fund. In 1979—80 the state
borrowed $26 million from the Recreational (Kammer) Trust Fund
and $46.2 million more in 1980-81, (Heckman 1981a). That same
year the state also attempted to borrow $20.1 million from the
Railroad Delinquent Tax Fund but gave up when it was found
that some of the fund had already been committed elsewhere.
(Lansing State Journal, September 30, 1981).

The state also borrowed from the Budget Stabilization
Fund, but as that fund was set up expressly for that
purpose, it is discussed is a later section. (See Attempts
to Reduce Environmental Uncertainty, below.)

Us1ng Capital Outlay Reserves. In addition to making
outright cuts in capital outlay commitments through
executive orders, on at least two occasions ($51 million in
FY 1974—75 and $46.2 million in FY 1980-81) Michigan raised
additional revenue by what some call non—funding
unencumbered capital outlay reserves (Heckman 1981b). The
procedure was this: normally, at the end of a fiscal year,
all unspent (unencumbered) capital outlay appropriations
balances would be carried over into the following fiscal
year and marked for expenditure. A fund reserve is also
carried over to cover appropriations. By diverting funds

normally used to fund that reserve, the revenue can be used

84
to cover deficits in other areas. The cost of that
procedure was that it required consistent yearly capital
outlay appropriations.

Substitution. Once a useful ploy for states in a
federal system, substitution of federal for state funds has
become much more difficult to do as federal lawmakers have
tightened loopholes. Nevertheless, Michigan was able to
generate $88 million in FY 1981-82 by substituting federal
funds in programs administered by the Departments of Social
Services and Mental Health, and by a newer form of
substitution, user fees (Citizens Research Council 1982).

Enlarging the Time Frame. Michigan extended its fiscal
year by three months in 1975-76 and considered extending it
twelve months in 1979-80 (Heckman 1981b). At the time the
first extension was approved in 1976, the intention was to
bring the state back to a July 1-June 30 fiscal year by
mid-1979, having followed the original extension with a
twelve-month fiscal year and then a 21—month fiscal year
(The State Journal, May 15, 1976). However, subsequent
events cancelled those plans.

The Paper Adjustments. According to generally accepted
accounting procedures, organizations account for monies
received and spent either by the cash method or by accrual.
The cash method counts monies only when actually received
and spent. Accrual counts when earned and obligated. For
an example, an item ordered in September is considered
obligated in September by the accrual method, but if

actually paid for in October, is not accounted for until

85
October under the cash method. ,Accountants tend to
recommend accrual accounting because it pictures financial
activity closer to decision points and therefore gives less
distorted data points to analyze for planning purposes. In
some instances, some organizations use both methods for
different accounts. but using both, i.e., accruing revenue
and not liabilities, for the same account is bad practice.
It can, however, be an attractive maneuver if budgets have
to be in balance at the end of a fiscal year and bills for
activities undertaken near the end of the year are unlikely
to appear until several weeks into the new year.

During the period 1975-1982, Michigan steadily accrued
revenues (but not liabilities) for assorted sources.
Beginning with the marathon end-of—year adjustment on June
30, 1975, the state accrued revenues for sales, use and
withholding taxes. As one tax committee aide later said,
"Suddenly we started to get into what has been popularly
'known in this state as "Chinese bookkeeping."

The following fiscal year (1975-76), utility property
taxes were added. In 1977-78, in an attempt at reform, the
entire Medicaid account was shifted to accrual accounting,
but the liabilities were shifted back to a cash basis in
1980-81. In 1979-80, revenues from the single business tax
and insurance premiums were put on an accrual basis, as were
oil and gas taxes and beer and wine taxes in 1981-82. That
same year, two more shifts took place. Liabilities for
utility bills of welfare recipients were returned to cash

accounting, but the state also began to pay back the debt on

86
property tax credits by starting to accrue liabilities.

Playing around with the Medicaid account was by far the
most costly. It was a prime bone of contention in the
October 1981 negotiations with Wall Street lenders and was
partly to blame for Michigan's subsequent credit rating drop
to lowest in the nation the following December.

The other cost was, of course, the tax reckoning. In
1981-82, the state needed to pass a ten-cent increase in the
cigarette tax, part of which was used to correct the
bookkeeping manipulations.

Although fudging the books in an attempt to meet the
constitutional requirements for a balanced budget received
the most notoriety, at least one study (Citizens Research
Council 1982) indicated that this option had less fiscal
impact, at least during the crisis years 1980-82, than the
other options of reducing expenditures or raising revenues.
Although it was the leading variable in 1981, accounting for
37 percent of the adjustments made to eliminate GF/GP
imbalances, over the three-year period it accounted for
about 25 percent.

2. Attempts to Reduce Expenditures.

Spending Ceilings. In addition to the constitutional
requirement for a balanced budget, state lawmakers made at
least two other attempts to set spending limits. The first
occurred in 1977 as part of the legislation establishing the
Budget Stabilization Fund (BSF). In addition to its "saving
for a rainy day" feature, the Budget Stabilization Fund

served to limit the rate of growth in state spending.

87
Indeed, the governor pushed for adoption early in 1977
before the adoption of the budget for the ensuing fiscal
year, because the BSF language established ceilings for the
budget. At the time, budget officials saw it as similar to
the federal process in which ceilings are set early in the
process, before specific appropriations are approved. (The
State Journal, January 25, 1977). Michigan was the first
state to adopt such a fund.

The second occurred in 1980 when the Senate adopted new
budgeting procedures which required targets to be set before
appropriations could be approved. Some saw this as
reinforcing the target setting required by the prior BSF
legislation, others saw it as redundant.

Spending Reductions. Even though spending ceilings may
have been readjusted downward, sometimes it is necessary to
back away from appropriations commitments. The most
conspicuous efforts in this category are the spending
reductions mandated through executive orders described
previously in this chapter. In addition to these, however,
were other methods which were often taken before the heavy
axe of the executive orders was swung. These methods
included freezes in hiring, travel, and equipment purchases.
Often regarded as first maneuvers, it was these options
which the governor exercised in November 1978 when the
second recession seemed possible. As he said, "I must act
now to anticipate an economic downturn in order to meet the
constitutional obligations of a balanced budget." (The

Detroit News, November 23, 1978)

88

Mandated Lapses. Another means used to withdraw from
appropriations commitments, mandated lapses are "agreements
between the Executive Office and the Legislature to transfer
appropriations from various line item appropriations into
the Executive or Administrative component appropriation line
item, such as a retirement line item" (Heckman, 1981b).
Michigan policymakers resorted to mandated lapses on at
least two occasions. In 1979-80, $60.8 million was
recaptured through this means and $31.8 million in 1981—82
(Heckman 1981a).

wage Reductions. Personnel costs in most public
organizations account for about 80 percent of operating
costs. Therefore it is not surprising that efforts to
reduce spending would involve some sort of wage reductions.
In Michigan, wage reductions took several forms. Some
involved down-sizing of jobs in which full-time jobs were
made into three-quarter or half-time positions. Others
included voluntary wage reductions, voluntary wage
deferrals, mandatory wage reductions including cuts in total
pay and total hours that could be worked and mandatory
payless days. For example, in 1980—81, Michigan attempted to
cut a proposed nine percent pay increase for civil service
workers to 4.5 percent, saving the GF/GP about $43 million.
Later the executive office required that executive branch
employees work six days without pay, which saved another
estimated $12 million. Some legislative employees had one
day's pay deducted from their bi-weekly paycheck, and had to

take 16 days off, some of which were discretionary, saving

89
another $700,000 (Heckman 1981b).

Another approach involved deferring pay increases. In
a hotly contested decision in August 1982, the Michigan
Civil Service Commission reversed its April 1982 decision to
approve a five percent pay increase for 17,000 state workers
and moved to delay the increase until the beginning of the
new fiscal year in October. Three public employee unions
filed court suits that the commission violated
constitutionally set procedures for setting civil service
wages. They won. The following year the courts ruled that
the governor's need to reduce spending does not limit the
civil service commission's power to set wages (Michigan
Association of Governmental Employees v. Michigan Civil
Service Commission (1983) 336 N.W.2d 463, 125 Mich. App.
180).

Of course the ultimate tactic in wage reduction was
layoffs. As mentioned previously, during this period the
number of state employees was reduced by about 16,000. The
cost of this in terms of employee morale has never been
fully documented, but is described in terms of one
department in Mowbray, Tableman and Gould (1984).

One feature of the layoffs involved what came to be
known as "bumping." A pink-slipped employee could save his
or her job by identifying someone with less seniority and.
in effect, commandeering that person's position. The state
retained presumably more experienced and qualified employees
that way, but the dislocations were enormous. People

employed in one department such as Social Services might

90
wind up in Treasury doing quite unrelated work. Although
some found the changes energizing, its indirect net cost in
terms of lost efficiency has yet to be studied
comprehensively. However, House (1981), among others, has
identified bumping as questionable policy akin to penny
wisdom and pound foolishness.

Delayed Payments. Another tactic used was deferred
payments. This took several forms. The most controversial
were the delays in installment payments to public
institutions. Schools, colleges, universities and local
governments were all affected as in, for example, the
February 1982 decision to defer $225 million in school aid,
higher education and local revenue sharing payments and a
similar decision in January 1983. The argument at the time
was that the payments would be made up later, but as late as
November 1986, some were still waiting for restitution.

The other form was delay in payments to contractors. In
‘October 1980, faced with a cash crunch, this was one of the
options chosen by the State of Michigan. That was the same
month that banks cut off the state's short—term credit
because lawmakers had been unable to formulate a budget.

Negative Appropriations. This was used to penalize
agencies which had overspent funds. The overrun is built
into the following year's appropriation which, if stable.
means that the agency has, in effect, reduced resources for
the following year (Heckman 1981b).

But spending reductions were never easy. One reason

why expenditures were so hard to out had to do with the

91
increasing demand for social services. One analysis (Heckman
1981a) showed that AFDC and General Assistance cases
increased 50 percent between October 1979 and April 1981.
During the 1980-82 period, there was over $600 million in
supplemental spending, 80 percent of which went to the
Department of Social Services which experienced
unprecedented increases in welfare caseloads. The Citizens
Research Council (1982) estimated that $100 million of that
was actually never appropriated but simply runover in
accounts, "indicative of a breakdown in legislative control
of spending."

One of the reasons for the upsurge in welfare caseloads
was the incapacity of unemployment insurance to meet demand.
A few facts about the Unemployment Insurance Trust Fund will
explain this. The Unemployment Insurance Trust Fund is a
reserve against which insured unemployed workers may draw
benefits up to a maximum of 39 weeks, almost 10 months, of
'which the first 26 weeks are funded by employers and the
remaining 13 by state and federal government. These
benefits are paid through the Michigan Employment Security
Commission (MESC), a division of the state's Department of
Labor. The devastation of the recessions in both 1974—75
and 1979-1982 were such that funds were rapidly exhausted.
Workers who were without other benefits then sought welfare
assistance. The other aspect of this incapacity, of course,
derived from the fact that unemployment insurance was
available to only about a third of the state's unemployed

workers (Blaustein 1982). Again, those with no other

92
recourse looked to welfare benefits from the state.

Although the state GF/GP budget was not directly impacted
by the fund exhaustion and consequent borrowing until March
1982 when a change in the law made states liable for interest
on the debt (prior to that borrowing was interest free). the
GF/SP was and the consequent increase in employer taxes needed
to repay the fund tended to depress other efforts to attract
private industry to Michigan and, in any case, made existing
employers wary of other kinds of tax increases.

Another reason why costs were so hard to contain was
that some were never put into the equation. The cost of the
debt, for example, was never budgeted. In order to meet
obligations during the 1980—82 crisis, Michigan engaged in a
great deal of short—term borrowing to get working capital.
Interest on these notes was estimated at $176 million, but it
was never budgeted (Citizens Research Council 1982).

3. Stabilizing an Uncertain Fiscal Environment.

Countercyclical Economic Measures. The most direct
effort in this area involved establishment of the Budget
Stabilization Fund (BSF), described previously. As the name
suggests, the BSF was primarily an attempt to stabilize
revenue flows. The Stabilization Fund works by formula tied
to the level of Michigan Personal Income (MPI). If real
(i.e., deflated less transfer payments) growth is greater
than two percent, then the state must pay into the fund.
Payouts in the form of limited quarterly withdrawals for
public works projects are allowed under two conditions: a)

if unemployment levels reach eight percent (larger

93
withdrawals are allowed if it exceeds 12 percent) (House
Taxation Committee 1983) and b) if there is negative growth
in the adjusted MPI (Bryan and Howard 1979).

The BSF was recommended by the Michigan Economic Action
Council which was chaired by Michael Blumenthal, a prominent
Michigan industrialist and later Secretary of the Treasury
under President Carter. Adoption of the BSF was a joint
effort of the Speaker of the House, Bobby Grim, and Governor
Milliken. As one legislative aide said,

"My memory is that Crim took the idea to Milliken
and said, 'Look, we've got to take a look at some
fundamental things that need to be done here.‘ It
was basically a recognition that we had a cyclical
economy and that we needed to adopt something that
would put us in a situation where in the good
economic years we did two things: we controlled
spending by adopting a formula that forced us to put
some money aside and secondly, kept us from reducing
the rate of taxation, i.e., kept a certain base
level of taxation but controlled the growth of that
base and allowed us to take it out on the low side."

But the BSF, good as it was, was limited. As the same
aide went to say,

"The concept of the BFS clearly is not one that
would allow you to handle something like the 80—82
(crisis). It could handle a 75-76 recession, which
I guess you might characterize as more of a normal
recession, but could not even begin to handle
something like an 80-82 crisis, which for this state
was a depression, not a recession.

As we finally went into the recession of the early
1980s, we might have had $450 million or $500 if

we hadn't made that (previous cut in BSF funding).
But 1980,'81, '82 and '83 collectively were such
horrendous years that the existence of another $200
million or so in the fund would not have made a
material difference in the way we had to respond to
that time-—we blew through that money so fast."

In its August 1984 issue, the Michigan Municipal;Review

94
graphed the impact of the BSF on diminishing the fiscal
crisis. It sustains this respondent's thesis. That graph
is reproduced in Figure 4.1.

Welcome as the BSF was. however, it was only designed
to deal with future spending. It was not designed to take
care of already incurred debts which had been, in effect.
rolled over since 1975 (Citizens Research Council 1982).

Other countercyclical economic measures taken by the
State of Michigan certainly include the numerous economic
development programs endorsed annually but particularly in
the governor's budget messages of 1977, the economic
development package proposed by the governor in 1981 and the
budget messages of 1982 and 1983.

Political Coalition Building. Although discussed more
fully in later chapters, this was clearly a stabilizing
tactic needed to sustain the political leadership through
the state's fiscal crisis. It was most clearly seen in the
procedures used in dealing with the executive orders
mandating budget cuts.

Rationalization of the Budget Process. Some would not
characterize budget reform as an attempt to reduce
environmental uncertainty. However, it should certainly be
included because these reforms typically have the effect, in
part, of controlling uncertainty internal to the system by
requiring enhanced planning.

During the period under study, the State of Michigan
saw a progression of attempts at budget reform, even though

not all of were precipitated by fiscal crisis. Among them:

95

V8. 33934“
0303... 390525. c3593.

mu 3 a no 3

 

Cu no;

3‘ «a 33

L

{80¢ 19:..15 92 (um up!
36— .NN fast .55; 022‘! all 259.com (um .50 In .0 0958
3.... .2 55.. .23 .32 .653 .0... 2.5m .63.. 2.. .o 839..

 

.03 thU KUDKO .UUXU

 

:3. 02?. 3.2.
29:24.35 Boone 8....

o
v
N
o

 

 

 

 

 

 

 

#30 > (a umm

 

 

 

 

 

up“

 

 

 

 

 

 

 

 

33 = m:
.28

 

 

 

 

Inlululmnluldal

 

393234 emol—

 

 

 

 

 

m32w>w¢ .dQuD. 023$ 4(mewO

 

 

o o. 80'
M . s...
3.2

 

F 3.282. 44285; 19.2. as. _ 3.9

 

3.0.2.:
A c.
.CDOE4
mg

a O u

00...an .oacc<
.o .50.:

do no

a .52

mam— mpm- 30.34 .32”. .35 5330 pc- uniu 269.com 59:92 I»

H.v gunman

96
in 1971, the House Fiscal Agency attempted to implement a
program budgeting system and, although this system was not
ultimately used, a variation was introduced by the executive
office in 1972-73. In 1975 there was attempted introduction
of a legislatively sponsored program evaluation zero-base
budget system. In 1976—77, the executive budget began to be
developed according to target budget concepts in which each
department submitted requests based on 95, 100, and 108
percent support of prior year appropriations. Programs were
also ranked according to priority. The 1981-82 budget was
developed on a minimum operating level approach and the
Management and Budget Act of 1984 consolidated budget
practice and tightened reporting requirements.

Tactical fielding Decisions. Sometimes the environment
seems so unstable that the only known is the immediate past.
When revenue and spending patterns seemed most inscrutable
in mid-1980, Michigan lawmakers opted not to pass a
full—year budget for 1980-81, but passed an interim measure
for October—December instead that, in effect, adopted going
rates based on those of the previous fiscal year. The
interim budget was ultimately repealed and folded into the
full budget when it was passed. (Heckman 1981b).

This decision was, however, not without cost. Michigan
lost what little remained of its credit standing and banks
refused to issue the state loans because there was no plan,
i.e., budget, available on which repayment could be plotted.

The attempt to peer into the future. The key to

controlling the environment is prediction. The State of

97
Michigan also attempted to do that. State officials signed
a contract with the University of Michigan to fund
development of the University of Michigan model for
forecasting Michigan tax revenue and the Michigan economy.
"The principal reason was that legislative leadership simply
did not trust what the governor's office, this (DMB)
department, and this office (Revenue and Tax Analysis) was
telling them and had every reason to believe that (the
budget director) was not so much lying as withholding
information. In fact, I know that to be the case."

Despite the availability of the model and the
assistance of world-class economists, revenues in the crisis
period (1980, 1981 and 1982) were overestimated by $1.3
billion, 92 percent of which was appropriated (Citizens
Research Council 1982).

Thus, there were many options available to state
government to confront a fiscal crisis and Michigan
policymakers exercised them all. There were efforts to
raise revenues, reduce spending and reduce environmental
uncertainty. All were done amid enormous controversy and
with considerable pain to policymakers and citizens alike.
A selected chronology of those events and the state's
response appears in Appendix B.

D. Summary

In this chapter we have attempted to describe the
research setting for this study, giving some of the flavor
of the complex events which gave rise to the budget crisis

and the response of state government. In order to do this.

98
we have first defined budgeting and described the budget.
process as it has been carried out in the State of Michigan.
We have also described the distribution of the budget,
including the total state budget and the general fund
general purpose section which is the focus of this study.

We have attempted to describe functionally the critical
events which shaped the budget process in the cutback
periods and the response of Michigan policymakers to those
events. Finally, we have included a chronology (Appendix B)
of selected activities during the period under study,
1963-1984, which provided the raw data for the functional
description.

With this background we can now proceed to report
specific findings of the hypotheses identified in Chapter
Three. An evaluation of the first, the linearity argument.

follows in Chapter Five.

99
Notes to Chapter Four

Much of the information in this section concerning

the constitutional and statutory requirements imposed on
the Michigan budget and some of their changes are drawn
from an invaluable summary put together by the House
Taxation Committee (1983).

The total spending limit works out to about ten percent
of total personal income in Michigan for the previous
calendar year although that figure has fluctuated from a
low of 8.45 percent in 1974-75 to a high of 10.01 in
1978-79, the year the Tax Limitation (Headlee) Amendment
was adopted. Even in the depths of the Michigan
economic recession in 1981-82, the percentage was 8.61.
somewhat above the 1974—75 low (Senate Fiscal Agency
1985:10). The internal local share is about 42 percent
(of the 10 percent) and was also based on the amount
local governments were receiving in FY 1979, the year
the tax limitation took effect. (House Taxation
Committee 1983:1).

It is interesting to note that expenditure reductions do
not have to be proportionate as well. In a suit brought
against the Department of Management and Budget by the
Michigan Association of Counties, the courts held that
the reductions do not have to be proportionate to a
decline in estimated revenue. The counties were worried
about maintaining their revenue sharing funds and lost.
(1984) 345 N.W. 2nd 584, 418 Mich. 667.

In FY 1982-83 this amounted to about $625 million (House
Taxation Committee, 1983:1).

An important additional constitutionally based feature
of the Michigan budget is the line item veto. The
governor may delete specific items from appropriations
bills passed by the legislature (Article V, Section 19).
Although the gubernatorial line—item veto was not a
critical factor in this study, it is an important
characteristic of the budgetary process in Michigan as
it is in 40 other states and so is mentioned in this
context (Yondorf and Summers 1983:66).

Unlike Congress where appropriations bills can only be
introduced in the House of Representatives, such bills
can be introduced in either house in the Michigan
Legislature which allows both houses to work
simultaneously on different aspects of the budget and,
in the long run. saves a considerable amount of time.

Generally, all bills are introduced in both houses, but
only half are initially taken up in either house. The
same categories of bills used to be considered by the

same house each year (with the exception of the School

10.

100

Aid bill which alternates annuallY). but more recent
practice has the bills alternating the house of origin
each year. The bills receive their greatest scrutiny
in the house subcommittee which first hears them and
more general attention by the subcommittee of the other
house (Legislative Service Bureau 1987:7).

There is an exception to this division of work. Capital
outlay proposals are considered by a joint subcommittee
of twelve members, six from each of the respective
appropriations committees (Legislative Service Bureau
1984:8).

On occasion, an entirely separate set of budget bills
has been introduced by members of the other party. This
occurred, for example, in the mid-19703 when both houses
of the legislature were controlled by one party, the
governor belonged to the other, and both branches were
strongly at odds over policy objectives.

The subcommittees are numerous. In the 1985 Legislature
there were seventeen subcommittees in the House and
twenty in the Senate (Kennedy and Harris 1985:9).

It is interesting to note that the legislature moved

to regularize the format of the appropriations bills in
1981 with the adoption of Public Act 18. This act
"regulated appropriations, allocations, and
expenditures; provides for expenditure reductions,
accounting and auditing procedures: provides for general
legislative oversight of the budgetary process; makes
stipulations concerning the lapsing of funds; and
requires certain reports. The purpose of compiling the
standard boilerplate into one statute was to reduce bill
printing costs and to prevent inconsistencies in the
various bills." (Legislative Service Bureau 1987:6). It
is interesting to note that this move to control the
budget format came just at a time when external
uncertainties shaping budget content, i.e., the fiscal
crisis, were most severe.

Some writers observe that the oil shortage, in turn, was
a direct response by Arab oil producers to a fundamental
change in U. S. monetary policy, i.e., a decision to let
the dollar float (see, e.g., William Greider. "Annals
of Finance," The New Yorker, November 9, 1987).

Interview with Douglas Drake, Director of the
Office of Revenue and Taxation, Department of Management
and Budget, and former Democratic Staff Director to the
House Taxation Committee, September 25, 1986.

Chapter Five
Findings: The Linearity Argument
I. Introduction

In this chapter we analyze the first of the hypotheses
identified in the research design. That is whether the
linear model, i.e., the functional relationship between
expenditures and prior—year appropriations, fails to explain
budgetary behavior in a cutback situation.

II. The Analysis

Linearity has been advanced as one of the most
appealing aspects of incrementalism. By this we mean that
budgetary decisions, whether requests, appropriations or
expenditures bear a direct relationship to some prior
budgetary decision concerning requests, appropriations or
expenditures. The appeal of the linearity argument lies in
its explanatory power. If a linear relationship exists
between expenditures and appropriations, then we can predict
:that budgetary spending will occur in constant absolute
amounts for given appropriations.

Linearity of budgetary decision rules is that dimension
of incrementalism seen in the various quantitative goodness
of fit models which have been developed to explain the
budgetary process. Most of these models (e.g., Davis,
Dempster and Wildavsky 1966, 1971; Hoole 1976, Gist 1982,
Hendrick 1986) have focused on the relationship between the
request and the appropriation, i.e., they have posited that
the budgetary appropriation is a linear function of a prior
request.

101

102

That interest should focus on the request-
appropriations relationship comes as no surprise. It is this
aspect of the request-appropriations—expenditure budget
cycle which especially captures the political drama of the
legislative process and the relationships between the
executive who makes the request and the legislature which
acts upon that request.

A. Focus on Expenditures as the Dependent Variable

An exception to this approach is found in the work of
Hoole, Handley and Ostrom (1979). Here, attention is
focused instead on the relationship between the expenditure
and the appropriation. They compare four different models
of expenditures in an attempt to explain budgetary behavior
of several international governmental organizations.

This approach was adopted in the current study.
Although interest is retained in the request and
appropriations relationship, the expenditure—appropriation
'relationship is explored as a surrogate for the
appropriation-request relationship to test the linearity
argument.

The reason for this choice is a logistical one. In the
Michigan budgetary cutback process, the appropriations
committees by law must either accept or reject completely
the governor's executive order, i.e., the cut back request.
Once approved by the appropriations committees, the
executive order becomes law. This process is explained in
detail in Chapter IV.

As we observed in that chapter, in the twenty-one years

103

under study, eighteen executive orders mandating budget cuts
were submitted by the governor and thirteen were approved. Of
the five disapproved, all were subsequently approved in modi—
fied form in a later executive order. Therefore, in separat-
ing out gubernatorial requests from legislative appropriations
in the cutback process, the nature of the executive order is
ambiguous. Whether the executive order should be interpreted
as the request, or the appropriation, or both is not clear.

In order to circumvent this problem, analysis of the
linear model is focused on the expenditure-appropriation rela—
tionship and the executive order is interpreted as the appro-
priation. This shift is theoretically justified because the
expenditure is conceptualized as a function of the appropria—
tion in the prior budget. Thus, the gubernatorial request is
subsumed in the equation. For example, expenditures by the
Department of Social Services in 1979-80 are seen as a func-
tion of the appropriations for that department in 1978-79, the
-prior budget. Since every budget has as part of its cycle a
request, an appropriation and an expenditure, the expenditures
of 1979-80 encompass the requests of 1979-80 and, arguably,
1978-79.

The linear model was specified as described in Chapter
Three, The Research Design:

Et 2 b At-i + at where

E a expenditure total

b = a fixed percentage of the prior budget

A a the total appropriation

e = the error term (factors not in the equation)

104
B. Statistical Considerations

Use of the usual regression technique, ordinary least
squares, poses problems for the analyst testing budgetary
models like that specified above. That is because the
ordinary least squares equation calls for inclusion of a
constant term (also called the intercept), which is the
value of the dependent variable when the value of the
independent variable is zero. This equation is
conventionally seen as:

Yt = a + bxt + et

In terms of the current budgetary model, the constant
would therefore be the value of expenditures when
appropriations are zero. Since this is nonsense, the
analyst must decide how to deal with the intercept.

One alternative recommended by Hoole (1976) calls for
the use of constrained least squares, a procedure in which
the intercept is forced through the origin, i.e., the total
,sum of squares is calculated from zero instead of from the
mean as in ordinary least squares. When this is done, the
value of the intercept becomes zero and the estimates
reported conform to the linear model described above.

Using constrained least squares is not without its
problems, however. Chief among these is the resulting
distortion of the estimate of the slope. This estimate will
make the slope appear much steeper than it is and leave the
researcher with biased information about the key
relationship that is being investigated. Therefore, this

approach was not used in this study.

105

Another alternative is to use the basic ordinary least
squares (OLS) estimation technique, report the constant and
interpret it in some fashion which is consistent with
budgetary practice. There is some precedent for this
approach in the literature. Hoole, Handley and Ostrom
(1979:929) proceed this way in order to preserve
comparability across several expenditure models being
tested. Some of these models call for an intercept and some
do not. Where the intercept is reported it is viewed as "a
constant amount for contingency factors."

There are other interpretations which may be applied to
the constant as well. Although the law of most states
mandates balanced budgets, i.e., that expenditures match
appropriations, such perfect efficiency is difficult to
achieve. Inevitably some funds are left over, returned to
the general fund, or in some cases, continued over to the
following budget. The constant could be viewed as that
lslack. Another interpretation is that the constant is
implicitly a kind of "floor" on which the annual
appropriation is built. Others (e.g., Gujarati 1978:52)
would argue that the constant is the average effect on
~expenditures of all the variables not in the model, i.e.,
all other environmental effects. In order to preserve some
comparability with the Hoole, Handley and Ostrom study which
is unique in its focus on expenditures, this analysis also
uses the OLS technique.

Two further observations regarding the statistical

analysis need to be made. They concern tests for

106
heteroskedacity and serial correlation.

Hetegoskedacity. One of the assumptions of the
regression model is that the error is independently
distributed with a constant variance, i.e., is
homoskedastic. This is particularly important where the
sample population includes observations drawn from
heterogeneous groups, e.g., groups of varying sizes. In
this analysis, however, data was analyzed separately for
each budget unit (department and fund) in a model containing
a single exogenous variable (plus a constant and an error
term). Therefore, testing for heteroskedacity did not
appear to be warranted in the initial analysis. Where
comparisons across departments seemed warranted in
subsequent analyses, the weighted least squares estimation
technique was used. In each case the weighted value was the
base, the lagged value of the appropriation.

Serial Correlation. An equally serious problem can be
[serial correlation, or autocorrelation, a condition in which
the errors are interrelated across observations. As Ostrom
(1978:24) notes, autocorrelation is often a problem in time
series analysis because errors that enter into a
relationship in one time period often carry over into the
next. Estimates obtained under conditions of serial
correlation are unbiased, i.e., they are an accurate
reflection of the true population parameters, but they no
longer are the most efficient, i.e., showing the smallest
variance. If there is positive serial correlation, the

estimates of the coefficient variances are likely to be

107
undervalued (and the R2 and f values correspondingly
inflated) leading the researcher to infer a relationship
exists when the null hypothesis is more likely true
(Hanushek and Jackson 1977: 156). Serial correlation is
usually positive rather than negative in most social and
economic data (Ostrom 1979).

The Durbin-Watson test was used to test for this
condition. This test is especially recommended for small
population sizes like that in this study and is the test
used in the Hoole, Handley and Ostrom (1979) expenditure
study.

The Durbin-Watson test is not without its limitations,
however. As Ostom (1978) points out, the test is not useful
when lagged endogenous variables appear in the equation. But
our variables are exogenous. (1)

Where the Durbin-Watson test suggested serial
correlation existed, disturbances were assumed to be caused
by a first order autoregressive process. Estimates were
then recalculated by an alternative method, the
Cochrane-Orcutt technique (Kmenta 1971:288).

III. The Initial Findings

Data was first analyzed for the entire state budget for
the twenty—one regular budget years using the Time Series
Processor Version 3.5 (Hall and Hall 1980). This was done
to establish a basic picture of the overall Michigan budget
and to see how the model fitted the data. Dummy variables
for intercept and slope were used to assess the effects of

the cutback budgets. These procedures can be summarized in

108
the following equations:
Simple: Et = a1 + biAt—i + eit (1)
Base Change: Et = a2 + bgAt_1 + gD2 + egt (2)
Marginal Change: Et = a3 + b3At-1 +

9D31At-1) + eat (3)

Complex: Et a4 + b4At-1 + gD4 +
905(At-1) + e4t (4)
where E = expenditure total

a = constant (intercept)

b = a fixed percentage of the prior budget

>
u

the total appropriation
g = estimate of the dummy variable
D = a dummy variable where

1 = regular budgets

O cutback budgets

e = the error term (factors not in the equation)
The results of the regression runs are reported in
_Table 5.1.

In this set of equations we find predictably high
coefficients of determination. The R23 are about .97. This
means that in these models, about 97 percent of the
variation in the dependent variable (the expenditures) is
explained by the independent variable (the lagged
appropriations) plus the pertinent dummies and the error
term. Furthermore, this statistic is significant at the .05
(actually the .01) level, suggesting that the results are

not due to chance. Although social scientists might rejoice

at such "full" explanation, it is unremarkable in the

109

Inn.wnm
IQN.TD?
xmo.~hm

xrn.mem

#0.
ha.
ea.

no.

.uiopLo ozfiyaucxm 830aLfio pin vwoazvora ansomvvm

60.“ we. we.

IND.V mo. no.

l-.‘.|'::l|!|.'lIIII"0!.l"Ulll'-l ll

it 13n—
Isowvaudfldauflats

mm. ooo.nev.nom ooo.~om.nu xvm.o.
e.g.mm
nvm.m oom.owm.mo ooo.vm..ve~ xe..-
Inv.o~

towaaxavwm 4¥JULDIOZQL£UOQ

llll'u|.l'""'!l.l-IIII'II'.--l'0'l'oli'l'Il'loli'

# um chem a
IIIII inlzlmtrjo somyvaczlll lillaliw
nvmuZV

emhtomayeu mm "ems.-voa. m.eyoc c.3548:
mmhcznsmu LzuHeauumou .Juaon «a

..n aHSaL

cowaauozm .zomM£U«c so I#num nouzaom

.Hosq. no. any as accouunzoum.
as. no. as. ooo.anm.finfi :ogaxou
me. as. VA.“ ooo.ow~.mo~ omzqgu

nacmeqz

we. no.” aw. oa~.nom.nm omcaru
Chen

no. me. xe..~ coo.nmv.ov~ oHqum

um aao.m » ouam .ouoz
mza: IIIII ulmvam

Guru O¥a¥m
quJ

110
budgetary literature. These types of models analyzed in time
series frequently produce such results. What these
statistics do reveal, however, is that the linear model
holds the Michigan data very well. This model (and these
variations) continues to be robust even in cutback
circumstances, so far as the overall state budget is
concerned. Now let us consider these models in more detail.

Simple. The simple model incorporates all budgets,
both regular and cutback. It is a composite picture of
budgetary decisions across thirty-four budgets in the
twenty-one year period. In a period in which total
expenditures for the twenty—five categories grew from $524
million to $5.3 billion with intervening episodes of reduced
spending, the average base is about $246 million. It is
statistically significant. The slope is .98 which means
that $.98 (plus or minus 3.06, the value of the standard
error times the appropriate t statistic for the 95 percent
(confidence level) of every dollar appropriated in the prior
year was spent. As Michigan state law mandates a balanced
budget, this should come as no surprise, but as a measure of
administrative efficiency, this is a creditable track record
indeed. This value is also statistically significant.

Base Change. With this model we are able to assess
some of the impact of the cutback budgets. It helps us to
compare the average (mean) bases of the twenty-one regular
budgets with the average bases of the thirteen cutback
budgets. The coefficients tell us that the average base

expenditures for the twenty—one regular budgets are about

111
$300 million (a value determined by combining the value of the
base with the additive dummy base) and that the average base
expenditures for the thirteen cutback budgets is about $35.4
million. This is intuitively satisfactory because we would
expect that base expenditures in the regular, or normal,
budgets would be higher than those in the cutback budgets and
that the combined base (found in the simple model) would be
somewhere in between.

We can see that the estimate of the additive dummy
remains statistically significant but that the estimate of
the base of the cutback budgets is not. This leads us to
conclude that the reason the model is so robust in the
simple version is the overwhelming impact of the regular
budgets. In other words, the changes occurring in the bases
of the cutback budgets are not statistically significant
and could have occurred by chance.

Marggnal Change. This version of the model gives

 

us added insight into the changes occurring in the slope
(margin) when we compare the regular budgets with the
cutback budgets. The estimates show that for every dollar
appropriated in the prior year, $1.02 (i.e., .95 plus .07)
was spent, give or take $.04 at the 95 percent confidence
level. For the thirteen cutback budgets, the tendency to
spend was lower, i.e., $.95 for every dollar appropriated,
but the error is larger, i.e., plus or minus $.06.

Once again this pattern has intuitive appeal. The
tendency to spend is higher during the normal years, lowest

during the cutback periods and somewhere in between when

112
the budgets are combined. Furthermore, these changes are all
statistically significant at the .05 (actually at the .01)
level.

Complex. Finally, data was analyzed in a model which
included both dummy variables. This was done to assess
their combined effects. The base averages for the regular
budgets drop to about $226 million and to $171 million for
the cutback budgets but neither figure is statistically
significant. The slope of the twenty-one regular budgets
also drops slightly to $1.02, but even this is not
statistically significant. The only remaining statistically
significant estimate is that of the thirteen cutback
budgets, which is $.96, but it has a larger standard error.

We can conclude from this exercise that the linear
model remains quite useful as an explanation of budgetary
decision making for the state budget as a whole and that it
does provide some insights about the separate effects on the
.margin when regular and cutback budgets are compared. It
is less useful, however, when attempting to analyze their
interactive effects.

IV. More Extreme Tests

The model was seen to be quite useful when applied to
the budget as a whole, i.e., to expenditures across
twenty-five budget categories. The budget as a whole,
however, is an average. What would happen if the model were
tested with component parts which were extreme cases?

We had originally hypothesized that the model would be

less useful in severe cutback cases. In order to test this,

113
some means had to be devised to identify those budget
categories which had experienced more serious cutbacks.
Accordingly, the mean percentage change each year in
appropriations for each of the twenty—five department/fund
categories over the twenty-one year period was calculated.
Percentage change for the twenty-one, regular budgets was
calculated in addition to the change for all thirty-four
budgets. A rank-order index of change, or volatility, was
then constructed to show which categories changed most. The
index was constructed in three different ways: through
simple addition, squared percentages, and as whole numbers.
The whole number scale was selected because it more clearly
reflected the range of change compared to the additive scale
and was a simpler clone of the scale of squared percentages.
The index is shown in Table 5.2 and Figure 5.1.

Before proceeding to apply the index, some observations
about the index itself are in order. The first and most
tobvious is that a range of change is indeed apparent and
that it is fairly broad, ranging from over 50 percent for
capital outlay to barely over eleven percent for the
Department of Mental Health for the twenty—one regular
budgets. That range expands to over 500 percent for capital
outlay and extends down to a bit over seven percent for
Mental Health when the thirteen cutback budgets are
included.

The second observation which must be made is the fairly
consistent pattern between the two budget columns. This

shows that budget categories that are relatively more

114

Table 5.2

Volatility Index
Percent Change (Whole Number)
in Appropriations by Department

21 34 Percentage
Dept Budgets Budgets Difference

AG 17.58 13.92 3.66
ATT 16.46 1.34 5.12
CR 22.22 14.33 7.89
CS 12.06 8.28 3.78
COM 23.39 14.91 8.48
COR 15.15 9.79 5.36
ED 21.53 14.57 6.96
EXE 24.16 17.76 6.40
HED 12.13 9.29 2.84
JUD 21.90 13.56) 8.34
LAB 32.32 22.98 9.34
LEG 17.97 11.32 6.65
L&R 13.84 10.21 3.63
DMB 37.16 24.29 12.87
DMH 11.03 7.38 3.65
MIL 15.39 10.72 4.67
DNR 20.16 13.61 6.55
DPH 15.45 11.47 3.98
SCH 24.89 20.03 4.86
DSS 17.82 11.90 5.92
ST 32.76 22.35 10.41
POL 13.61 9.42 4.19
TRS 11.82 8.13 3.69
DS 34.29 20.84 13.45
CO 53.49 526.56 ~473.07
AVE 13.14 10.04 3.10
Standard Deviation 93.48

Standard Deviation
(less Capital Outlay) 4.17

Source: State of Michigan. Executive Budgets,
1963—1984 and various Executive Orders.
Note: See Appendix A for explanation of
abbreviations.

.mpopuo o>fiu=uoxm
m=OALm> was «waalmcoa .muowpsm o>fiusooxm .cmMacoaz mo oumum "oopsom

O .00 1. PO 338 m
W%&D%W.UdVP.m%MflNBOVXWOWOSPO
HlSSGBHHUHDSWOBOHDBVHBSLBO

115

 

msmmpzm £00330+u23mmm 88o

mwmmpnm .6393. a om

scmrctoama LE mcozoraocaad E macaro Emucma

SE @328

H.m ouswam

116
volatile in normal times are also those that are more
volatile in cutback periods. The relative lack of change in
rank order. however, does mask some differences in those
categories which sustained relatively more change under the
cutback budgets. This only becomes apparent when the
percentage differences are examined and compared to the
regular budget ordering. In this case, five categories: the
Department of Agriculture, the Executive, School Aid, and
the Departments of Treasury and Corrections change positions
by five or more ranks.

Budget categories were then grouped by deviation from
the mean. As extreme changes in the capital outlay category
greatly distorted the calculations, separate computations
were made for the standard deviation, with and without this
category. Budget categories lying outside two standard
deviations from the mean on the smaller scale were then
selected for the analysis. These were: Capital Outlay,
.Debt Service, the Department of Management and Budget, the
Departments of State and Labor, and the Department of
Commerce. All exceeded a value of 8.34.

Data was then analyzed for each of these budget
categories across the twenty-one regular and thirteen
cutback budgets. As with the budget totals data, dummy
variables were used to assess the impact of the cutback
budgets. Results of these analyses are reported in Tables
5.3 through 5.9. Analysis of these results follows each
table.

Capital Outlay. This budget category is clearly the

117
most volatile of all. That this is so is not surprising.
Capital outlay is that part of the budget devoted to
large-scale construction and maintenance of long-term
additions to the state's fixed assets. Such projects may
range from prisons to waterways and include such costs as
planning, site acquisition and development, engineering
studies, remodeling and repair, fire protection, energy
conservation, as well as those for actual construction
(Office of the Budget, n.d.).

Capital outlay is also the classic pork barrel. As one
informant described it, "capital outlay is probably the most
political, sensitive budget area there is."

Because these projects tend to be large, discreet,
efforts, budgeting patterns tend to be lumpy even in normal
times. These characteristics also tend to make the capital
outlay budget most vulnerable to budgetary cutbacks. If
times are bad, acquisition of a new whatever can simply be
.delayed until more money is available. For example, in
fiscal year 1982-83, when Michigan was still in the grips of
the recent recession, capital outlay appropriations were cut
sixty percent below those of the previous year and a
mid-year executive order reduced the amount almost another
100 percent. From a budget of $63 million in 1981-82,
capital outlay appropriations in mid-1983 had been reduced
to $355,000. In the following fiscal year, 1983-84 which
was the first up—swing year in the recovery, appropriations
for capital outlay were restored to almost $58 million, an

enormous increase.

118

Capital outlay expenditures also may not evenly reflect
prior year appropriations, as appropriations tend to be made
for the needs of the current year which may differ
significantly from the previous year. Although funds for
longer term projects are appropriated in annual increments
in the context of a multi—year authorization which is "not
to exceed" a certain amount, the mix of projects naturally
changes each year.

These conditions are reflected in the results seen in

Table 5-3- The R2 for the cluster of models never exceeds
twenty percent and is lowest (nine percent) when all
budgets, regular and cutback, are included in the equation.
Even in normal times, appropriations in the prior year
account for only about twenty percent of the variation in
expenditures.

Coefficients in these models vary considerably from
those reported for budget totals (Table 5.1). Here we find
.that base for the combined regular and cutback budgets at a
statistically significant $44.5 million but it is only about
$40 million for the regular budgets alone. Indeed, the base
is higher (about $49 million) for the cutback budgets alone,
but none of the changes are significant. Spending in the
cutback budgets tends to be at a slightly higher rate ($.34
per $1.00 appropriated-—also statistically significant) than
for the regular budgets ($.18), but the difference is not
quite significant at the .05 level. The complex version
mirrors the relationships in the base change and marginal

change models but it is not statistically significant.

119

DM.N on.
IDD.M 0N.
xvv.m ON.

M0.N GD.

'0'...“ Il'..l'||'n' '8' '00'IIoI 'I'Ol"'o'i"l-l'--|i""-|'o'i'|.-I|'O't'-l..|-!'i'|.."'o"l|"'

.uusmnrm osayaucxm aJOaLis 1:- Tfiduzvoafl .maomflam IzvaUUIm .comm£0m: mo 0&0am "CULDOM

..os.. no. .25 a. accoucuzmumz

mv.- .m. so.- um.: oom.e.v.fifi o:m.ooo.v: om.. «N. ew. neo.~ oo..nnn.vv xo.a:ou

.o.m; so. 3... xan.~ as. wm. xno.m oom.mnn.~v smears
Hacwmte:

aa.fi- o.«.nav.v onn.enn.mz we.“ as. am. x»~.v aon.mo«.or smears
Chem

up.. 5.. 8.. xe..v oom.wnv.vv oHQth

COwwatmwum auSULOI€£~L£Uoo

 

e um eao.m r em case 5 mm oaon a cane .ouo:
mtljo :Iltlmrtzo ebwuwspcsliu IIIIII CmeQ: IIIII #omvam
-mshuauufiaheflazi

nvmuZV

vmoflsvoefi motseuucaazm magpao Hauaaqu
mmuccacmm LzmHuHmuuoo .umgo: maqu.

m.n ens.»

120
Part of the reason for the curious estimates found in
these models may lie in the fact that appropriations for
capital outlay showed annual reductions in fourteen out of
the thirty—four budgets. Only five of these were cutback
budgets.

Debt Service. Debt service is that part of the budget

 

devoted to payment of principal and interest on state debts.
For the purpose of this analysis it also includes transfers
and grants such as payments to the State Employees'
Retirement Fund, workers' compensation insurance premiums,
grants for community development training, regional
planning, and other projects. Like capital outlay, these
features also tend to make this category a political
porkbarrel. Debt service is separately itemized in some
budgets and is combined with grant and transfers in others.
Therefore, for the purpose of this analysis, both categories
were combined. It is important to remember this because in
.the cutback orders, cutbacks in grants largely accounted for
the reductions in this combined category. The results of the

regression analysis on this data are shown in Table 5.4.

Although the 329 for the OLS estimates suggest that the
model explains about one-fourth of the variance in
expenditures, the errors are suspiciously serially
correlated. Alternative results produced with the
Cochrane-Orcutt technique show virtually no explanation at
all. The model is not useful with this data. Why this
should be so is not entirely clear. However, if we compare

the percentage change in appropriations the previous year

121

00.
ON.
60.

-, .

.wLoULo 03«#300Im

no. VM.H! mm. Qm.|
ac. ~B.I mo. VD.
n99.

Yea.

mo.-

uDOaLio 3:0 vwmnivoou nw#omv3m 03m&:Uixm .camm£0mc $0 0&0um "cuznom

..o:e. no. .55 an a:qu.u.:m.mx

nl'"l'-l'i'""-l'l'l'."!'-'l‘.'l'l|

oom.pnm.mu oov.mno.e~ ms. mu. 6.. x»..m
m..- on. «2.- xvv.v
o.v.mmm.o emm.am - mm.. 6.. o:.. xov.v
om.- 6.. 69.- xnn.v

sawuuxmymu u¥30LDIitOL£UOU

cav..n..so

ooo.omn.m..
ooo.voo.n..
coo.ono.v..

Isnatoo

imcs£0
notmeq:

Omcszo
Chem
o.ax.m

I'll.-l".l 'Il.'|"0'.l' I'Ol'-'l| 'II' |"l'-nl-" I.'|l't'i'"'I|!'pl""'|-tln’-""--O'i'l..|'l.'i":"'I'I.'"-||!'-"Il|!l--':"!|

u

we a ma eao.m
31:30
:os.aau..a.e.::-

y

mm cage e um aao.m a
IIIII mIIDD somyvaczlli I:II!:mmkztlillltz
Avmnzu

VQGH!Voou ROLaédv2lQ3u cuiokam unsa
muhcnnhmu bzumuumuuou .Juaot MEMZHJ

T.m smash

.oeo:
someao

122
with the percentage change in expenditures for the following
year, we find that both are negative or positive in only
thirteen of the budgets. Of the others, five show no
change, and the remainder show mixed patterns, i.e., when
appropriations increase, expenditures decrease, and vice
versa. Moreover, a decrease in appropriations matched with
an increase in expenditures occurred twice as often as the
reverse, i.e., an increase in appropriations matched with a
decrease in expenditures.

Mangggment and Budggg. The budget category showing the
third highest percentage change between the regular and
cutback budgets was the Department of Management and Budget.
Estimates for this category are reported in Table 5.5

Unlike some of the other budget categories analyzed in
this chapter, data for the Department of Management and
Budget responded to Ordinary Least Squares estimation
without evidence of serial correlation. Therefore, it is
.these estimates which are discussed here.

As the name implies, the Department of Management and
Budget is that unit in Michigan State Government charged
with development of the state budget and with management of
state properties including office services and purchasing as
well as oversight of management practices. Three huge
retirement systems are managed by the department including
those for public school, state and municipal employees. In
addition, under the departmental umbrella function a number
of specialized commissions such as those for toxic substance

control, the arts, Indian affairs, women and Spanish

123

wa.vo No.
xno.a¢ ho.
leo.wo ND.
Inu.moN #0.

a NE

.wwomvam 03m¥2061m uaowLae pt! Moofilmeou

an. .m.. me. «7.-
.m. wk. mm.
.o.
5 mm oao.m a
mtxzn IIIIIII
-os.vqu..a.u.ac-
wes.-voo.

coo.n~e.no mmo.on~-

con.n~g.wm onv.nnn

anacflvnm

xmm.n MD."
zom.NH no.
lov.mH no.
xm~.7n co.

uOLQJUm #ucoq mLocvao

mm sham
tartan Osmawtvclllls

AVMIZV

w um
lllllll :mmLo:

03m#auoxu

.cnmm50m: wo owovm nouxaom

..oso. no. as. a. acqu.e.zm.mx

 

rodatou

Outlso
”ordain:

Catatu
anon
o.ax.m

o..m vv.. oo..vo~..c
~v.m xw..~ oao.mno.oo
~n.o on.. aoo.nn~..o
~n.o xe..~ oo~.vno..o
ombum y Once

w0L3#«pciaIm aomvam use #coxomecflc no vCOtvkodco

Mubanhmw bszuHmmeo
n.n Can.»

.Jmoo: mmuzua

.ouo:
anmvao

124
speakers. The departmental director is appointed directly
by the governor.

In this data set, the cluster of models show a high
degree of explained variation between expenditures and prior
year appropriations, and all of the equations are
statistically significant at the .05 level. While only the
base in two of these models is statistically significant,
all of the slopes are. They show that this department was a
growth area for all thirty—four budgets, i.e., DMB officials
spent about $8.52 for each dollar appropriated to their
department in the prior year's budget but that this dropped
ten cents (i.e., to $8.42) when the cutback budgets are
taken alone. One obvious reasons for this is that the
department experienced cutbacks in appropriations in
two—thirds (nine) of the thirteen cutback budgets.

If we consider only the regular budgets (although the
slope change here is not statistically significant), the
department spent $8.65 for each dollar appropriated in the
prior budget year, and the standard error is actually
larger. This may be explained by the fact that in the years
up to 1971-72, there is a clear pattern of slight
overspending in every budget. The department also received
a substantial increase (250 percent) in appropriations in
1973—74, the year its reorganization took effect. and other
increases (91 percent each) in 1977-78 and 1982-83. Given
the lumpiness of this data, it is somewhat surprising that
the model works as well as it does here.

Following the Department of Management and Budget, the

125
budget category showing the greatest difference in change
between the regular and cutback budgets is the Department of
State.

QEpartment of State. Inclusion of the Department of
State in this list comes as a bit of a surprise. When one
thinks of this department one thinks of activities that are
quintessential obligations of state government:
administration of elections and vehicle registration and
driver licensing. The department also controls the state
seal and is responsible for maintaining the state museum and
archives. Not the sort of thing likely to promote volatile
budgetary behavior. It is one of the smaller departments in
state government and its head, the Secretary, is elected and
a constitutional officer of the state.

Estimates derived from this data are reported in Table
5.6. Once again the cluster of models show a fairly high

degree of explanation, i.e., the R23 stand at 53 percent and

all are statistically significant.

Like the overall budget totals (Table 5.1), the base
for the twenty—one budgets alone is a slight bit higher
($2,293,666 million) than that of the thirteen cutback
budgets ($2,254,840 million), and the combined thirty-four
budgets are in between. These base changes are small and
they are only partly statistically significant, i.e., the
change for the twenty-one regular budgets registers only a
t-value of .07.

What is interesting about these models is the marginal

change. As we can see in the simple model, only 3.61 is

126

Inn.efi
ITo.DN
1H0.DN

Iflo.mn

II'I"I'."|'li"o,.l."llllla'f I-’Illl'o'.|lll.l"o|--'l.'ll'n'ol'"0'l'Il-l'I“I"o’.'-'.‘"!

me.
me.
me.

we.

.MLNULD

osfivjuaxm nJOaLfio Via VWOaITOfiu nuaomvam 03mu3061m

E...

as.

JIIJD

-63.6mu..a.6.acg

G~.I

no.

&

6N6.666..

cn6.666

um

66..66ma

6N6.6m

Guam

I---:mx::6 o:.u.uvc-;-ugu

nVMIzv

766.1166. 66L36.6:66x6 euaym

mapczmbmm hszuHLLwou .Jma

0.0 suaah

HrLfijvm unafim mLocmfiLD

.cqmm£0«c mo owaam nouzaom

..cse. 66. 6;» 6a sequ.u.zm.mx

an..mon.~
oom.n-.~
ove.vnm.~

o6n.oom.m

rofiatoo

lmcsso
HCCmOan

6&2850
Chan
Outlaw

xdn.m Om. on. MQ.H
xmm.o mm. as. lvm.m
xwa.o 0c. N6. 1&9.N
xnm.h ma. «0. 10?.m
..--.........ewm=hm_w..m .

so virtfiLaaso

0t xcmzHJ

owam

.ovo:
pomeam

127
spent for each dollar appropriated in the prior year. This
return on public investment seems extraordinarily inefficient
until we observe that in nineteen of the thirty-four budgets,
expenditures for this department were actually less than the
prior year's appropriations. Only eleven of these budgets
were cutback budgets. The remainder reflect, in part.
economies that this department was able to achieve through
implementation of a staggered automobile registration system,
implementation of a rather sophisticated workload planning
process based on anticipated transactions in the department's
234 branch offices, and installation of what the department
calls an intelligent terminal process in its source data entry
systems located in its branch offices for the various
licensing and registration programs which it must administer.

There is virtually no change in the margin when the
effects of the regular and cutback budgets are separated
out and the change is not statistically significant.

The relative uniformity of these estimates suggest that.
this department is, in effect, exercising cutback management
across regular budgets and cutback budgets and that this
spending behavior does not change in good times or bad. It
is a kind of reverse pareto optimality. As their budget
director described it, "We would innovate so long as (the
innovations) did something for the citizenry that we were
dealing with and the cost either remained the same or
hopefully was reduced."

The model is somewhat more successful with this data as

well in that slightly more indicators are statistically

128
significant even though the overall explained variation is
somewhat lower than with the DMB data. And, although the
budget-by-budget change in appropriations is still great
enough to place this department in the most volatile
quartile, the amount of change is declining as we progress
lower on the list. Whether this is a satisfactory reason
will be seen when we analyze the fifth and sixth categories
on the list. We turn to the fifth, the Department of Labor,
now.

Department of Labor. The Department of Labor showed
the next largest change between regular and cutback budgets.
Data on this department is reported in Table 5.7.

As the name suggests, this department monitors working
conditions in the state and promotes employee interests.
Among its responsibilities are administration of the
workers' compensation program, development of information on
employment and economic development, and administration of
,occupational safety, disability, and rehabilitation
programs. The department has a large labor relations and
mediation program as well as specialized offices serving
handicappers, youth and women. A large amount of federal
funds flow through this department because the Michigan
Employment Security Commission (MESC), its Advisory Council
and Appeals Board are organizationally part of the
department although autonomous. The MESC administers the
unemployment insurance benefits program described in Chapter
Four for eligible workers and maintains statewide offices to

match job openings with job seekers. Like the head of the

129

666.66 66.

666.66 66. 66.. 6.. 6.. 666... 66. 66. 6..- 666.666:

666..6 66. 66.. 666..66.6 66..666.v xv..6. 66. 66.. 6...- 666.66v.6-

:6 .66. 66. 666.6. 66. 66.. 6.. 666.666
MOLGJUM #uQOJ mLacatLo

J ..... -6 ...... “a...EHHH“wuumwflm---Mm“6.6.6--.-in... ......

.mzwflLo 036#3U0Im aaofitfls 2:0 Twa«:¢oou ah¥omfinm isq¥3U61m .cqmm50m: $0 C¥l¥m "OULDOM

..636. 66. .66 64 a:eu...zm.61

.6. 6 . 66. 66. 666.66v.v 666.666.6 166.6 6.. 66.. .6.- 666.6.m.~-

!03.y$U«fidwuazni
AleZu

vmonIYfiOu «0Lafidvzoaxm Losiu #0 wilt¥Lidca
mwhctfihmu hzmuUHLumou .Jmooc xcquJ

....n a an:

roHatoU

Omcsfio
ansmeet

dmcs£o
Chem
6.66.6

.666:
6.6666

130
Department of Management and Budget, the director of the
Department of Labor is directly appointed by the governor.

Although the OLS estimates for the marginal change and
complex versions of the model suggest that serial
correlation might be present, analysis nevertheless focuses
on the OLS estimates because the correlation problem is
slight and is not apparently present in the other two
models. Here we find that the simple model shows a high
degree of explained variance (eighty—five percent) in
expenditures and that the variation is statistically
significant. The model also shows a statistically
significant marginal change such that for every dollar
appropriated in the prior year. $1.04 cents was spent. Thus.
although this department was among the more volatile
fluctuators between regular and cutback budgets, the overall
effect on the department suggests that growth was nearly
static. This is so because, despite the fact that the
.department showed spending at a rate of $1.16 per each
dollar appropriated in the regular prior year budgets as
compared to $.99 for the cutback budgets, the change was not
statistically significant.

So the model, in this case, remains useful although the
explained variance for the marginal change and complex
models is probably a bit inflated because of the slight
serial correlation. There is also some fall off in overall
statistical significance for all the indicators.

Department 9; Commerce. The final data set considered

in this chapter is that of the Department of Commerce.

131
Estimates are reported in Table 5.8.

Although the Michigan Department of Commerce is
considered a regulatory agency because it is charged with
oversight of the state utilities, financial institutions,
corporations and securities, liquor control and energy
consumption, there is another side of the department which
is concerned with a form of resource development. This
includes tourism, international trade, housing, economic and
community development and related job development. Except
for housing, these latter responsibilities have grown
substantially in the last decade. The department is one of
the more diverse in state government. Its director is
appointed directly by the governor.

All versions of this model yield a very high degree of
explained variance, ninety—three to ninety—five percent.
These coefficients are all statistically significant.

Spending in this department across all thirty-four
.budgets is at $.97 for each dollar appropriated in the prior
year. When we test for change in this rate between the
regular budgets and the cutback, we find an annual increase
of about twelve percent in good times, (i.e., a
statistically significant $1.12 per dollar appropriated in
the prior year) compared to $.94 in the cutback budgets.
This relationship is repeated in the complex model, but only
the slope of the cutback budgets is significant. Compared to
the other budget categories analyzed, budget behavior in the
Department of Commerce more closely approximates that of the

total state budget. That may result from the smaller amount

132

Inm.Nnfl mm.
IaN.mom no.

:6..666 T6.

.MprLo ozwfiauoxm naofiLio pin Twofilvoaa .n#amfl3m 03m¥3061u

no.« as. 0“. an. Damnfimonm oom.fi~N.H IGG.TH OD.
xcm.m m3. mfi. ION-”N TD.

666.6 6.6.666.m 66n.666.6 676..~ n6.

.camm£0«t we O¥oam nouznom

..636. 66. .66 6. 6666.6.zm.6x

fio. ON.i
To. 0—.

No.fi NT.nI

666.666:
6¢6.¢6.
666.666.»-

666.666..

IIHQIOU

Omcs£u
flatmee:

imcstu
Chem
6.6:.6

"".l"nll' "l"O'-"'Il‘l'c'i'"."!'

Inn.wom mm. ram.0fl no. no. 09.
HOLODUW anal; 1L0£6ULO
6 66 6 66 666.6 6 66 66.6 6 66 666.6 6
mix): 11111111113: ioficmpvcillzll! I:II!Iicmea:Iiuiil

Ioeavaufifiaayajc:
Avmazu

vzdfi1790H w0L3¥mpzoaxm OULOIIOU #0 #:0IaLstD

mmbcznbmu bzuHuHLLwou .Jmaon mamzHJ

m.m adnsp

Chem

.666:
6.6666

133
of volatility present in the Commerce data.

So what can be said of this model? How adequately does
it handle explanation of budgetary behavior in periods of
fiscal stress? One means of summarizing the previous
discussion would be to compare the range of R29 reported and
the frequency of statistically significant coefficient
estimates across each of the models. That is summarized in
Table 5.9 below.

As we can see with the budget totals, the model holds
firm at a high level of explanation (.97) with the budget
totals simple model and is virtually the same with the base
and marginal change models. All are statistically
significant. While the base in the cutback models is not
significant, the marginal change is. Altogether, three-
fourths of the indicators show statistical significance.

We really have two basic questions here: 1) whether the
linear model holds the Michigan data and 2) whether it is
.still significant under cutback conditions. When we
consider the GF/GP Totals (all twenty-five categories) we
find the model shows a high degree of explanation but that
the cutbacks are only significant at the margin. There is
no significant change in the base.

Although the cutbacks in personnel and programming
seemed devastating, especially during the 1980-83
depression, the greater foundation of state spending was not
eroded. Changes between the regular and cutback budgets are
significant only at the margin.

When we consider the more extreme cases selected on the

134
basis of volatility, we find that the model breaks down. The
six budget subcategories in Table 5.9 are arranged in terms
of declining volatility and, except the DMB models, there is
a trend shown in this data: as the volatility declines, the
explained variance increases. Like the Totals models, these
six show no significant changes between the regular and
cutback budgets. Like the R23, the slopes do not become
significant until the data regularizes and there is no
significance in the slope change between the regular and
cutback budgets until the last (Commerce).

Clearly with these more volatile budget subcategories,
the model works, but less well. Compared to the Totals
models, there is a fall off in explained variance as well as
in statistical significance. Something else is going on. Of
course, firmer conclusions could be drawn if all twenty-five
categories were analyzed in this fashion. That will be the
subject of subsequent research.

.V. Summary

In this chapter we have tested the hypothesis that the
linear model as first developed by Davis, Dempster, and
Wildavsky (1966) as interpreted by Hoole, Handley and Ostrom
(1979) is an inadequate explanation of budgetary behavior in
periods of fiscal stress, i.e., there is no relationship
between expenditures totals and the total appropriation as a
fixed percentage of the prior budget in a cutback period.
The analysis shows that the model and its variations explain
changes in the total budget well and shows that these

changes came primarily at the margins. It is not adequate

135

Table 5.9

Linear Model and variations: Comparison of
Statistical Significance of Reported Coefficients

(* = Statistically Significant at .05 level)

% Significant

 

 

 

Budget Base Slope Change Models
Category R2 f Base Change Slope Change Only
Totals (25 categories)
Simple .97 * * n/a * n/a
Base Change .96 * * * n/a
Marginal Change .97 * n/a * * /8 = 75%
Capital Outlay
Simple .09 * n/a n/a
Base Change .20 * * n/a
Marginal Change .20 * n/a *
Debt Service
Simple .004 * n/a n/a
Base Change .005 * n/a
Marginal Change .01 * n/a
Management & Budget
Simple .87 * * n/a n/a
Base Change .87 * * n/a
Marginal Change .87 * * n/a
State
Simple .63 * * n/a * n/a
Base Change .63 * * * n/a
Marginal Change .63 * * n/a *
Labor
Simple ' .85 * n/a * n/a
Base Change .86 * * n/a
Marginal Change .86 * n/a *
Commerce
Simple .93 * n/a * n/a
Base Change .94 * * * n/a
Marginal Change .95 * n/a * *
6-Category Totals
Simple Model 6/6 /6 n/a 3,’6 n/a
Change Models 12/12 8/12 1/6 8/12 1/6 30/48 = 62.5096

136
for subsets of the budget which display greater volatility
generally and in deviation between regular and cutback
budgets.

Although the linearity feature is perhaps the most
important aspect of incrementalism, it is only one dimension
of the theory. Another aspect is the fair shares concept.
Whether fair shares holds under conditions of cutback is the

initial focus of the next chapter.

Notes to Chapter Five

1. Some scholars argue that the cyclical nature of
the budgetary process is such that lagged endogenous
variables implicitly occur in the equation
nevertheless.

An additional shortcoming of the Durbin-Watson test is
its uncertainty zones, i.e., areas in the four-point
scale within which the researcher has difficulty
deciding whether autocorrelation is a problem. In
order to avoid this dilemma, conventional strategy was
adopted: the upper limit of the uncertainty zone was
used as the cut-off point.

Chapter Six
Findings: Fair Shares and Marginality
I. Introduction

In the previous chapter we evaluated the argument that
the linear model, that classic expression of the budgetary
decision process first formulated by Davis, Dempster and
Wildavsky (1966), is no longer servicable when dealing with
budgetary cutbacks. We found that the model does retain a
measure of utility for the total state budget, but breaks
down under the extreme conditions existing in some
categories of the total state budget.

In this chapter we proceed to evaluate two other
features of incrementalism, fair shares and marginality,
which have also been thought to collapse as cutbacks eroded
more and more of the budget. We will discuss the more
interesting issue, fair shares, first.

As first outlined in Chapter Four, fair shares is the
"concept that budget decisions are reflections of attitudes
that agencies ought to receive some appropriate portion of
the total revenues available to the system. Agencies that
continue to receive a given, or larger, piece of the pie are
thought to prosper.

In this analysis we use the fair shares model developed
by Natchez and Bupp (1973) as interpreted by Hoole, Handley

and Ostrom (1979):

137

138

Et = b Pt-l + et (1)

where E = expenditure total
b = a fixed percentage
P = the total budget for the system
e = the error term

As with the linear model, the statistical procedures
and constraints discussed in the previous chapter apply here
as well. In the first set of estimations, we used the basic
ordinary least squares (OLS) technique which produces values
for a constant and a slope for exactly the same reason given
in the previous chapter: comparability. Dummy variables for
intercept and slope were used to assess the effects of the
cutback budgets. These procedures are summarized as
follows:

Simple: Et = a1 + blPt-1 + eit (2)
Complex: Et = a2 + b2Pt_1 + gD2 +

903(Pt-1) + ezt (3)

'where E expenditure total

a = constant (intercept)

0'
II

a fixed percentage

'0
l

the total budget for the 25 budget categories
9 = estimate of the dummy variable
D = a dummy variable where
1 = regular budgets
0 = cutback budgets
e = the error term (factors not in the equation)
As serial correlation was also a problem with these

models, they were re-estimated using the Cochrane-Orcutt

139
technique. Again, the assumption was that the
autocorrelation was a first-order autoregression.

With these models, however, heteroscedacity is
potentially a more conspicuous problem. Because we are
comparing shares of a single unit which range considerably
in size, i.e., the amount claimed by the smallest budget
category (the Executive Office) in the 1983—84 budget was
only slightly more than .1 percent of the largest budget
category (Department of Social Services), it was thought
that some means should be used to reduce potential
distortion of the estimates caused by the extremes in
relative size. Therefore, the models were re-estimated a

third time, this time for weighted least squares. The

weight used was the base, Pt_1, Although correction
procedures were used, serial correlation continued to be a
problem. Estimates for two—thirds of the budget categories
continue to be plagued with serial correlation, although it
is the complex model which is largely troublesome. Serial
correlation appears in the simple model versions of only
eight budget categories, but indications are that the degree
of serial correlation in five of these cases is small.

If we discount the estimates of the seventeen
categories apparently biased by serial correlation in one or
both models, we are left with eight: agriculture, the
departments of civil rights and civil service, the higher
education fund, the departments of labor, management and
budget, military affairs, natural resources, and public

health. In four of these remaining cases, neither of the

140
models is statistically significant so no conclusions can be
drawn from them. These four are: the higher education fund
and the departments of labor, management and budget, and
natural resources.

Thus, although the fair shares model shows some
statistical significance for sixteen of the twenty-five
(sixty-four percent) budget categories, residual serial
correlation limits analysis of all but four: the departments
of agriculture, civil rights, civil service, and public
health. These estimates are reported in Table 6.1.

II. Initial Findings

In first evaluating the linear model, estimates were
first obtained for an overall average, the totals of the
twenty-five budget categories. Because we are testing for
shares of the overall in this model, however, that is not
possible. Therefore the benchmark data taken is that budget
category of the remaining four which is found to be closest
to the average reported on the volatility index appearing in
chapter five. That category is the Department of Public
Health.

Public Health. This department is charged with
administration of programs designed to promote and protect
what the state constitution calls a "primary public
concern," the health of the people of Michigan. Among its
responsibilities are: prevention of communicable and chronic
diseases, assistance to local health programs, management of
health programs for special needs populations such as

crippled children, licensing and regulation of health

]_4Il

Table 6.1

FAIR SHARES MODEL.
C.

COEFFICIENT EST

I
DepartmentaI expenditures 1954: 98

DJ

5.

MATES
4

-J

(O CO

0
sch

p.85

0".) fJu-J

C0 C0 C0

105.45*
8.95*
8.95*

mcncn
CT!
tn
Ir

(N = 34)
Department/ Intercept Sioce
Fund (Base) t (Margin) SE
Weighted Least Squares

AgricuIture

SimoIe 4.928.270 2.28* .00290 .00054

ComoIex: Rec 3,622,991 -.26 .00346 .00088

Compiex Cut 4 333,680 1.85 .00286 .00056
Civ Rights

SimpIe 8 724.670 5 42‘ .00016 .00018

ComcIex: Reg 6,687,? i 52 .00049 .0000?

Compiex: Cut 5 $36,570 5 21* .0004? .00019
Civ Service

Simaie -375.551 -.93 .00163 .00010

Compiex: Reg -402,352 -.04 .00168 .0001?

Compiex: Cut -371 I23 -.55 .00159 .00016
Puinc HeaIth

SimpIe -i3,213,400 -i.83 .02242 .00184

CompIex: Reg —16,919,950 -.12 .02466 .00259

CompIex: Cut -15,671,700 -1.51 .0218? .00249

 

*Significant at the .05 Ieve].

Source: State of Michigan. Executive Budgets,
various Executive Orders.

60—.”

1953-64 through 1983—84 and

142
services and facilities including substance abuse programs,
administration of some federally funded programs such as
hospital construction, and other programs.

As we can see in Table 6.1, the fair shares model shows
a high degree of explained variance (.92) between
expenditures as a share of the total appropriation in the
prior year and that this level holds when varied to
differentiate between the regular and cutback budgets. This
lack of change in goodness of fit does not coincide with the
hypothesis. so we have a bit of evidence that the concept of
fair shares may perhaps hold in the cutback process.

While the intercepts are all negative, (and may
indicate other problems), they are not statistically
significant. What is significant is the slope. Here values
are reported to the fifth decimal point to show the tiny
marginal change. This is necessary because we are looking
for marginal change in a fraction of the budget based on a
'change in the entire GF/GP total. The spending estimates are
$.02 per dollar appropriated in the prior year, slightly
higher in the regular budgets, lowest in the cutback and
in between for the combined (simple model). This is as
expected. The marginal difference between the regular and
cutback budgets, however, is not significant. The standard
error shows a small increase (.001) over that of the error
for the simple model.

Having established a benchmark, we move to the
remaining categories, again using the volatility index to

order the analysis. According to that criterion the order

143
is: the departments of civil rights, civil service, and
agriculture.

Civil Rights. This department, among the smallest
third of the twenty—five budget categories, is one of five
departments in Michigan State Government headed by an
appointed commission. The commission is constitutionally
established and appoints the departmental director.

The department is responsible for investigating alleged
discrimination incurred by individuals because of religion.
race, color, national origin, as well as handicap, marital

status. sex and age.

With this data, the R2 rises conspicuously. Prior
appropriations for all categories only account for seventeen
percent of this department's expenditures in the simple
model, but the coefficient more than doubles with the
addition of the dummy variables to forty-two percent. All of
these values are statistically significant. If we compare
the shares received by this department under the regular and
cutback budgets. we see a tiny change, dropping to .0047 per
dollar appropriated. but the change is not significant. As
expected, the error rises under the cutback situation.

Compared to the other budget categories in this
analysis, the fare shares model has less explanatory value
for Department of Civil Rights data. This is primarily
because the coefficient of determination is significantly
lower.

We now turn to the next category in this initial

analysis. That is the Department of Civil Service.

144

Civil Service. This department, like the Department of
Civil Rights. is headed by a constitutionally established
commission. The commission appoints the departmental chief.
the State Personnel Director. Its primary obligation is the
maintenance and promotion of the state merit system which
covers classified civil servants who account for the vast
majority of state employees.

With this data. the fair shares model accounts for more
explained variability than with any other in this analysis.
The level of appropriations for the system accounts for
ninety—six percent of the variation in expenditures by this
department. This statistic drops slightly in the complex
model and all are highly significant. The coefficients show
that civil service nets about two mills (.0016) per dollar
appropriated for the system. As expected, this amount rises
in the regular budgets and falls under cutback conditions.
The error increases a bit in the complex model.

Like the public health data, there is no statistical
significance in the base or slope change between the regular
and cutback budgets, lending further evidence to the notion
that fair shares continues to play a role in cutback
budgeting.

Agriculture. Like the Department of Civil Rights, the
Department of Agriculture is relatively small and headed by
a commission. Unlike the Civil Rights Commission. however.
the agriculture commission is not constitutionally
established. The commission appoints the department's

director. As the name suggests, this department is charged

145
with promoting agricultural production and marketing, food
inspection, and protecting the state's foods from pestilence
and disease, as well as related programs.

The fair shares model shows a high degree of explained
variance for the simple model, i.e., about seventy—eight
percent, and this coefficient rises another ten percent in
the complex model. The slope coefficient for the simple
model shows that agriculture spends about three mills for
each dollar appropriated for the whole. As with the other
previously reported, this value falls between spending in
the regular and cutback budgets. Once again, the change in
base and margin between the regular and cutback budgets is
not statistically significant.

We would conclude that the fair shares model is most
useful in explaining budgetary decisions for the Department
of Civil Service, fairly useful for agriculture and public
health, and somewhat less useful for the Department of Civil
Rights data.

Summary. Given the statistical problems with the data.
we can say less about the value of the fair shares model
than of the linear. A comparison between the simple and the
complex models is only possible with a few budget categories
because the remainder continue to show serial correlation
and/or are not statistically significant. There is nothing
in this slim evidence, however, to suggest that fair shares

does not continue to be honored in cutback times.

146
III. A Closer Look at Shares

A conspicuous problem with this analysis is the lack of
any substantive comments which can be made about the policy
question: is budgeting more redistributive rather than
distributive during cutback times. Because slope coefficients
were only reported in Table 6.1 for the few data sets showing
statistical significance, real analysis of this question is
yet to be made. The most interesting answers still need to be
teased out.

One way to do this is to use a different form of analysis
in which average cuts are compared to average expenditures.
This is what has been done in Tables 6.2 and 6.3. Departments
and funds are rank ordered according to the size of their fair
shares expressed as average expenditures in the regular
budgets and the size of their average cuts. Comparison is

made by calculating the ratio of cuts to expenditures.

 

Shares in the Regglar Budgets. The distribution seen in
Table 6.2 comes as no surprise. That social services ranks
first in budgetary spending is well known. Although some of
the services remain subject to hot political controversy, its
major role in consumption of the state budgetary dollar in
Michigan is well known. Nor does it come as any surprise that
higher education and mental health should be among the top
grouping.

That the smaller budget categories, e.g., the departments
of civil rights, licensing and regulation, and the attorney
general, are found in the lower end of the spectrum is also

unremarkable. The same may be said of those in the middle.

1.4'7

Arc
A...»
«NV
phd

nhv

nJJ

Cd

AI.»

nv

CJ

CV
h. J

(I!

firs

DO
I;

(V

I.

‘24

GO
49
6L

CU
“V

{.v

0....

All.
411
‘1

AM}
0n
.3“

Ah

o‘I

(J

0U
Gad

“V
“J

CV

CV

14

A34

CV
CU

1V
Cd

DU

all

:4
”V

Commerce

00
CU

A...»

8PV1C8

S

1 .
fiv
Cu
0U

Alla
AUU

A...»

Com

P3
0U
he
A...

“.4

CU
AIL

Commerce

4»

‘1

l”

A10
A1.-

Elf
3%

1.0

0U
CU

4n:

n)..—

OI-

AU

‘5‘

”V
:4

4:1

Labor

3d
CU

3.1

All-

‘4

CU

sIature

c

Q
1

99

h
(s
V

c 8 Reg

10n5

OFPGCZ

6‘

all
0U
A...
0

Affairs
xec Off

1
I

0"

M

0U

CiviI Serv
25 Exec Office

24

C8

0

‘

ative Serv

i iary

1

ud

der, Leg

In

I“
q

ice
tive Orders 8

U

C
1-
fl
8.

Executive Budgets 1964-1984, Department of Management

3

ng, and E"ec

1.98
Lansi

State of Michigan.
and Budget,
Bureau Librar', Lansi

So"rce

.ozbmzen .Jteibbb :mmism mudsiom osdasameman niwozsm mzmtio wsfiuzuoxu pce..mcfiwceb
aswmoem uzm ezmrwseze: so acetatoawa nvmmfilrmmfi “momonzm mseyzuwxm .zmofi:Usr so suoym "esteem

'II'I'Q‘."‘!I"\I.III.II.I ’aul!"|.\. n..-allelic-"n'oill’QI'III'oIIu."I'II.II|'-I ll.'lll_II-.'o‘l '.'e"lll..l‘-ell.nl- ’Ol."'.|l l-n\..lllll‘o' 'II’VIII’II.‘l.--l-.I lllll 'I‘.‘

magistem use " n n u n
as: Heezum " u u n "
em cacao: " u n u " demote;
Les: sense: " sometmm seen u n u u on age
m 3:... x m m m m
" seems: nae " u n " goose
modes: arm " msswuumzuou " jeammmip " n " Lagoon
m m 8.582. s: m m m
n " antennas " cosoeusum " " goose
" u use s sneer " atzoosesman " " stage
.8 - ................. m ................... m .................. m-------------- m ................... m-;---- .........
.M n u " eomom “ “ goose
" tones " misadsufluo: " ysmfluwuzp " cam may: " ocouem
m m m m use: 3. m
u u u “ scam Hesse "
u u u u noses“ Hosea " sowed
" u u use e ass " oaseeo uaxu " suazsazm
demote; . going . enema . geese some“ mataozuzaaxw
am as; spine; pews» ocoumw coca—arm amend}:

£33363. mm.m.._.m...._u_

firmes-roesu mmtzoaezmaxm sends weotesc
3n nmmmfi:ommfig :cflauzpma gotta msfiuzumxm wmoxasc

m.e eases

149

What is interesting about this list is that the general
distribution is as predictable as it is. This says
something about the fair shares concept, i.e., that it does
produce a distribution which would be recognizable to many
who deal with Michigan state budgets. (See, e.g., any of
the pie charts included in the various editions of the
Budget Message of the Governor.)

Shares in the Budget Cuts. Table 6.2 also shows the

 

relative order of the budget cuts. There is a remarkable
similarity to the listing in the expenditure column. This
is demonstrated in Table 6.3 which shows the strong
clustering on the diagonal. Those units which show smallest
expenditures tend to be those with smallest cuts and those
with large budgets sustained the largest average cuts. This
general ordering, however, does not provide the finer
dwetail needed to adequately test the hypothesis. That
detail is provided by the ratio information in Table 6.2.
These tables allow us to draw some conclusions about

the redistribution argument, Hypothesis 2b; those programs

with the strongest political bases are least likely to be
cut.

We had expected that constitutionally established units
such as the legislative and judicial branches would receive
proportionately smaller cuts compared to the executive
branch. We find that this is only partially so. While the
judiciary suffered the least of all and the legislature
experienced the fourth smallest, the executive departments,

i.e., the departments of civil service and civil rights,

150
which are governed by constitionally based commissions.
fared less well.

We also hypothesized that executive departments headed
by elected officials such as the attorney general and
secretary of state would receive proportionately less cuts.
This was true with the Department of the Attorney General
but not true with the Department of State, although the
attorney general, in comparison to the other departments was
not spared.

Finally, we also hypothesized that executive branch
departments such as mental health and social services which
serve less organized and less affluent groups would receive
proportionately more cuts. This also was apparently nOt the
case but social services fared less well than mental health.
This is not to say that these departments did not sustain
major cuts. Quite the opposite is true. Table 6.3 shows
us that. But these cuts still left these departments
'maintaining their relative position in the budget pie.

Higher education and school aid, while also receiving
huge cuts, maintained relative position. But in terms of
the cut to expenditure ratio, higher education actually
experienced smaller cuts than the school aid fund.

Of course, such a ratio of averages over twenty years
hides the changing position over time of the various budget
categories. For example, school aid expenditures were
larger relative to the whole in the 19603 when enrollments
were larger than they were in the late 1970s and early 1980s

when most of the cuts took place. Averaging in the earlier

151
years makes it appear that their cut to expenditure ratio is
less than it was. A fairer way to calculate the ratio might
have been to obtain a ratio for each of the thirteen cutback
budgets and then calculate an average from that.

The Vulnerability Issue. In the research design
chapter (Chapter Three), we had also hypothesized that
retrenchment would be directed at the most vulnerable parts
of the budget such as discretionary programs like libraries
and maintenance. The fair shares model. as it was
subsequently worked out, does not adequately test this
issue. although it is a real one in cutback research. What
the previous tables (6.2 and 6.3) tell us is only which
budget categories were more vulnerable to budget pinioning.
As Table 6.2 suggests, these are capital outlay and the
departments of labor, state, agriculture, and licensing and
regulation.

Addressing the question of program vulnerability
requires a different approach. This will be taken up later
in the chapter.

Summary. How good is the fare shares model? We found
that the fair shares model applies somewhat indifferently
with the Michigan state government data. The statistical
goodness of fit criterion worked well with only a few of the
budget categories, but with those four seemed to be quite
robust.

Is the fair shares concept honored in the cutback
process? We found that the largest budget categories tended

to maintain their position although sustaining large cuts.

152

Similarly, the smallest ranked spending category (the
executive office) also received the smallest average cuts.
In between. although there was some shuffling of position.
(see Table 6.4), the change was small if we keep Table 6.3
in perspective. Therefore, we can say that the fair shares
concept tends to be honored in cutback as well as in regular
times so far as Michigan state government is concerned. (1)
IV. Comparing the Linear and Fair Shares Models

As is apparent in the preceding tables in this and the
previous chapter, the linear and fair shares models perform
differently with different budget category data. Even so,
an interesting question remains to be answered. That is,
which is better? Given the statistical problems encountered
with the fair shares model. can any comparison be made?

One way to answer this question is to compare the budget

categories which did emerge with statistically significant R2s

in the fair shares model with the same categories analyzed
with the linear model. In order to do this. however, we must
take into consideration that the fair shares coefficients
reported in Table 6.1 are weighted. Therefore, linear model
data for the pertinent categories was re-estimated using
weighted least squares. In this case, however. the weight
used is the lag of the appropriation, not quite the same as
the weight used in the fair shares model which is the lag of
the total appropriation. Nevertheless this produces somewhat
more comparable data than a comparison of weighted and
non-weighted data. The results of the weighted linear model

are reported in Table 6.5.

153

Table 6.4

Fair Shares: Relative Position
Average Expenditures v. Average Cuts
(number of positions)

 

Maintained Lost Gained
Social Services Labor (9) Corrections (4)
School Aid Capital Outlay (4) Debt Service (4)
Higher Education Agriculture (3) Education (4)
Ebcecutive Office Civil Service (2) Judiciary (4)

Cannerce (2) Treasury (4)
Licensing and Reg (2) Legislature (3)
Nat Resources (2) Mgmt & Budget (2)
Public Health (2) Att General (1)
State (2) Civil Rights (1)

 

Source: State of

Mental Health (1)
Mil Affairs (1)
State Police (1)

Michigan. Executive Budgets. 1964-1984

and various Executive Orders.

1.513

 

 

Table 6.5
LINEAR MODEL. COEFFICIENT ESTIMATES
Departmental Expenditures 1964-1984
(N = 34)
Department/ Intercept Slope
Fund (Base) t (Margin) SE t ' R2 1
Weighted Least Squares

Agriculture

Simple 21,511,300 4.66* - 15860 08 -1 84 .08 2.37

Complex: Reg 21,626,271 .35 -.15929 15 - 30 .08 .79

Complex: Cut 20.726 600 3.96 -.11522 .15 - 70 .08 .79
Civ Rights

Simple 8.835.790 6.59* .06458 .11 .61 .14 4.°9*

Complex; Reg 8,052,502 . 7 .15788 05 -.44 30 3. 7*

Complex: Cut 7 729 030 5.70* .17897 11 1.56 30 3.77*
Civ Service

Simple 10,017,200 2.88* .07912 .16 44 . 3 95

Complex: Reg 8,411,795 .38 .10188 .07 - 23 .06 53

Complex: Cut 8 214,360 2.96‘ .11919 .19 53 .06 53
Public Health

Simple 22,278,300 1.52 .76118 .18 4.20* .67 59.76*

Complex: Reg 14,523,260 . 2 .91365 .12 .21 .86 55.48*

Complex: Cut 9,547,220 .84 .88842 .14 6.17* .86 56.48*

 

*Significant at the .05 level.

Source: State of Michigan. Executive Budgets, 1964-1984 and various Executive Orders.

155
A comparison of these coefficients with those reported
for the same categories in Table 6.1 shows that the fair

shares model is superior to the linear model. The mean

value 0f the R23 reported for the fair shares model (simple
and complex) is .75 and all are statistically significant,
while the mean value for those of the linear model is .28
and only half are significant. This is congruent with the
findings of Hoole, Handley and Ostrom (1979) who reported
higher values for the fair shares models than for the linear
(which they call incremental), although their results showed
far less difference between the models.

The observation that the fair shares model is superior
to the linear model should not be construed as a
contradiction of prior comments that the fair shares model
produced statistically weak results. It only means that the
linear model is more broadly applicable with the Michigan
data, but that the fair shares model produces better results
’in the narrower range of cases where it is useful.

V. Program Vulnerability

In retrenchment budgeting, are cutbacks directed at the
most vulnerable parts of the budget? In one sense the
question answers itself, for if anything is cut, surely it
was vulnerable. It seems that the question more properly
ought to be, what kinds of things tend to be cut when the
going gets tough? Although the analysis thus far has
identified the departments and funds which were more

vulnerable, it says nothing about the distribution of those

156
cuts within departments.

Since analyzing all cuts across all departments was not
possible, a sample was selected. The budgets of three
departments representing highest. mean and least cuts were
inspected and compared across the last seven cutback
budgets encompassing Executive Orders 1980-03, 1981-08.
1981—09, 1982-04, 1982-06, 1982-13 and 1983-05. The
percentage change in appropriation level each represented
over the prior level was then totalled and a rank order
determined. That is reported in Table 6.6 as the cutback
budgets column. However, during this period, some
departments also received sizeable increases a few months
later in the regular budgets which tended to mitigate the
savagery of the executive orders. For example, the
appropriation for the Department of Commerce in the 1980—81
budget represented a sixty-seven percent increase over the
appropriation level of the prior budget, taking into account
the cutback of the 1980-03 executive order. The increase
for the Department of Labor for the same period represented
just over 110 percent. On the other hand, there were others
which took continuing cuts, even in the regular budgets.

For example, in the 1980-81 budget, the Department of
Agriculture took almost an eight percent cut on top of the
two percent cut received in the 1980-03 executive order, and
a twenty—three percent cut received in the 1979-80 budget.

No doubt there was a whipsaw effect, but it seems that
a truer test of where the cuts were made would only be

revealed by looking at the total appropriation trend during

157

Table 6.6

nercentage Change in Appropriations: 1980w1084

(0 ed *4 tn (3 -4 tn L3 C3 0)

(0 (H CO (3 I>

-4 *4 (n ‘3 DJ
CD C0 L3 (0 (O

Cutback All
Rank Department Budgets Department Budget
3 Debt Service “3.85 cdbCQthD 43
2 Judiciary 5.41 Scuool Aid 32
3 Legislature w7.80 Agriculture

4 Corrections 18.33 Civil Rights 12
5 Mental Health 11.48 State 14
6 Civil Service 12.57 Higher Ed 0.
7 Civil Rights 16.78 State Police 30.
8 Social Services 17.87 Legislature 30.
0 Mil Affairs W10.85 Public Health 36
10 Treasury ~21.22 Mental Hea th 40.
11 Commerce ”21.43 Mil Affairs 41.
12 Att General w23.23 Treasury 44.
13 State Police w23.49 Debt Service 45.
14 Manag 5 Budget ~24.99 Executive Office 45.
15 Higher Ed "28.70 Att General 6
16 Nat Resources w32.96 Civil Service 53.
17 Public Health """" 32.86 Social Services 55.
18 Education ---- 33.17 Corrections 63.
19 Lic 3 Regulation ~38.27 Lic & Regulation 67.
20 Executive Office ~40.83 Nat Resources 70.
21 Labor ----- 43.51 Judiciary 93.
22 Agriculture ”59.84 Commerce 107.
23 School Aid ”67.32 Manag & Budget 108.
24 State ~73.16 Labor 183.
25 Capital Outlay w105.03 Capital Outlay 16146.
Total -24.03 Total 26.

Source: State of Michigan. Executive Budgets 1980 1084
and various Executive Orders.

01

C0

1’.

©53LDL.

-4

-4 CD (3 DJ (0

(0 (H C) L“

CD CO (0 Ln tn
DJ F) (D 03 (D

(D
(n

158
this crucial period. Accordingly, similar percentages were
totalled for all budgets, regular plus cutback, beginning
with the 1979-80 budget and continuing through 1983-84.
This represents twelve budgets and this rank ordering is
reported in the right—hand column of Table 6.6.

Three departments representing highest. mean and lowest
cuts were then identified from this column and their budgets
inspected for types of programmatic cuts. As cuts in the
departments of labor and education were confounded with
federal budget activity, and school aid and capital outlay
were not applicable, the departments of agriculture and
management and budget were selected as those representing
highest and lowest cuts. Although showing a somewhat higher
value than the statewide total, the Department of Public
Health was selected as representing the mean.

The following analysis is based on an examination of
the gubernatorial requests contained in the Executive Budget
and the executive orders for each of the identified fiscal
years. This shift from focus on expenditures was
necessitated for this part of the analysis because the
rationale for the recommendations is documented and part of
the public record. It was thought to provide a fuller
picture of executive intent when assessing program
vulnerability.

Highest Cuts. If we compare the 1983-84 requests with
the actual appropriation levels for the 1978-79 fiscal year.
GF/GP funding for the Department of Agriculture dropped

twenty-eight percent. GF/GP appropriation levels for Fiscal

159
Year 1978—79 were almost $27 million and GF/GP
recommendations for the 1983-84 period were $19.5 million.
While the department undoubtedly achieved some savings
through a reorganization which occurred during this period.
when we look at program shares of the total departmental
GF/GP budget, we find that almost all categories had
increased. The reason for this apparent anomaly was the
phase—out in this period of an enormous program the
department had to mount to respond to the PPB
(polybrominated biphenyl) contamination disaster which began
in the early 1970s. By 1978-79, the department's need to
provide pre-market biopsies and PPB analysis of dairy cows
en route to slaughter, as well as test, quarantine and
indemnify contaminated livestock and poultry accounted for
more than a third of the department's GF/GP budget.

The other area that showed the largest cuts were those
associated with meat, food and dairy inspection. There was
*a thirteen percent decline in spending (not taking into
account inflation), only part of which was absorbed by

increased federal activity in the area of meat inspection

and the departmental reorganization. Nevertheless, these
activities wound up with a larger share (twenty-six percent)
of the departmental budget in 1983—94 than they had in the
1978—79 appropriation (just under twenty-two percent).

Of line items which were specifically identified for
reductions in these budgets, perhaps the most frequently
occurring referred to cuts in research whether for pest

eradication programs. user surveys, incentive grants.

160
gasohol development, animal diseases, or others.

Average Cuts. At the median among state departments

 

and funds, the Michigan Department of Health total GF/GP
recommendation stood forty percent over its 1978—79
appropriation. During this period, the department also
began a major reorganization. the chief beneficiary being
the local health services office, whose share of the total
departmental budget rose from about eleven percent in
1978-79 to almost nineteen percent in the 1983-84
recommendations. This office serves as the "central
conduit" between the state department and local health units
throughout the state and supervises a cost sharing program,
among other duties.

Although the reorganization of this department presents
the same data analysis problems as the reorganization of
state government in the mid 19609, it appears that the
most vulnerable programs in this department were those
-appropriation units associated with disease prevention.
communicable disease control and adult health, which
suffered about a ten percent loss in the share of the
departmental pie. Part of this was made possible through
the absorption of a fairly large chronic disease program by
county health departments. The second largest loser was the
health care resources appropriation unit which oversees
development and regulation of health facilities and licenses
emergency medical services, among other responsibilities.
The share loss was just over five percent for this period.

The third largest share loss was incurred by the Division of

161
Services to Crippled children.

An inspection of itemized cuts in these budgets shows
that the department was initially able to shift monies out
of some units such as disease prevention and control because
federal funds became available to service them. The second
layer of cuts was taken more directly through administrative
staff reductions in most of the department's units.
Thereafter, we see cuts proposed with substitution of
licensing, certification and user fees and cost shifts to
local governments, followed by another round of staff
reductions.

Least Cuts. The department selected to represent those

 

with least cuts was the Department of Mangement and Budget.
Comparing the 1983-84 request with the 1978-79
appropriation, this department's GF/GP funds increased about
sixty—eight percent. The Department of Management and Budget
was created in 1973 out of the old Department of
'Administration and the Bureau of Programs and Budget which.
until that time, had been housed in the Executive Office.
The department is organized into eleven major offices and
bureaus ranging from those assisting the governor with
policy formulation and planning such as the offices
concerned with budget preparation and revenue and tax
analysis to those more directly concerned with management of
state operations, such as the Office of the State Employer.
the Facilities Bureau and the Bureau of Retirement Systems.
The department is also the umbrella for an assortment of

special agencies such as the Commission on Services to the

162
Aging and the Council for the Arts and is home for the state
lottery bureau. As with most departments, GF/GP funds
support only part of these activities.

Continuing the data analysis procedure used in this
section in which the shares of the various appropriation
units are compared across time and then ranked according to
gain or loss, we find that the losing units. in order of
their percentage loss were: the volunteer commission, the
child care council, the criminal justice office, the
management science bureau. arts council, crime victims'
compensation board. the support office for the various
special boards and commissions. and the Indian Affairs
Commission. These were followed by several units directly
concerned with departmental administration: accounting,
office services. building/facilities/technical services, and
purchasing. Following these were the Spanish Speaking
Affairs Commission, the Women's Commission, the Office of
Revenue and Tax Analysis, and the Office of the Budget.
Units which improved their shares over this period were the
office concerned with comprehensive health planning, the
office of the state employer which formulates policies on
classified employee compensation and working conditions and
consults with employee unions, the commission on the aging
and its companion community and nutrition service, the
department's administrative services unit and the director's
office.

Like the other departments analyzed in this section,

the Department of Management and Budget reorganized during

163
this period. For example, some shrinkage, such as the
volunteers unit. occurred when federally related programs
such as the VISTA program, ran into disfavor in 1980-81.
Others such as the Veterans' Affairs office were largely
grant programs and were shifted into a centrally
administered grant category for budgetary purposes. Still
others such as the Office of Intergovernmental Relations
were transferred to different departments.

Not all changes reflected changed intradepartmental
priorities, however. Some also reflected policy preferences
of the new governor which caused this department to lose
some jurisdiction to the Department of Treasury.

Summary. The purpose in reviewing line items of
these departmental budgets was to see whether discretionary
parts such as maintenance and capital funding would show
proportionately deeper cuts as the departments in this
distribution showed increasing cuts.

While comparison across the sample departments is not
particularly satisfactory because the departments are
engaged in quite different activities and the extreme case.
the Department of Agriculture, is in its position largely
because of declining need to address a critical issue
external to the fiscal crisis, some useful information can
be drawn from an analysis of these budgets.

The maintenance question, for example, is not
supported. The Department of Management and Budget, the
agency responsible for maintaining state properties, reduced

the Property Management unit's share only slightly (three

164
percent) during this critical period. At the beginning of
the time period, this unit accounted for about 22.5 percent
of the department's budget and that share declined only
slightly in the 1983—84 request.

The capital funding question, however, is supported,
but not in this section because capital outlay for these
departments is considered as a separate budget unit. It is
addressed elsewhere in this study and we have shown that
capital funding is indeed the first to be cut.

Analysis in this section does tend to confirm the
hypothesis that "soft" areas are hit: research in
agriculture, prevention programs in health, and programs for
some specialized groups such as volunteers, artists, crime
victims, and Native Americans.

VI. Marginality

In this section we investigate a third dimension of
incrementalism, the marginality question. As discussed in
'Chapter Four, the hypothesis here is that marginal change to
the previous year's budgetary base is an inadequate
description of budgetary outcomes in a cutback period partly
because expenditures no longer are closely associated with a
fixed percentage of the agency's budget for the prior year.
and partly because interest on the part of policymakers
shifts from the margin to the base. We argued that this
seemed to imply two different tests, one for change in
magnitude of the margin and another for change in focus from
the margin to the base.

Magnitude. Analysis of the magnitude question requires

165
that we return to the linear model data discussed in Chapter
Five. Here our attention is focused on the regression
coefficient and its standard error. Specifically, we refer
to the marginal change version of the linear model:
Et = a3 + b3At_1 + gD3(At-1) + e3t (4)
where E = expenditure total
a = constant
b = a fixed percentage of the prior budget
A = the total appropriations
g = estimate of the dummy variable
D = a dummy variable where

1

regular budgets

0

cutback budgets

What constitutes a test of the hypothesis here poses
something of a logical problem which needs to be mentioned
before proceeding. If marginal change in the regular
budgets is significant, what sort of change must be observed
'in the cutback budgets if marginality is not predictive?
If there is no change, or if the change is not significant,
then it means that the marginal condition is the same in the
cutback budgets as in the regular and that marginality is
still operative. If there is marginal change and it is
significant, however, that may still mean that marginality
is still operative. That is the case, unless the change in
the cutback budgets is smaller than in the regular, has a
larger error. and is significant. In that case we can say
that the marginality argument has less force, but we cannot

entirely accept the null hypothesis.

\

166

Given the hypothesis. we would expect the marginal
coefficients of the regular budgets to be statistically
significant and the coefficients of the cutback budgets to
be significant as well. but smaller and to have a greater
error term compared to those of the regular budgets. The
results are reported in Table 6.7. OLS estimates are
reported for all categories because we are not concerned
with goodness of fit properties here.

The results do not support the hypothesis (and a few of
the categories, e.g., the executive office, show curious
results, doubtless owing to some lumpiness in the data).
Although in nineteen of the twenty-five budget categories
the cutback coefficient is smaller than the regular
coefficient, of these nineteen the standard error increases
in only six cases. And of these six. only two of the
changes are statistically significant. These are higher
education and natural resources.

So, it appears that marginal change continues to be an
adequate descriptor of spending behavior in a cutback
period, but only to the extent that marginal change is
significant in regular budgets. In our data set that is
true in all but one category (the executive office).
However, whether we finally reject the marginality argument
may depend on the corollary question, i.e., does interest
shift from the margin to the base. That is what we turn to

now .

167

LINEAR MODEL. COEFFICIENT EST
Departmental Expenditures 18

Department/ Regular Cutback
Fund Margin SE t Margin SE t

Ordinary Least Squares

Agriculture .72 .07 ”.21 .73 .08 7.77*
Att General 1.05 .02 5.88* .82 .02 45.81*
Civ Rights .88 .02 3.74* .81 .02 36.80*
Civ Service .86 .04 1.66 .80 .04 22.36*
Commerce 1.12 .05 3.36* 84 .04 21.70*
Corrections 1.13 . 2 6.71* 1.00 .02 62.37*
Education .45 .01 “.04 5 .10 4.46*
Exec Office .06 .46 m.8 45 .62 .72

Higher Ed .88 .03 2.84* .8- .04 23.33*
Judiciary 1.08 05 2.26* .87 .04 22.26*
Labor 1.16 10 1. 3 .~8 .08 11.87*
Legislature .85 2 2.84* .8~ .02 42.38*
Lic & .eg 1.12 04 3.51* .8 .04 24.80*
Mgmt & Budget 8.65 .7 .3 8.42 .68 12.38*
Mental Health 1.08 . 2 5.64* .88 .02 48.15*
Mil Affairs .82 .04 . 2 .88 .07 13.00*
Nat Resources 1.01 06 2.08* .88 .07 12.76*
Public Health 1.08 .05 3.08* .85 .05 20.83*
School Aid .81 .06 .38 .78 .08 10.36*
Social Services 1.04 .02 5.65* .81 .02 40.55*
State .62 .07 .15 .61 .08 6.87*
State Police 1.03 . 2 5.27* .83 .02 43.27*
Treasury 3.48 .47 ----- 1. 8 4.18 .51 8.21*
Debt Service .50 .15 ----- .88 .63 .21 3.04*
Capital Outlay .48 2 ~~~~~ .8 .58 .18 3.34*

 

*Significant at the .05 level.

Source: State of Michigan. Executive Budgets, 1864 1884
and various Executive Orders.

168

Interest ingBase. If interest of policymakers shifts
from the margin to the base, then we would expect to see
statistically significant base changes in the linear model.
This would be especially persuasive if the significant base
changes were accompanied by smaller but significant marginal
changes.

Here we return to an analysis of the base change linear
model described in Chapter Five. An inspection of the
estimates shows that thirteen of the twenty-five categories
show a significant change in the base between the regular
and the cutback budgets. However, when we inspect
comparable estimates for the complex model in which marginal
changes and base changes interact together, the significance
largely disappears. None of the complex model estimates
show a significant base change together with a significant
slope (margin) change. It is largely the slope itself that
remains significant, not the slope change nor the base
change. Therefore, we have no statistical evidence that in
periods of cutback the focus of policymakers turns from the
increment to the base. It is possible. however, that such
interest might have been manifested in other ways which
would not necessarily emerge in a statistical analysis. One
component of the budget process which was thought to
demonstrate this was the management plan. We hypothesized
that if interest shifted to the base, management plans would
have required additional program documentation when the

cutback process became more critical.

In January 1976 when Michigan was in the midst of one

169
of its periodic recessions, the governor presented an
executive budget developed for the first time along target
budget concepts. This approach, designed to ferret out
spending priorities, required each department to submit
requests based on 95, 100. and 108 percent support levels of
prior year appropriations. not including inflation. and to
rank programs according to priority (Budget Message of the
Governor).

This approach continued until May 1980 when threatened
adoption of a popular tax cut initiative forced policymakers
to look for better ways to divine base spending levels for
state programs. According to a directive issued to
departmental directors at that time, "...experience with the
target approach used for the the past few years has shown
that, while it has enhanced our ability to examine state
programs and priorities within the range established by the
targets. it hasn't provided analytical data of comparable
quality to support budgetary decisions when reductions below
the lowest target were required, as during development of
the FY81 budget," (Department of Management and Budget
1980:1).

The target approach was replaced with a "priority
budgeting approach." This approach required departments to
determine minimum operating levels for all programs and rank
preferences for any spending increments which might be
possible above the minimum.

So we do have some support for this test of the

hypothesis that in periods of cutback the focus of

170
budgetmakers turns from the increment to the base. It is
interesting to note, however, that the new procedures
invoked in the management plans for FY 1982 were justified
because of a perceived tax revolt, not because of darkening
economic conditions. Indeed, the directive stated that the
new tools would be needed to aid adjustment in the coming
economic recovery.

We also hypothesized that if interest turned from the
increment to the base. then we would see evidence that
briefing papers prepared for legislative appropriations
subcommittee hearings should contain additional program
explanation compared to those of prior years.

In interviews conducted with representatives of the
House and Senate Fiscal Agencies—-units which provide staff
support for the appropriations committees-—and analysts in
the Bureau of the Budget who responded to queries from the
fiscal agencies during the fiscal crisis, response was of a
different order.

These analysts thought that the nature of the requests
for information did not change substantially during the
budget cut period. but where they searched for answers did.
For example, one analyst who worked closely with a
department receiving substantial federal funds said the
problem of untangling the web of federal. restricted state.
and GF/GP funds supporting some programs was so difficult
that it was simply easier to search for programs that were
more-exclusively identified with state general fund monies

and out those programs. Thus, the nature of the information

171
provided shifted from largely programmatic information to a
combination of program content and funding source.

Another analyst argued that he had to seriously
re—think whole modes of service delivery, not questioning so
much the program base as its manner of provision. This
analyst also implied that, as the need to cut became greater
and budget office analysts became more aggressive in
targeting new areas for axing, legislative response became
less concerned with broad economic policy, more issue
specific.

Perhaps the most senior of these analysts, certainly
one with long experience in his position, argued that
legislative requests for information, and subsequent budget
reduction decisions, were initially predicated on program
priority. But as the need for cuts continued, legislative
policymakers actually sought less information.

"...as we got to the end. we had been through so

many of these reductions and cuts, I think the

political process, along with the frustration.

stepped in and all at once there was a

leadership decision saying, 'All right, let's go

right across the board. Everybody suffers the

same amount and therefore you're not getting

treated any differently than the other

department, agency or institution.‘ I think

that's what happened."

There is a hint of a difference in response here, i.e.,
that the legislature was less interested in systematic
information change or expansion as the fiscal crisis
deepened. It is the exhaustion factor: exhaustion of

energy, resources. and mistrust of information. Those

implications will be discussed in the concluding chapter.

172

We also hypothesized that in cutback periods,
particularly more severe ones. if interest shifted from the
margin to the base, it would not be a direct shift. but it
would be discernible. It would proceed from an initial
stage of disbelief in which there is an attempt to maintain
business as usual (May and Meltsner, 1981. argue this way)
or to resort to quick fixes, followed by later stages in
which there is more serious concern with the base.

In interviews with key players and observers of this
process. it was apparent that some did accept the notion of
initial disbelief. As one member of the governor's budget
team expressed it.

"As we entered the downturn. I did not believe
that the degree of economic recession in this
state would be as severe as it turned out to
be.... As it persisted-—and this may be
difficult for people to believe--I was
constantly surprised (and it's difficult to be
constantly surprised) about the fact that the
economy continued to turn down.

So, the longer it became as the numbers got
worse, you were forced into a recognition of how
bad things were and clearly as we were even
dragged within the administration into believing
how bad things were, then people on the outside
became more aware. But I do think that it took
an awful long time going into the recession
before people became convinced how bad it was."

This view was repeated by a leading appropriations
committee member, a member of the governor's political
party. who explained it this way:

"We relied on four different sources for our
revenue projections: the House Fiscal Agency,
the Senate Fiscal, the University of Michigan
and the DMB. Of those four, the U of M's was
the most conservative. And when the revenues
started to fall, they fell below what the most
conservative estimates were and they were hard

173

to believe. Everybody was sure that in the next

two months the economy was going to come back.

Nobody looked on it as though it was going to

get worse. Everybody kept on being optimistic.

But it didn't get any better. It kept getting

worse, worse and worse. I could even see the

governor aging in the process. At first he was

all smiles and then even he got to the point of

being frustrated."

But others disagreed. The essential argument among the
dissenters was that some knew about the problems all along.
The divergence in that opinion was 1) just how large the
group was and. 2) if they knew, why things were allowed to
get so far out of control. the idea being that anyone
rational would not wittingly pursue such agony.

This view was heard from a key appropriations committee
member, an influential reporter, and also from several
lobbyists. As the committee member observed, "The insiders
in the legislature--the fifteen percent who do all the
work——and in the executive branch knew what was going on but
the rest never really came to grips with the issue."

It is on this last point, however, that opinion further
divides. While the committee member suggests that his
colleagues would not "come to grips with the issue". others
were more specific. As the reporter put it, "The attitude
was one of general sympathy (for the governor) against a
political backdrop of what was do—able and what wasn't
politically. I think that tax increases were not anything
they wanted to do as (was subsequently) proved. They
wouldn't do it for him."

Still others contend that not only was understanding

there, but also intended action. As one analyst said,

174

"It was a conscious, deliberate policy and not
an accident. You need to not blame somebody
like (the budget director) because they
understood what they were doing. This is not an
accident. This is not an error. This is not a
thing of 'Oh. my goodness, we've overestimated
the budget.‘ This is just a guise of that."

As suggested in Chapter Four, opinion also sharply
divided on the role of the governor. One view commonly
attributed to the governor's successor, was that the
governor really did not know what was going on. According
to this notion, the governor had become the pawn of his
budget director who had usurped some tactical power and then
was unable to wield sufficient strategic power to build the
coalition necessary to extricate the state from its
financial problems. One analyst, a well known consultant.
was particularly critical of this view. As he said,

"(the governor) made the decision that (the

previous governor was Eisenhower and that he was

a tool of the budget director who had too much

power. Therefore he was going to make the

Treasurer more powerful than the budget

director. The budget people thought that (the

previous governor) always had great power. The
view of Eisenhower as a fuddy duddy and a tool

is just b ------- . Eisenhower was a man of
strong intellect and great power. He always
wanted to operate through straws. (The previous

governor) was the same way. His secretary once
got angry at me because I said that he was a
great dissembler and pulled off the greatest
sham in the history of the state by making
people think he was a dummy when, in fact, when
he called in his chief ministers in a room with
him he was boss. (The present governor) thought
that he was watching Eisenhower the dummy. He
didn't understand that the real Eisenhower was a
man of direction and power. They simply decided
to let someone else take the heat. That's want
you're paid for at the second level."

Although the captured governor thesis seems

least credible (but perhaps most powerful considering who

175
espoused it), the other theories are both plausible
interpretations of the events. The constant surprise theory
can be argued if one takes a fairly narrow view of the
budget process and does not consider its broader political
and sociological context.

The knowledgeable insiders theory is also arguable if
one accepts that lack of consensus on solutions prevented
the state's leadership from articulating a coherent
budget policy. For there were mixed signals all along the
way. An analysis of the governor's budget messages. budget
office directives, press accounts, and interviews with key
players and observers of the process shows little coherence
in policy. For example, if we accept one observer's
assessment that analysis of the deep fiscal crisis of the
early 19805 should begin with an undertanding of the events
beginning in the early to mid-1970s, we have to recognize
that from the beginning, Michigan policymakers were being
‘wise and unwise all at the same time. Virtually the same
policymakers who introduced the state to the wonderland of
"Chinese bookkeeping" were also those who adopted and
implemented shortly thereafter the state budget
stabilization fund, the first of its kind in the nation. The
latter. an innovative response showing keen understanding of
the state's intrinsic economic condition, appears on the
scene just about the time as we see some of the worst
features of budgetary ad hocmanship being adopted.

There are other examples: this period which saw

adoption of thirteen executive orders implementing budget

176

cuts also saw a continuing practice of giving back taxes.
According to one observer, between the adjustments,
abatements, reductions in the sales tax and so forth, there
were about twenty corrections. Or another: even as a state
delegation was going to Wall Street to borrow money in the
fall of 1981, the governor was proposing a property tax cut.
Or another: the governor who in January of 1982 was
foreseeing a better economy and saying with great
satisfaction that no tax increases would be needed was
cutting the budget and asking for a tax increase three
months later.

While imposing categories on history is risky and best
done tentatively, it is possible to argue that there was a
period of make-believe beginning in the mid-1970s when
budgeters first resorted to quick fixes. Certainly the
decision to use the accounting tricks and to extend the
fiscal year by three months in orer to balance the budget
belong in this category. That was followed by a period
characterized by internal dissention anad confusion which
probably began sometime in early 1979. The governor said
that budget formulation was tough, but when the budget was
passed his budget director said it was the best ever. There
were squabbles in the legislature about the stabilization
fund and disagreements in DMB about the Michigan model
estimates. In retrospect, the white flag was showing
by the summer of 1980 when the legislature failed to adopt a
budget, gave the budget director "czar-like" powers and went

on a going rate for three months. The six-month period

177
which followed, i.e., January-June 1981, showed a mild
economic recovery and probably gave a false sense of
security, because in the quarter which followed, i.e., the
fall of 1981. we hear brave words and see activity which
looks like a call to circle the wagons. The Speaker is
quoted as saying that there will be no negotiation on budget
cuts, that he does not blame the governor. "We're all in
this together," he says, but clearly the governor is having
second thoughts. In December he announces he has had enough
and will not stand for re-election.

By January 1982 the siege is on for those who must
still lead and the leadership is stonewalling. The budget
director announces that the state has a balanced budget.

"We have always had a balanced budget," he says. He also
says accounting reforms are "impossible." The governor says
a better economy is coming and no new taxes are needed. But
the state's bond rating is dropping and unemployment now
-averages over sixteen percent. By March cracks in the public
posture begin to be evident. The budget director starts to
distance himself from the governor's no—tax policy and by
May the political scene is one of public dissention and
fights. Bond rating houses are threatening, local
government officials are protesting, public unions are
fighting the civil service commission, and legislators begin
to publicly doubt the governor's ability to handle the
crisis. A tax increase is passed but it is only temporary
and is passed with great difficulty. Just how difficult it

was is revealed in the following anecdotes:

178

"I remember so well the difficulty they had in

getting the votes. That's why the temporary one

percent income tax was introduced. They had to

go until four o'clock in the morning to get the

votes. I remember that the governor had to come

across the street and drag somebody out of a

hotel room and bring him back to get the final

vote. So it was tough." (A lobbyist)

"Of course we did do that temporary increase in

1982 at the end. We stayed up all night. I'll

never forget that because my office mate was the

one who broke. We were there about three hours

trying to get one vote and I was down in the

office sitting there when he walked in the room.

I asked him, 'Well, what a ------ caved?‘ And he

didn't answer and I knew then and there it was

him. He just kept on walking. And about two

hours before that he told me that one member was

weakening and that I should go and talk to him."

(A prominent legislator)

It is possible to argue that this is the point at which
policymakers finally become seriously concerned with the
base. It is seven years since they first resorted to the
quick fixes. By August the budget director is announcing
that the economy has collapsed and that he is leaving. He
also says the worst is yet to come. Indeed, reports issued
shortly thereafter show that auto sales are the worst in
twenty—four years. The fall of 1982 is Michigan's nadir.
Unemployment goes over seventeen percent, another budget cut
is ordered, and the legislature passes the budget late only
to be told by the fiscal agencies that it is already in
trouble. Only a rescue by foreigners (a consortia of
Japanese banks). saves the state's budget.

Resignation and resolve only appear in January 1983
with a new governor and by admission of some legislative
leaders that a continued tax increase is needed. But the

deep divisions persist and although a tax increase is

179
finally voted there are great costs. Two Senators who
supported it are recalled by their constituents and others
in the House are threatened.

Thus, the hypothesis is partially sustained. There was
a shift in interest, but not from the margin to the base.
The quick-fix mentality associated with the
business—as-usual approach of budgeting at the margin did
continue. Rather, the focus broadened to include issues
associated with the base.

Finally, we hypothesized that as the attention of
policymakers became more absorbed in the base, we would
expect the role of structural constraints to take on
increasing importance. Although there is scholarly
disagreement about what actually constitutes the base. our
approach was to see it as a collection of rules or
constitutional, statutory and procedural requirements which
are or may be intervening variables affecting budget
'decisons. This approach permitted us to use several
different measures for this hypothesis.

1) We expected to see attempts to secure
constitutional protection of program budgets and fund
allocation. Article XII, Sections 1 and 2 of the Michigan
Constitution provide for amendment to the state constitution
either by legislative proposal or by petition of the
electors. In either case, they must be subsequently
approved by a vote of the people. Although there were
attempts (The Headlee Amendment was conspicuously

successful) during this period to amend the constitution by

180
petition as a review of Appendix B shows. it was thought-
that a review of the legislative proposals would provide a
better trend line, since it was expected that these
proposals would be more numerous. Since proposed
constitutional amendments are considered as joint
resolutions and may be introduced in either house, journals
of both the House and Senate for the period 1977-1984 were
inspected. The results are reported in Table 6.8

Table 6.8

House and Senate Joint Resolutions Involving
Some Limitation on the State Budgeting Process

Year # Introduced # Passed Legislature
1977 6 O
1978 3 0
1979 10 O
1980 13 1
1981 10 1
1982 13 0
1983 6 0
1984 10 1

Source: State of Michigan. House and Senate Journals,
1977-1984.

We can see that there were indeed increased attempts to
limit the budget process in some way. Almost half (44
percent) of these proposals, however, were not to protect
program budgets and fund allocation. They were designed to
directly limit the taxing authority of government either
through property tax limitation, income tax limitation or
extension of the referendum to tax acts passed by the
legislature. Doubtless many of these were a calculated
legislative response to a property tax limitation initiative

which was being circulated during some of these years. Of

181
those which had specific programmatic bias. most sought to
protect funds for education which were especially dependent
on property tax revenues. A few had environmental
protection/land use purposes and one protected crime
deterrence programs. Several, e.g., proposals for a budget
stabilization fund. were designed to put into the
constitution what already existed. or was about to be put,
in statute.

Table 6.8 shows that most of these proposals were not
passed by the legislature. The vast majority were simply
printed and held in committee. There were various reasons
for this, but an analysis of that is beyond the scope of
this study.

In our exploration of increased importance of the base.
another measure also seemed useful. We thought we might see
greater use of certain procedures such as unit voting rules
to secure passage of budgets cuts.

That was indeed the case in one major respect. By
constitutional requirement, an executive order mandating
budget cuts must be either completely accepted or completely
rejected. It may not be amended. That tended to have two
effects. It forced much more emphasis on prior, informal
negotiation and it tended to ensure that, once those
agreements had been worked out, the executive order would
be passed because cutback decisions were largely worked out
before anything was submitted to a formal vote. A

legislative staff member described the process this way:

182

"(The governor) had been around many, many years

and he knew how to walk over before an order

even came out. At that time X was director of

management and budget. He'd come over and talk

to the Speaker of the House and the Majority

Leader of the Senate, the two appropriations

committee chairmen, the two vice chairs, and they

would sit down and work out some type of

agreement."

But one of those appropriations committee members saw
it this way:

"I don't want you to think that the legislature

had that big an input. It was really the

executive. They called I would say 90 percent

of the cuts.... We reacted to their proposals."

But once the deals has been made, the formal rules were
invoked. In only five out of eighteen tries, did the
governor have to revise an order once the deals had been
cut.

We also speculated the obvious, i.e., that as the
fiscal crisis grew, the need to serve the primary rule in
state budgeting--the constitutionally mandated balanced
budget requirement—-would be increasingly evident through a
Ilarger number of executive orders to implement budget
reductions.

That was indeed the case, and the incidence of these
executive orders is documented in Chapter Four and in
Appendix B.

In some cases. mandated lapses (also described in
Chapter Four) were part of these executive orders. One
respondent who was formerly in charge of a legislative

fiscal agency described just how unexpectedly useful the

mandated lapse was:

183

"Every year there are more than 5,000 separate
accounts that all the state General Fund is
divided into. It is an impossibility for a
department director to expend to the last dime
every one of his accounts. In a certain number
of them he's going to have money left over for a
number of legitimate reasons, e.g., contracts
don't materialize. a project gets off the ground
later than they anticipated, maybe supplies cost
less than anticipated. maybe there is less
travel, etc. So there are normal lapses. They
ran about $20-$25 million for the total GF/GP.

"Now when you come into a budget deficit
situation...you put a directive out to the
directors that you are going to have x amount of
lapses at the end of the year. You can get them
any way you want, e.g., not filling positions.
curtailing travel. etc. Actually what you're
saying to them is, 'We need x amount of money
out of your budget that has to be there at the
end of the year. We think you're the best judge
of where that can come from. So you find out
where the money is and you make sure that you
have x dollars at the end of the fiscal year.‘
And in most cases we required that they report
back as to where they were going to take it.
i.e., they all had to come up with a plan for
lapsing.

The other thing it did for the state is that

many departments had little cookie jars where

they'd get money in a fund and then at the end

of the year they'd ask for a transfer out of

this fund. The lapse plans showed us where most

of those were. After the first year we kept a

good record of where those came from."

Finally, we expected that as interest in the base
became more important we would see greater incidence of
judicial activity and/or advisory opinions concerning
attempts to raid protected funds.

In an interview with the head of the Advisory Opinion
Section of the Department of the Attorney General, we were
told that so far as advisory opinions were concerned, such

was not the case. He argued that the constitutionally

dedicated funds, e.g., the school aid special fund and the

184
highway fund, were never touched. He also said that if the
statutorily protected areas were, they there for the
legislature to change, if desired.

Although this respondent was correct if we view
"protected" funds as only special purpose funds. but we see
something else if we broaden the definition to include funds
(or simply programs) fed with general purpose monies because
there were indeed several examples of judicial activity
and/or advisory opinions generated as a result of the budget
cuts. A review of the annotations to Article 5, Section 20
(MCLA) of the state constitution shows that:

° In 1975 the Attorney General said that school aid
funds could be out even if such cuts distorted the outcomes
of the state school aid formula.

° In 1979, the Attorney General said that mandated
lapses were not legally binding unless followed up with a
proper executive order.

° In 1983, the Michigan Association of Governmental
Employees won a case which forced the state Civil Service
Commission to keep its agreements about wage increases.

° In 1984. the Michigan Association of Counties lost a
suit contending that revenue-sharing funds had to be honored
in the cutback as well as in initial distribution. The
court found that "the governor would have discretion to
reduce expenditures of some agencies to a greater extent
than others."

In addition. we do know of one instance where a raid

was proposed and a stand—off occurrred. That was in the

185
case of the public school employees'retirement funds. An
early executive order in 1975 proposed to take 811 million
dollars from these funds in order to balance the budget and
the teachers union effectively scotched it.

Although court rulings did not save some of the early
cuts in the fiscal crisis. later rulings which did affect
two key departments were a direct outgrowth of departmental
experience with the budget cuts of the fiscal crisis. As
a former Director of the Department of Mental Health put it:

"We (now) have tremendous constraints in our

correctional and mental health systems through

court orders. We've basically taken those two

systems off the table for any future reductions

without buying major legal issues. For example

in this department, we're arrested literally in

our institutional system at the highest level

we've ever been staffed."

These findings suggest that structural constraints did
indeed take on increasing importance as the interest of
legislators became more absorbed in the base. There were
(some attempts to secure constitutional protection of program‘
budgets and fund allocation, but more concern with saving
the taxpayers' pocketbook. Special voting procedures were
invoked, as was the fundamental rule of all. the balanced
budget requirement. Judicial decisions also played a role
in protecting programs.

But, in another sense, structural constraints were also
critical throughout the whole process. This is especially
true with the balanced budget requirement. That triggered

the executive orders which, in turn, shaped the budget

cutbacks from beginning to end.

186

It is ironic that the structural constraints which
triggered the process also looked the state into positions
with little maneuverability left. If anything, the fiscal
crisis produced even more of them leaving policymakers with
less room than ever to manage the next crisis. More about
this will be discussed in the concluding chapter.

Summary. During cutback periods there was evidence
that policymakers became interested in the base because
there was increased demand for zero-based justification of
programs as evidenced in changed management plan
requirements and because structural constraints take on
increasing importance. But marginal change and the behavior
associated with did not disappear during cutback budgeting
periods.

The margin still remained the most statistically
significant aspect of the budget based on our analysis of
the linear model. When immersed in the base, policymakers
'did not abandon the resort to quick fixes which are
characteristic of early crisis behavior. That is because
they are stuck with them. Only improved economic conditions
and a changed or chastened policy leadership forced into
changes by financial forces external to the state brought
about abandonment of the quick fix policies.

VII. Summary

In this chapter we have shown that two other dimensions
of budget theory, the concepts of fiar shares and marginal
change, are not invalidated in the cutback process.

Although the goodness of fit model which was used to test

187
the hypothesis performs well only under limited conditions,
other approaches show us that fair shares continues to be
honored on the broadest levels when we compare change across
departments. However, when we look within particular
departments there is some support for the argument that
activities such as research and prevention programs which
have less immediate impact. and advocacy areas serving
historically less established groups do tend to suffer. We
also found that although policymakers become more interested
in the base, marginal change is still a Strong descriptor of
budgetary behavior when comparing budgets in good times and

bad.

Note to Chapter Six

1. Critics may wonder why fair shares continue to describe
cutback decisions when the twenty-year history of
Michigan budgeting shows considerable change over time
among the various policy areas (see, e.g., Table 4.5
which describes percentage expenditures at ten—year
intervals across the twenty-one year research period).
That is because the fair shares measure used here is an
average by department and fund across the time periods.
Unfortunately, while averages depict generalities. they
also disguise anomalies which are sometimes of greater
interest.

Chapter Seven

Findings: Other Dimensions

f4

Introduction
Chapters Five and Six reported findings about the best

known aspects of budgetary theory and what happens when

0)
ID
(1'
#4
(D
0)
0)
rf
rt
;
(D
(D

tested under conditions of fiscal stres

V‘

other dim n ions of thc theory remain to be examined

(0
0)

however: the circumstances of the annual cycle, the issue of
budgetary roles and centralization and the role of the
budget itself. That is what we turn to now.
II. The Annual Cycle
As we mentioned in Chapter Two, Wildavsky (1975)
has argued that the annual budget cycle breaks down when
financial resources dwindle and their availability becomes
less regular. The annual budget cycle is interrupted by the
need to recast the budget. Therefore, in our research
design we hypothesized that there would be no timely
(relationship between authorization of expenditures and
actual programming of funds. We expected that payments and
transfers to operating units would become erratic during
cutback periods when compared to more normal budgeting
times. We proposed to test this hypothesis two ways:
through analysis of fund payouts and inspection of the
incidence of executive orders mandating budget cutbacks. In
this case, our interest focused on the period 1976-79 which
was a growth (or recovery) period and the 1980-83 cutback
period which followed.
Payouts from Funds. We looked at payouts from two

188

188
categories: the school aid fund, which is actually called a
fund, and payments to institutions of higher education.
These payouts are shown in Table 7.1. We can see that the
payments to colleges and universities remained regular and
stable through the first, normal period, but begin to
fluctuate with the 1979-80 fourth quarter payment when
payments were cut, a pattern which was repeated in each of
the following three fiscal years with an ever enlarging cut
the final quarter. Payments in the final two fiscal years.
particularly 1982-83, are conspicuously uneven.

Unlike the higher education payouts, those from the
school aid fund are bimonthly instead of quarterly. and the
installments are slightly uneven even in good times.
Normally, each payment would amount to about sixteen percent
of the total, a pattern which is apparent in 1976-77. the
base year. Beginning the following fiscal year. however, we
begin to see erosion in the first installment. It is only
fourteen percent of the total and this percentage falls to
six percent in 1983-84. Other than the 1982—83 fourth
quarter payment which dropped to seven percent of the annual
total, however, it is the drop in first installment payments
which is most conspicuous.

The reason for this is not difficult to find. First
installments of state aid are paid to Michigan's schools in
the summer. Like the final quarterly payments to the
state's colleges and universities, these education payments
are made toward the end of the state's fiscal year when

revenues and expenditures have to balance. Given the

Sixth

Fifth

130.70

29.80

206.70
Fourth

allment--——-—___-_-
148.50
166.80
273.70
Third

1.9()
s
166.80
3.10
*tttx
Second

Table 7.1
School Aid Fund Payouts

148.50
----------~----~---lnstallment‘-----------------------

. Department of Management and Budget, Lansing, .I.

Payouts to Institutions of Higher Education

 

576.10

—————-—.—-—_———_.——_-—

flu 0 c 0 OH 0
1| 0.... 7 a... 9 94
e o a o a

4 6 g 00 o S
8 1| 1| his 9 9
1| All. 8.:- AI‘ 1| 1|
0 0 0 o 0 0
8 1| 1| Aid 5 2
Ar.» 2 0 8| 0 9
7| 1| «ad ‘9 0 9
7| Au‘ 51‘ A" 2 7|
“U 0 0 0 0 o
6 g 3 5 7| 9
3 4 7 S 30 all
7 1| 5 s 11 1|
1| A" no... A.‘ A}. A...-
0 o 0 0 0 o
g 0 7| 7| 6 1|
5L 1| 0 AIL g AIL
9 his 0U all 5 Add
1| AIL A... A" AIL A...-
o 0 o 0 o 0
7| 4 4 4 5 o
o u u o O 0

all 4 0 DU 4 5
9 1.1 9 3 n04 1!
1| Al‘ 0.:- Ar‘ Ar‘ 4.16
c 0 0 0 0 0
7 A}. 5 OJ 9d 1|
0 OJ 9 GU 7| r3
8 7 7| 0U S 5
III. 1 1' ill 1 1
o o o 0 0 0
AIL 4 7 4 S 5
a O o O o O

5 8 7|. ‘ 6 4
9 S 5 8 g 5
o 2 4 IV A: All.
‘I 1 1|. ‘Ilv 1| ‘4!
7| 8 g 0 7| 2
7| 7 7 0U 8 8
_ _ . _ _ .
6 7| 8 g 0 1|
7 7: n1 7 8 00
g 9 9 9 g 9
1| 1| All 1| 4:1 1|

253.90
297.00

302.20
220.00

84.20
245.60

226.40
258.00

233.60
265.00

85.30

85.60
State Aid Financial Status Reports, Department of

1,185.60
1,371.20

Education, Lansing.

1983-84

1982-83
Source: State of Michigan.

_—————--—-—-

191
percentage of the GF/GP budget these funds represent and the
timing of their outflow, it is not surprising that state
policymakers would utilize them to help even the balance.

Analysis of this data tends to support the hypothesis
that there is no timely relationship between authorization
of expenditure and actual programming of funds. although the
evidence is not so strong as the hypothesis suggests.
Payouts were made regularly, but the amounts of the payouts
fluctuated. particularly during the 1982-83 fiscal year when
the fiscal crisis was at its worst. Furthermore, there is
some evidence of volatility in the school aid payment even
in good times, i.e., first installment payments began to
fall off even in 1977—78, two years before the cuts began to
be seen in the higher education payouts and three years
before the generalized crisis began to be felt throughout
state government.

Incidence of Executive Orders. In operationalizing
this hypothesis. we also expected to see greater incidence
of executive orders mandating budget cuts in the crisis
period because of the need to keep the budget in balance.
And this is. indeed, the case. As inspection of Table 3.2
shows, there are no executive orders mandating cuts in the
1976-79 period, but ten in the 1980-83 crisis period which
followed. Of the ten, seven were subsequently approved by
the legislature.

The executive orders are absolute indicators of a
fiscal crisis, for without a crisis it is virtually

inconceivable that a governor would issue such an order. So.

192
in a sense. this is the too obvious measure, but they also
demonstrate a breakdown in the annual budget cycle and.
therefore. lend further support to the hypothesis.

Summary. Our indicators partially support Wildavsky's
assertion that there is a breakdown in the annual budget
cycle in that there was need for repetitive budgeting and
because the amounts of funds available tended to fluctuate
with the depth of the crisis. We found, however, that
actual programming of funds. though much reduced, continued
on schedule. 5

III. Budgetary Roles and Centralization

As we mentioned in Chapter Three, theorists looking at
decisionmaking behavior in times of cutback have disagreed
about what happens to traditional roles in the budget
process, i.e., whether the legislature and the executive.
particularly the fiscal office, continue to exert power in
their customary ways. Questions are raised not only about
'the relationship between the legislature and the executive,
but about the role of the budget office versus the other
departments within the executive branch. and the role of the
director's office versus the other units within a department
as well. Levine and Rubin (1980:15) argue that central
control is fragmented under stress: Bozeman and Straussman
(1982:511) say centralized control increases. The debate
poses something of a crucial test. Because it was
anticipated that such role shifts would not necessarily be
apparent from analysis of budget data, the inquiry shifted

into other areas.

193

Enhanced Budggt Office Power? We argued that if the
role of the executive fiscal agency becomes more important
in fiscal crises, then we would expect to see certain
departures from business as usual.

Directives from the Budget Office. Although any
bureaucrat knows that directives are sometimes ignored, they
can measure certain kinds of activity. According to sources
within the Department of Management and Budget. the amount
of communication from the department to the other state
agencies increased significantly during the fiscal crisis.
These directives tended to be of three types: 1) There was
the broad requirement first used in the 1981-82 budget
instituting minimum operating levels. This was a mandate
forcing program managers to identify spending levels below
which a program could not serve its purpose. 2) There were
specific directives issued early on in the crisis
instituting freezes on such things as hiring and
‘out-of—state travel. 3) Finally, there were the open-ended
orders asking department managers to find new ways to reduce
spending. These tended to be questions: are there things
that could be postponed? Could programs be reduced? These
mid-year inquiries also made further use of program ranking.
a procedure first introduced into the regular budget process
in 1976—77.

Of course. a flurry of directives in itself is not an
indicator of actual centralization, but as part of a pattern
of other indicators it may tell us something. And there

were other indicators.

194

Complaints about Unilateral DMB Action. Here, protests
were directed not so much at the fiscal office as at its
director (once described by a journalist as "...sort of a
wizard jumping all around and flapping his arms and carrying
on"). Evidence of this was found in published newspaper
accounts where at least one newspaper went so far as to
describe the budget director as acting like a "czar."
Evidence also tended to emerge indirectly from interviews,
where opinions about why such unilateral action happened
were more divergent than that it happened at all. One view
held that unpopular decisions had to be made and the budget
director took the immediate heat to protect his boss. As
one lobbyist put it, "his job was to make the governor look
as good as he could."

Another perspective, this one offered by a journalist,
suggested that action shifted to the executive, particularly
the DMB, because the legislature let it happen. As he said,
"There were dirty things that needed to be done and (they
thought that) it was better to let (the governor and his
budget officer) do them." This attitude also emerges when
the role of the legislature in the fiscal crisis is
examined. It is discussed more fully later in the chapter.

Still a third explanation was offered by a former
colleague of the budget director. He argued that the budget
director made many preemptive decisions simply because the
budget director "...knew the governor better than most of
the other directors. He would know in advance what the

governor is likely to approve.... So the governor's budget

195
reflected the governor's priorities."

Finally, a fourth version. this one offered by one of
the directors on the receiving end of some of those
decisions, suggests that the budget director made some
unilateral tactical decisions as part of a longer range
strategy to force other decisions and because that was .is
decision style. "Probably the budget director knew that
when he was throwing out cuts that he knew couldn't
materialize, that was a way to get into some other
places...that was his knack of doing it or the way he
approached it."

Thus there is some confirmation that the budget agency
appeared to occupy more time and space in the decisionmaking
agenda during the cutback period. But there are still other
aspects of the centralization issue to consider. One of
these concerns the role of negotiations between individual
departments, lobbyists and the appropriations committees
during the fiscal crisis which we turn to now.

The role of negotiation. Another test of the
centralization hypothesis surely lies in the role of
negotiation. For if decisionmaking becomes more centralized
as fiscal crisis deepens, then negotiations must collapse or
at least become less important. We probed a variety of
individuals who were intimately involved in budgetary
deliberations during the crisis on this question. All had
been in key positions from the early 1970s onward and had
seen the fiscal crisis develop from its origins.

Not unexpectedly, their answers appeared to be on all

196

sides of the question. Like blindmen first feeling the
elephant, their answers seemed to reflect the part of the
creature they were touching. Yet, as we probed further, it
became apparent that some might have been describing
different stages of the crisis. That suspicion was
confirmed by a senior executive, one who had held several
different cabinet-level positions during that period.

Because he had been in the inner decision-making circle
during the entire budget cutting process from those in the
mid-19708 to the crisis cuts in the early 19803, we asked
him to describe that process. In his words:

"There were tiers of decisions (beginning with) the
kitchen cabinet, i.e., a select group of people who had
been with the Governor over the years.... (They)
reflected various philosophies of government from
conservative to liberal and had some smattering of
experience in the departments. but we didn't have the
day-to-day implications. So that was a weakness-—Point
One——which didn't serve the governor well.

The second step would be presenting that to the
Quadrant which, at times, would become an extended
Quadrant which would be the four leaders, the chairs of
the (appropriations) committees and--when all hell
broke loose-—when people who were substantively
involved in the budget. e.g., the subcommittee chairs
or standing committee chairs, would express concern
about what was happening to their programs. we'd get a
whole roomful of people.

As you went down that line. the decisions became
tougher. Obviously, because you had people who had a
vested interest in policy and early on many of the
decisions had been made by the top five people and
their respective aides or maybe the top eight people.
But as the cuts became more difficult. then you saw
people like X come in who asked tougher questions
because they were very concerned about the implications
of the cuts.

I think that there was an inevitable approach. We
would go into these discussions--I think it was
particularly the last two or three executive orders
before the tax was passed--there was almost a

197

resignation that the best you could do was to ward off

five or ten or fifteen or twenty percent (of the cuts),

but in the final analysis there was almost a panic.

Even at that point. I don't think that the rank and

file executive branch people, the department directors

or deputies had much impact. We would go into those
meetings after discussion, generally internally in the
executive branch. one with the leadership. maybe the
extended leadership, and the deal would be out. And we
always had the budget director in the background
putting the package together. Sometimes frankly. from
my point of view, not being totally honest about
it--maybe he couldn't be in those circumstances--but
not telling everybody what the total implications were.

Maybe he couldn't be, because it was like trying to

play poker. he was trying to get everyone to show their

hand in order to get a package that may have been $200
or $300 million dollars."

So, according to him the character of the negotiations
depended on the phase of the crisis. In his View. the
initial decisions, particularly those made in the earlier
crisis of 1974-75 were derived from priorities established
in the executive branch. According to him, "Much of the
discussion in the executive branch really dictated the final
decision in the legislative branch all the way through the
*budget process with the exception of two services: education
and mental health."

As the crisis deepened and the magnitude of the cuts
became more controversial, he went on to say. negotiations
became more serious. "The four leaders from the two
respective caucuses of each house and the Governor would
regularly sit down and talk about issues...started looking
for some relatively painless ways to reduce in anticipation
of a turnaround."

Then, in the latter. deepest phase of the crisis. the

character of negotiations changed again. As he said.

188
"Towards the end when we were hitting a billion dollars in
cuts and it became clear that the reliance on accounting
maneuvers couldn't bail us out anymore, then I think we got
into sheer panic. At that time. from my point of view, the
' elected leadership relied too heavily on the appointed
leadership, particularly the budget director. to propose
what would be draconian cuts and then to come back and
restore part of those." This view was corroborated in part
by key legislators serving in leadership positions on the
appropriations committees. As one said. "I don't want you
to think that the legislature had that big an input. It was
really the executive. They called I would say ninety
percent of the cuts. The decisions were largely made by
(the budget director)."

In different ways these legislators also said they were
less interested in negotiation, particularly with lobbyists
and agency representatives. As one said. "We knew we had to
cut and we knew they'd resist it." Another complained that
when he would not listen to certain lobbyists, "they went
around me to my subcommittee members because they didn't
want to hear my message." Somewhat predictably, the
lobbyists insisted that they were listened to as much as
usual. More than sheer bravado, however, it was probably
true in at least one case as the lobbyist represented a
group whose interests one of the legislators strongly
advocated. The lobbyist had information that the legislator
needed in order to argue against cuts in a particular

service area. "They (the legislators) were suffering

199
together with the lobbyists. The interest groups were
unhappy, the lawmakers were unhappy." He characterized his
relationship with the legislator during that period as
"handholding."

Alone among the non-lobbyists. one fiscal agency
analyst working in a different area of the budget tended to
support this view. According to him. legislators were more
open to negotiation and persuasion during the fiscal crisis
because they wanted to minimize the political costs of
cutting the budget. He said the legislators looked for
areas to out where there was no consensus. "One could out
there and get some support and some negative fallout, but it
would cancel out."

It was not possible to obtain a clear answer to the
question whether there were actually fewer hearings and for
those that did occur. if they were briefer. As one
appropriations committee member said, most of the big
"agreements were worked out beforehand and the details
settled in the subcommittees. The appropriations committees
served largely to ratify those decisions.

It was clear. however, that the role of negotiations
did seem to change. Its nature depended on the stage of the
fiscal crisis.

Control of Information by the Budget Office? While
some legislative staff who were interviewed claimed quite
vigorously that the chief budget officer (the director of
the Department of Management and Budget-~DMB) at times

deliberately withheld information, particularly news about

200
downturns in revenue flows, legislative fiscal agency
personnel denied that they were ever driven to deal only _
with DMB personnel because DMB was calling the shots.

This response from the fiscal agency personnel seemed
to spring from several different rationale. One concerned
their pride of turf. As one analyst put it, "Here in
Michigan, we've always had direct access to all the state
agencies. I mean Direct Access. And if we didn't, we'd
raise a little hell."

Another concerned the unique force that the crisis
exerted on information as the emergency worsened. It was
the toothpaste tube phenomenon. While pressure in the
middle forced some information down, other inside
intelligence came oozing out the top. As a former fiscal
agency director, said,

"In some cases I think we probably received more
(information) for a couple of basic reasons. If you're
going to cut me and I can show you somewhere else to
get some money, you're maybe not going to cut me quite ~
as much.... So you would get those kinds of
suggestions out of the clear blue sky from people who
would say. 'How about doing this,‘ or 'How about doing
that." They would come in a number of ways, into the
staff or the legislators who would send them back to
the staff for review. I remember one executive order
we put together a whole book of ideas: list after list
of items that you could do. These were things that had
just come in from everywhere."

"On the other hand (and I'm not talking about the
appointed people--you can control their comments),
there's a tremendous number of people in departments
and a department can't do a whole lot on some items
without going down into those areas. When you get into
there, people perceive what's going to happen and if
they don't like what's going to happen, sometimes they
give you a phone call. We used to receive quite a few
from people who did not want to be quoted. It was very
simple. (They'd say) 'I wonder if anyone is thinking
about doing this. If you do, you know it's going to be

201
devastating. Boy. I'd sure hate to see this. Do you
know of anyone who's talking about it?‘ So you would
find out more about it." .
There were other reasons offered as well for the
increased amount of information available during the crisis.
One analyst said that the general confusion generated by the
crisis forced him to look beyond his usual channels of
information. Whereas in normal times he would receive much
of his information about departmental activities from DMB or
the departmental budget office, during the fiscal crisis he
felt constrained to talk much more to departmental program
officers as well. "...to get some sense of priorities not
only as a check on DMB to make sure that they weren't just
cutting something that they'd been after for a long time or
simply looking at numbers and cutting," but also to protect
the appropriations subcommittee members from potential
embarrassment. As he explained,
"We had to be sensitive to programs that had been
fairly recently established by legislative mandate. So
in order to get good information to the subcommittees
it was really worth looking at both sides because just
to rely on DMB...well, at the hearing the department
people could come in and say, 'We understand that we
have to take this percentage cut. Now there are
certain priorities that the legislature deems important
or we have certain statutory mandates that our director
or board or commission feels are more important than
others and DMB doesn't understand or is out to get us.
or etc.'"
Therefore. centralization may have been clearly evident
in other areas, but in terms of information control by the
budget office, it was mixed. Temptation to suppress

information was there. The budget director hid bad news

about evaporating revenues presumably because it was

202

embarrassing and made him look incompetent. It also created
image problems for his governor. Departmental directors and
bureau chiefs hid information about cookie jars because
cookies gave them flexibility and some vestige of power. But
response was fairly swift and dramatic. Legislators.
nervous about revenue information shutoff, went to outside
sources. Civil servants. nervous about short-circuiting
programs and jobs, went to legislative fiscal staff. As
DMB's threats to slash programs and jobs came close, talking
increased. So did letters to the editors of newspapers.

So we can say there was mixed support for this test.
The budget office did attempt to exert more control over
information, but its efforts were partially undermined by
those who perceived the controls would undercut their own
power and control.

Diminished Power for Program Managers? We also

 

hypothesized that if centralization were occurring, the role
of program managers would become less important in the
budget process. We would expect to find program managers
expressing reluctance to assume any greater involvement in
the budget process as the fiscal crisis worsened.

Here again a sample was taken. this time from three
different departments at the average to high end of the cut
spectrum as shown on Table 6.6. These were the Department
of Public Health. selected again for its position near the
mean, and the Departments of Mental Health and Public
Health. Interviews were conducted with program managers in

three different areas: a service area and two staff areas:

203
budgeting and evaluation.

The purpose here was rather modest: to see whether any
alienation toward the budget process occurred at all among
program managers in departments experiencing moderate to
large expenditure reductions. And we found some, but it was
leavened with pragmatism, not bitterness. After all. these
were survivors.

Indicators of this reaction varied and, not
surprisingly, were conditioned by the such factors as the
managerial style of the department directors above them. the
career stage of the managers themselves, and their
functional positions in their department's hierarchy. One
saw himself as simply doing as he was told. He said that
the decisions regarding cuts in his department were made
"top down". Managers were simply told how much was to be
taken out of the bureau's budget and they would then convene
the program managers and they would sit down together and
work out the cuts. This manager was nearing retirement and
seemed to be saying that he had been a loyal soldier to the
end.

Another manager said some attempts were made initially
to secure participatory decisions in her department. But,
according to her, "That was perceived as an exercise in
futility because people didn't see how anything that we
suggested was used. After awhile. when it didn't seem as
though that input process was having a direct linkage to the
decisions that were made, it got kind of farcical, i.e., why

should anybody bother." This manager said that the basis on

204
which most cuts were made in her department seemed largely
driven by personalities. For example. a program director's
position which was deleted early on was occupied by an
individual who was not liked. His supervisor thought he was
"someone who would be difficult to have work for other
people." In order to ease him out his position was
eliminated. But it was clear to the respondent who related
this episode that the decision was not driven by financial
considerations because the program was funded with federal
dollars. Eliminating that position saved no GF/GP funds.

Not surprisingly, the manager of a budget unit
reflected least alienation, largely because his work
required him to take a departmental-wide view of his
organization. While he argued that his unit should have
been protected from cuts because of the extra work required
of them. his overview position as fiscal advisor to the
department director made him realize that his unit had to
take a fair share of the cuts.

This small probe into the views of mid—level managers
and their response to fiscal crisis is additional evidence
that some centralization did occur. The differing
perspectives which conditioned their assessments, however.
suggests that this area merits further research. There are
further insights to be gained here for organizational theory
in the larger question of managerial response to crisis.

A RecedingyRole for the ngislature? If centralization
were occurring, we also hypothesized that the role of the

legislators would thereby become less important. We thought

205

we might find evidence for this, for example, in statements
by lobbyists that legislators were less interested in
listening to their positions. Certainly there was some
justification for this. As we noted in our preceding

iscussion on the changing role of negotiations, one key
legislator deeply involved in the budget slashing said
bluntly that lobbyists were listened to less during this
period. But the lobbyists we interviewed disagreed. They
did not feel (or would not admit) that legislators were less
willing to listen to them. (Some lobbyists did say, however,
that they tended to hold back on requests because they knew
funds were short, but made themselves available to
legislators if needed.)

The view of fiscal agency analysts privy to these
interactions was also mixed. Some said the lobbyists "got
more", some said less.

It became apparent that this measure of centralization ‘
‘was poor. Although designed to test for weakened power, the
responses it elicited were confounded with pride of turf
("Of course the legislators listened to us") on one hand and
boredom and frustration ("after the twentieth followup, they
would start to say no") on the other. Another indicator was
needed.

As it turned out there were two. One was the passage
of Public Act 268 of 1980. In this act, unprecedented in
the history of the state, the legislature gave the governor
through his chief financial officer, the power to operate

the state budget for three months. Faced with enormous

206
revenue uncertainties, fearful of a coming election and
harassed by a pending tax cut initiative, the legislature_
gave up its power of the purse to the executive budget
director. As one insider, a former DMB official said, "It
was a complete abdication of responsibility."

The other measure is found in a comparison of paired
rejected and approved executive orders. As we mentioned in
Chapters Three and Four, the large majority of executive
orders mandating budget cuts were passed as submitted by the
governor. (See especially Table 4.2.) In five cases out of
the eighteen, however, the legislature chose to reject the
orders despite prior negotiations. A comparison of the
orders which were subsequently submitted shows some
interesting changes. These are indicated in Table 7.2.

These suggest that the legislature made an effort to
reassert power in the two years which followed. The 1981
paired orders taken up in September of that year show the
legislature protecting higher education, mental health and
the school aid fund and approving cuts $25 million less than
what the governor had initially proposed. Coming on the
heels of a slight economic recovery and voter rejection of
the tax cutting Proposal A, the legislature perhaps felt
encouraged to resume the charge.

There was at least one insider who argued that, as
things got tighter, legislative participation in decision
making actually expanded because of resentment by some
legislators who had not been involved in prior cutback

decisions. In this respondent's view, this demand for

le 7.

2()7

I U
-—----—"-------—-Executive Orders-----~-----------——-----~--

Comparison of Paired Rejected and Approved Exe " °

.
_
_ BHLRHS 1.3
_ ”NINPSTuanSO
. DDMDOUDSPTDC
.
.
huUan . To MR CLDOUGR
CECE; . GTIRSOnvDVAHuAEfu
UHCUR “ AACCPVPVECLIOLIuL
11 ll 11 1|. 11 1.1 || 11 l I. I ll 11 1| 1| 1|. 1|
_
.OUHILRHCu LS
_MMINPSTIOR
“DDMDDDCupv-t
_
_ Tn “MR OUR BUG
.GTTRSOOODAQG “0:550
“AACFvvavEluaL luluDflv
1|. 11 II. II II I“! 1|. 1.! II II I 1| 1|. 1|. II II I
OuLRUnS ILCO V.
MTANPSTORSC...
DMDnvDSPTanuR_
_
_
T- MR 5086.
TRSOODXUAE. 0
ArvbvrvPvEElelu_ .rv
_
1| 1| 1| 1|. "I II 11 II 1| 11 II II II
.00....RUH 155V
.MYINannanE
“DMDDSnrfnR
_ C
. T: In Enuou DG
.hOTuRCgOnUXEAH UES
.AHAACfivnvCLEUHIL 101-nu
.
'l-'|I|l"'llll||I'llwllu""ill-II.-'I'|lll|llll'|"llll|l'lll'llll|'.lll'l|l'l
_
1LSICCO _
TASORS _
"1.00an10 _
.1:
.a
T: M £50.0an .8t0unur00n V
TRODXEAIG _OOHC..Nnv SE
AanCCuCcn—HILIL _T-CIUIcnurv 00R
_
.
_ d
..0 e d
.8 S e
“S .d d
.0 8 U
_AP .1 1|
.Ohsc tC
_n|UnH on
.DFPUTA Noll

 

Source: Based on analysis of Table 3.2

‘-*-——--————

208
participation arose because of pressure exerted on them by
lobbyists and departments which were feeling the impact of
cuts, particularly in education and social services, that
had already been taken. and their argument that "the revenue
side of the question" had not been considered. That, in
turn, fueled demands by other legislators who feared that
the revenue issue would be opened.

The following pair also shows the legislature acting to
protect higher education and school aid, but this time
cutting mental health in favor of protecting local revenue
sharing funds. This pair, taken up in the spring of 1982.
was also cut. the final version being about $140 million
less than what was first proposed. It was during this time
that the budget director was beginning to distance himself
from the governor's tax policies and the legislature.
perhaps smelling blood, may have decided to carve a little
flesh for itself as well.

The final pair. those considered in September 1982.
show no change. The version finally approved is identical
to the prior version which was initially rejected, but the
legislature promised school district officials to restore
their cuts before the end of the schools' fiscal year. By
this time, the state was in its worst fiscal throes.
Unemployment was over seventeen percent, the budget director
had concluded that the economy had collapsed and that the
worst was yet to come. He had announced his resignation.
Did no change in the executive order mean abdication again

or merely despair? It is difficult to know.

209

As the discussion on the changing nature of negotiation
showed, the role of the legislature seemed to change with
the degree of duress. The worse things became the more
likely the legislature seemed to go along with centralizing
forces. By the fall of 1982. however, it is not clear
around whom the forces were centralizing.

Summary. So we have some further bits of evidence that
the role of the budget office became more important during
the fiscal crisis. As Bozeman and Straussman (1982)
suggested, the budget office did accrete more power. The
amount of communication did increase between the Department
of Management and Budget and the other agencies of state
government. The posture presented by the state's budget
director in making many of the cutback decisions invited
frequent comment, some of it derisive. The role of
negotiations changed during the crisis, but when things got
really bad, they broke down. The budget office seemed to
'take the upper hand, although there was mixed evidence about
its ability to control information flow. There is also some
corroboration for this hypothesis from program managers who
saw centralization tendencies in their own organizations.
Finally, we saw that the legislature itself was vulnerable,
but its abandonment of power was not uniform nor consistent.

Certainly, the sheer volume of press coverage on the
Department of Management and Budget during the fiscal crisis
is an additional index of activity. It is an interesting
footnote here that the budget director actually appointed a

senior capital area journalist as his spokesperson during

210
the height of the fiscal crisis. Such appointments in state
agencies are somewhat rare, usually being found in the
governor's office, top legislative positions. and perhaps
the state supreme court.
IV. The Role of the Budget

The final hypothesis we sought to test in this study
concerned the role of the budget. As a prime tool of
governance, the budget serves such varied purposes as
planning, management. control, and communication. However,
as we observed in Chapter Two, various scholars have argued
that these traditional uses change in a cutback period.
Schick (1980), for example, says that budget-related
planning decreases because events are perceived to be out of
control and Caiden and Chapman (1982) found little evidence
that policymakers were willing to face up to their budget
crises, no systematic response. These suggest that not only
planning, but also management falls by the wayside. We
proposed to evaluate this proposition with several different
tests.

Diminished Budget-Related Planning? If planning
deteriorates in a fiscal crisis because of the sense that
events are out of control, we might expect to see decreased
and/or delayed completion of management program
documentation for forthcoming budgets. Management plans. as
described in Chapter Six, explain the way departments
propose to spend their appropriations during the coming
fiscal year. They consist of a half-dozen forms providing

detailed information such as comprehensive descriptions of

211

programs, analysis of possible alternatives, and narrative
justifications. In these plans. managers also describe each
program's history and performance as well as the resources
used to fund the program. In addition, there is a summary
ranking of all departmental programs in descending order of
priority.

Hundreds of management plans are used to develop budget
recommendations every fiscal year. They are developed
during the spring once policy guidelines have been issued
and are reviewed by DMB and the legislative fiscal agencies
during the summer prior to development of the interim budget
in early fall. We thought delays might be particularly
evident during the period April 1 through August 1 when such
activity normally takes place.

In order to assess this. we interviewed prominent
analysts in both fiscal agencies, an individual who had
occupied a key position in DMB during the fiscal crisis, and
a budget officer in a department which had received major
cuts. The fiscal agency analysts confirmed that delay was
indeed the case. As one observed,

"Some of them came in quite late and even after

(submission) there had to be some revision because the

budget numbers were cranked down even before it was

released to the legislature in January. So there was
delay and they were usually pretty much useless right
after they were released..."

What turned out to be interesting about this question,
however, was not the matter of delay in submitting the

management plans, but the disagreement among respondents

concerning the value of the management plans in making cutback

212
decisions. We had supposed that management plans, being-
roadmaps for program spending, would also serve as guidelines
for retrenchment. Not so. We encountered only two who
claimed to use them in making cutback decisions. One was a
legislator, a ranking appropriations committee member, and the
other was a budget officer in one of the executive branch
departments, but even she said they were of doubtful use in
the final analysis.

When this situation was described to a senior member of
the executive service who had been intimately involved in the
budget reductions, he said the plans still suffered from what
he called the "Washington Monument Syndrome," a reference to
hostage items, i.e., those treasures which would be destroyed
if the fortress is invaded. As he said,

"My perception is that it was a mixed bag.... Either

the plans themselves were not valid to begin with, or

other people in positions never took them seriously and
when forced to cut back, made other decisions. In any
event the management plans then weren't honest plans."

So this test turned out to be less useful than we might
have supposed. Management plans in Michigan government are
rather new and, at the time of the fiscal crisis. had been in
place for just a few years. As the principal vehicles of the
budget planning process in state government, they were not
fully established. Therefore, the fact that they were not
used much by those involved with the cutback process (with the
exception of the legislator) says either that this particular
instrument was weak, or that the critics were wrong to imply

that budgetary planning per se was as established as it was.

If budgetary planning itself is not well established, reasons

213
other than fiscal crisis might account for its diminution. It
seems that we may have the effects of both arguments here-

Established or not. the fact remains that the crisis made
budgetary planning and management chancy. As one analyst
recalled,

"...it was very di ficult to plan and manage when the

budget was basically a roulette wheel. You just didn't

know. On the other side. people were saying, 'Well,
you're just not trying hard enough.’ So you had to go
back and re-evaluate. You had to go back if you're the
program manager and be able to seriously address the
question of 'How can I carry out my mandate for my
program at a 90 percent level, or an 80 percent level,
rather than saying I just can't do this because I just
don't know how much money I have. I'm constantly
reacting and I never know how much I'm going to have
until it's too late.‘ It took a lot of day-to-day
operating in which they had to prioritize because those
activities which were absolutely essential had to be
somehow identified and carried out."

Procedures other than those found in the management
plan were used to make the cutbacks. Priorities identified
in the plans were often ignored. Timing of the cuts, amount
of money needed. availability (e.g., lack of federal
'strings). annoying the smallest number all seemed to figure
more prominently in the cutbacks than priority of need as
established in the management plans.

No Systematic Resgpnse to Crisis? A common complaint
seen in the fiscal stress literature is that governments
facing budget problems are incapable of systematic response.
There seems to be no commitment to facing budget problems.
These complaints have been expressed by analysts reviewing
fiscal crises not only at state and local levels, but at the

federal and international levels as well. The complaints

were also heard in Michigan. How true the allegations were.

214
however, seemed to be a critical, ultimate question which
deserved multiple measures. We identified several:

Incidence of "creative accounting" procedures? If
actual funds were not available to balance the books.
temporary paper shifts might make it appear so until actual
funds became available. That policymakers in Michigan
resorted to these techniques to balance the budget has
already been documented in Chapter Four. Use of these
procedures began in the 1975 fiscal year and continued on
through the end of 1982.

Just why policymakers should have resorted to these
techniques at this time is an interesting subsidiary
question. General theory heard on the street holds that
political leaders believed the fiscal crisis was a passing
thing and that patchup techniques would do. Almost everyone
we talked to recalled the wishfulness of the period, i.e.,
the conviction among legislators, bureaucrats. forecasters.
‘even the press that the bookkeeping magic was temporary
because "things are going to improve."

But an alternative explanation has been suggested by
VerBurg and Press (1982). They argue that Michigan became
involved in these practices because the governor was a
captive of his predilection for professional advice and the
professionals could not agree. Like V. O. Key's earlier
lament, the larger social welfare questions could not be
resolved with economic rationality. This is an interesting
argument and nothing we encountered refutes it. But there

is some evidence, as we shall show later in the chapter,

215
that decisionmaking turned fundamentally political when the
cutmaking went deeper and faster.

Whatever the motivation, however, for some who had been
deeply involved there was an aura, in retrospect. of
defiance. As one former DMB official said,

"I think that some of them (i.e., the creative

accounting procedures) were probably the most creative

issues that we have dealt with in some time and if one
is looking for an apology you're not going to get one.

The issue that government was faced with at the time

was...whether we would continue to reduce services that

at least this particular governor thought he could not
reduce and at the same time was unable to get a tax
bill through, or adopt the alternative of creative
accounting."

This same official argued that. if creative accounting
were defined as departures from generally accepted
accounting principles, then DMB was not guilty, because one
generally accepted accounting principle is that agencies
should follow the law. According to him. in only one
instance did DMB stretch the law by accruing thirteen months
~of revenues against twelve months of expenditures. which was‘
also an irony because generally accepted accounting
principles recommend accrual. The remainder were all
sanctioned by statute. Thus, as he pointed out, "The
legislature was an equal partner in utter manipulation."

Incidence of quick fixes? A close relative of creative
accounting, the quick fix is here understood to involve a
lightning raid on reserves such as use of special purpose
funds to balance the budget. As we documented in Chapter

Four and Appendix 8. this field was also visited by the

budget marauders. At various times, they tapped the Motor

216
Vehicle Accident Claims Fund. the Veterans' Trust Fund, the
Uninsured Motorist Fund. the Recreational (Kammer) Trust
Fund. the Liquor Control Commission revolving fund and the
teachers' pension fund contingency reserve.

As one of the respondents observed, none of this was
illegal. Indeed the concept of tapping reserves is
justifiable and underlies the establishment of the Budget
Stabilization Fund. The problem with tapping these other
reserves, however, is that they were meant for other
purposes and using them shows the degree to which planned
response to the fiscal crisis fell short.

Criticism by outsiders that state is unrealistic? If
there were no commitment to facing budget problems and no
systematic response to the budget crisis, then we supposed
that we would find substantial criticism to this effect from
outsiders. Political leaders are always subject to
criticism from the competition within the political system
‘and finding allegations to this effect would prove little.
However, if outside agencies without the proverbial ax to
grind were saying these things, then perhaps there would be
some merit to the criticism.

Foreigners looking at problems in the American states
often wonder why federal, i.e., national, agencies would not
be more concerned with the fiscal fortunes of the individual
states. But the logic of the federal system as it is played
out in the United States is such that little coordinated
effort is ever brought to bear on such problems. It is true

that some federal agencies, e.g., the U.S. Department of

217
Labor through federal assistance with the Unemployment
Insurance Trust Fund, did become involved and. of course,
the Congressional delegation was distinctly aware. But on
the whole the federal government seemed rather oblivious to
Michigan's dilemma. Indeed, policymakers at the federal
level were making cuts in their own budget which had
deleterious effects on the states just at a time when
Michigan could least afford to sustain those losses. The
brief break in this oblivion was poignantly illustrated when
the Detroit Free Press chose to make front page news of
President Reagan's admission in February 1982 that Michigan
was in a "first class depression."

If the national political agencies were somewhat
oblivious, however, the national financial markets were not.
Their continuing pressures noted in Chapter Four and in
Appendix B in lowering the state's bond rating and ultimate
refusal to lend the state any more short term funds were
'probably the single most important force for reform.

Changes in fiscal forecasting and other procedures? If,
as the critics supposed. fiscal crisis begets no systematic
response nor commitment to facing budget problems, then we
might expect to see no changes in such things as overall
fiscal forecasting procedures, budget monitoring or program
management documentation. Was this the case in Michigan?

Forecasting. Interviews with various individuals
suggest that the record is mixed here. As mentioned in
Chapter Four and Appendix B, the State of Michigan had

access to revenue forecasts through various sources,

218
including those put together by the legislative fiscal
agencies and DMB's Office of Revenue and Tax Analysis.
Nevertheless, in direct response to the earlier fiscal
crisis in 1974—75. the state moved to negotiate a contract
with the University of Michigan to provide even more
sophisticated forecast data on a regular basis through the
well-known Michigan Model.

Even so, as subsequent events proved, the data proved
inadequate given the size of the crisis which ensued. Some
individuals we interviewed suggested that, partly as a
result of this experience, the state has now de-emphasized
use of forecasting models. As one said. "...it is still an
imprecise science. somewhat of an art trying to predict the
future and not something that we can sit down and say, 'Gee.
if we'd only done this we would have known.'"

But others suggested that the state came to
de—emphasize the models for other reasons as well. As a
'consulting fiscal analyst said,

"One thing I do know is that when X took over from (the

previous director of DMB), he didn't like numbers. That

was strange for someone who was heading up a department
like DMB. He didn't trust the sort of analysis
produced by economic forecasting. That wasn't
important to him. Politics was what was important to
the new administration. Really good analysis didn't
seem that important."

Thus. we see that there was an attempt early on to
respond systematically, but that the unreliability of one
important technique, forecasting, eventually undermined that

determination at least in that respect.

Budget monitoring and program management documentation.

219
Here, everyone we spoke to said that the continuing
instability in revenue flows made systematic budget
management during the crisis a virtual impossibility. But
the experience produced sound afterthoughts. Although it
came too late to help with the big crisis but certainly was
occasioned by it, Public Act 431 of 1984, the Management and
Budget Act, required departments to report encumbrances and
receivables on at least a monthly basis and further
centralized the accounting system within departments and
throughout the system. According to several sources, by
1985 the State of Michigan was planning a systemwide upgrade
of its general accounting system which would improve the
capacity of the Office of the Budget and the legislative
fiscal agencies to monitor the budget throughout the fiscal
year.

No overall fiscal policy changes? We also reasoned
that if there were no systematic response to the fiscal
‘crisis, then we should find no overall fiscal policy changes
such as tax innovation or disengagement from identifiable
expenditure programs.

Here again the Michigan response was mixed. On one
hand, we see a clear attempt to deal with the fluctuating
revenue situation with the creation of the Budget
Stabilization Fund in 1977. Adopted at the end of the
1974-75 recession, it was a clear attempt to set spending
limits and, at the same time, provide a countercyclical
hedge on recession through its savings provisions. Yet

events proved the fund to be hopelessly inadequate to

220
buttress sagging revenues in the later recession which
occurred a few years later, and serious questions were raised
whether a fund large enough to cover such a gap would be
politically feasible. As the head of DMB's tax unit said,

"All told. if we added up all the cuts in the executive

orders and the cuts that were made before the executive

even presented the budget and what the legislature out
after the presentation, there were probably over $2
billion in spending reductions made from original plans
over that period of time. It would be politically
irresponsible and would be irresponsible to the people
of the state to have a fund sitting there with $2
billion dollars in it. I don't think we could
reasonably get beyond $500—750 million in the fund
without creating demands that the money be used for tax
cuts or something like funding higher education or
other special needs."

Subsequent events proved him right, as in 1986 the
legislature began taking funds out of the stabilization fund
for prison construction, drawing the fund down to about $350
million. Some thought the fund needed to remain at about
$800 million, or about ten percent of the General Fund and
School Aid Fund budget.

Ultimately, or at least in the mid-term, there were
also increases in the income tax and cigarette tax. Although
the initial effort at raising the income tax was undeniably
a case of too little too late, the increase, though
temporary. did mark a fiscal change. And part of it was
innovative. One-fourth of one percent of the increase was
dedicated to a special fund, the State Accounting and Fiscal
Responsibility Account (SAFRA) to pay off the state's
accumulated debt. Also innovative was dedicating the

cigarette tax increase to a Working Capital Reserve Fund to

recharge the state's cash flow, thus lessening Michigan's

221
need for short—term borrowing. Both were needed changes.-

Our respondents were less clear about the second issue:
disengagement from identifiable expenditure programs. None
were able to point to specific programs which were
eliminated. Their responses tended to speak to other
dimensions such as what was not begun. As one legislator
said.

"I think that for a long time there were very few new

programs started. New programs really had to show

their worth. Before that. when we were on the upswing,
people would get an idea and they'd come in and we
would generally find some money for that idea. But at
the end, that wasn't happening at all. You could come
in with ideas. but it better be an idea how to save
money. There were very few new programs that were
undertaken."

0r focus on better management. Another respondent said
he thought the fiscal crisis produced deeper internal review
of programs. Whereas some programs might have been allowed
to limp along because they "weren't broke," the crisis
forced managers to review almost everything.

It may seem surprising that none of the respondents
could actually identify programs that had clearly been
abandoned. But that was not the major purpose of this
study. That finding only emerged when we probed for
evidence of fiscal policy changes as a measure of the impact
of fiscal crisis on the role of the budget.

Substantively, however, it may have meant something
else. As one tax analyst wistfully observed,

"They go on and on. Each program has its constituency

and it becomes very difficult to impact it. Despite

the fact that there were tremendous economic pressures,

it's amazing the small amount of impact that it had on
the budget. It impresses me even to this day that the

222

programs were so resilient, so able to protect their

turf through the political process. It's amazing. it

really is. Even though they (the managers) can't show
you why the programs work, they're very successful at
getting those numbers maintained."

In fact. a definitive statement of what indeed was
abandoned requires further research. What we can say.
however. is that there were some fiscal policy changes.
There were some short term, albeit reluctantly adopted, tax
increases. But the impact of the one change which may have
the longest term effect, i.e., the creation of the budget
stabilization fund, is still too new to be assessed.

Focus on remediation only? We thought that the nature
of the response to the crisis might finally be tested in an
assessment of the discussion. particularly within the
appropriations committees, at the time. Was it centered on
remediation rather than reform? If remediation only, then
the critics might be right. Systematic response would
suggest a broader search for reform.

Of all the questions we asked, this one elicited
probably the most uniform and emphatic replies: remediation.
Lobbyists, analysts, legislators, journalists all said the
same thing. A lobbyist: "There was no detailed
argumentation. It was absolutely a case of putting out
fires." A fiscal analyst: "There tended to be a
concentration over the top issues and not really getting
into much more detail after that...they weren't quite as
interested as usual in going through the whole--like leave

the rest of it alone and concentrate on where we have to

swing the axe." A legislator: "They were not interested in

223
long term solutions." Another legislator: ”It was a case of
putting out fires. That's all it was." A journalist:

"The budget director would show up to present his
latest doomsday report that we'd all go over there and
we'd write about that. but to the extent that a full
appropriations committee would sit down for a serious
discussion of this, no, it was basically the budget
director making a presentation and a handful of
questions being asked of him and that was the end of
it. Then, maybe if something serious had to be done,
I'm sure he and maybe two or three of his people went
over and talked to (the chairman of the House
Appropriations Committee) and they talked to various
other characters over there and they struck the damn
press then--if they did——with the seriousness of it.
And they did it. That's what came out. That's what
got marked up."

It was the fiscal analyst who provided the most
perceptive analysis, however. His response is worth
reporting in full. According to him,

"The fiscal crisis had a rationality of its own. I
don't think it can be understood outside of the
political context. If one looks at it strictly from an
academic viewpoint it would make no sense at all as to
what got cut and what didn't get cut, i.e., who and
why.

It would have to be looked at in a political context
because when legislators are looking at cutting back
programs which they personally may have championed or
that they were particularly proud of, the cost of
cutting is very high. That's where the politics really
comes in. There was an executive order out. for
example, that the two appropriations committees
rejected because it cut into some very sensitive areas
that they just wouldn't do. They just wanted to be
consulted a little more. It seems to me that there was
something in higher education that year that they
particularly objected to, and of course, during that
time there was a Republican governor and both houses
were controlled by the Democrats and the Democrats were
saying that the governor is just picking on the
programs which would impact in Democratic areas or in
urban areas of southeast Michigan or Grand Rapids or
Flint. A lot of times it just became a Viking smash
and grab affair, i.e., wherever you can find
money-—whoever is vulnerable—~would get stomped on.

I don't think anyone could build any kind of a model

224

unless these political factors are strongly included. I
don't want to imply that there was no rationality to
it, just that it's a political rationality.

But I think a really important aspect of all this from
the appropriations committee perspective was
information overload. They were getting hit with so
much from the department, the lobbyists and interest
groups as to why their program should not be cut and
why, if they cut that program, Michigan would go to
hell and people are going to drop dead on the streets,
that after awhile they just couldn't deal with it. It
was just too much. So they had to look at some other
process. At that point when everyone was hitting them,
they had no other way to make a decision which was the
tried and true way but the political factors. That's a
real important key to understanding why of two
perfectly good programs, one got cut and one didn't. If
one looks at that they might be able to see more of
what happened and to understand what happened. But
they understand that they could cut this program
because. for example, that the Governor's a Republican
and this is a Republican program, or the other way
around.

Yes, the ultimate rule is twenty-one votes (what it
takes to pass something in the Senate). You can ask
all the other questions you want, but the final
criterion is twenty-one votes."

V. Summary.

In this chapter we have looked at three final
controversies about the impact of fiscal crisis on budget
theory: whether it affects the annual cycle, budgetary
roles, and the role of the budget itself.

We found that there is a breakdown in the annual cycle,
and that funds are partially reprogrammed. This is what
Wildavsky would have predicted. But we found that payment
schedules, however partial the payment, tended to hold firm.
Thus the engine continued to fire, but on lower octane. We
also found that the executive fiscal agency tended to gain

power, a hypothesis of increased centralization advanced by

Bozeman and Straussman. We found little evidence for Levine

225
and Rubin's assertion that scarce resources fragment
authority. We did find that the role of the legislature
became more ambivalent. Its abandonment of power, however,
was not uniform nor consistent.

Finally. regarding the role of the budget, we found
some erosion in the use of the budget as a planning tool as
suggested by Schick. Management plans were not completed on
time and were regularly disregarded in deciding cutbacks,
raising questions about the degree to which they were useful
in the first place in the budget building process. The use
of the management plans for management purposes was chancy
at best.

Response to the fiscal crisis was mixed. In the
beginning there were elements of a systematic response. The
rainy day budget stabilization fund was created early on and
there were efforts to buy into high level fiscal
forecasting. But adhocmanship permeated the entire process .
and clearly got worse at the end. This lends only some
support to the Caiden and Chapman notion that response to
budget crisis is non—systematic. For in Michigan, there was
an attempt at systematic response at the beginning and more
at the very end. Confusion was the dominant theme in the
middle. Insiders themselves admit that the approach was
limited and criticism by outsiders, especially from national
financial interests not interested in the internal political
forces was evident. Centralized budget monitoring was weak
but eventually the state moved to improve it with the

adoption of the Management and Budget Act of 1984.

226
Fiscal policy changes came but too little and too late
to stop real agony. Eventually, however, they-~together
with an improving economic situation—~had an effect. And it
was unclear what programs, if any, the state relinquished.

That certainly needs further research.

Chapter Eight
Summary and Conclusions
I. Introduction
This study explored the applicability of some aspects
of budgeting theory when applied to decision—making in a
crisis environment. Data from the State of Michigan was
selected because this state must budget in the country's

volatile economic conditions, making it an unusually

E!
O
0)
rt

£0
0
O
(I.

extreme test of the propositions.

On November 8, 1985 the governor of Michigan declared
"solvency day", having retired a $1.7 billion debt from the
most volatile budgetary era in its history. This governor.
elected in 1982 on a platform of fiscal reform and economic
recovery. had ended the crisis at some political cost.
Forced to push through a tax increase, he lost two
supportive Senators through recalls and, consequently. party
control of the Senate. He had to issue an executive order
mandating further budget cuts in 1983. He had to lead an
angered, poorer citizenry and preside over a demoralized
bureaucracy. He was faced with weakened educational systems
and court challenges on lowered patient/ or inmate/staff
ratios in state institutions. Infrastructure, i.e..
highways, bridges, dams, and sewer and water lines, always
vulnerable in a frost-zone state and neglected through
maintenance cuts were in substantial need of attention. But
the governor was re-elected in 1986, vindicating some of
these decisions.

These were some of the political, economic and social

227

228

fallout from the fiscal crisis. Some had been remedied
rather quickly and some still needed to be addressed. But
what had been learned?
II. What Has Been Learned: the View from the Experts

We asked many of our respondents what they felt had
been learned from the fiscal crisis. Not surprisingly,
their responses tended to reflect their positions in
government. But the responses did cluster around several
themes.

Fiscal Policy. Several respondents thought that some

 

key decisions made in the mid-19703 proved to be extremely
wise citing, for example, adoption of the reserve fund. the
Budget Stabilization Fund. Although they admitted that
controversy continues about how large the fund should be.
and whether the fund should be used for other purposes, they
thought its adoption was vindicated. At least one
respondent felt the crisis also showed the wisdom of passing
.the Single Business Tax (SBT) in 1975. Adopted as a
substitute for the corporate income tax which was extremely
volatile, the SET probably kept the state's deficit from
reaching a further $500 million in this person's opinion.

Several also thought less reliance should be placed on
fiscal forecasting models, or if continued, a more
conservative bias was needed. The science, they said, was
still too inexact to be really useful.

Mixed Success for Budgeting. Although some said the
need continued for more prudent budgetary planning.

particularly for ways to plan for dramatic changes. some

229
thought that budgeting in state government emerged stronger
in two respects: it was more program focused and, so far as
some interim decisions were concerned, had more credibility.
Sheer politics may have determined the cuts when the marrow
was reached, but at least one thought early and mid-run
decisions were influenced in her department by management
ns and thereby reinforced their legitimacy.

Others thought that the budgetary decision process
till failed them when decisions had to be made across
departments, an echo of the Key (1940) concern, and left no
insights about where the important services were if the
state should have to face a zero growth situation.

Leadership is Critical. Because of these concerns,

 

several said that the fiscal crisis underlined the critical
importance of leadership, particularly gubernatorial
leadership. Strong leadership on the part of the governor
was needed not only to articulate commitment to key service
areas but also to direct the charge on tax increases, if
needed. It could be done in a first term. The experience
showed that the legislature was unlikely to take the
initiative there.

Fears about Future Capacity. While one respondent said
with some satisfaction that the fiscal crisis had stopped
the trend toward big government, several others expressed
concerns about the capacity of what remained to deal with
outcomes of the fiscal crisis in three critical areas:

° Loss of key personnel in higher education,

° Regulatory. certification and investigatory

230
activities in licensing and regulation, labor and
education, and

° Social liabilities in case of a future crisis.

Studies have shown that unemployment has always

been left a little higher after each fiscal crisis in
Michigan. In the fall of 1986, people on some form
of income transfer or assistance based on economic
need, or on unemployment insurance, were estimated to
exceed ten percent of the population. At the same
time, state budgets were at their leanest. If
another recession were to occur, social liabilities
would balloon and the state would be ill prepared to
cope with them.

The Continuing Need to Diversify the Economy. Although
Michigan had made progress in this area, the fiscal crisis
reinforced a simple truth that everyone had known for a long
time, i.e., that the economy needed further diversification.
It was still too automobile dependent. ‘
III. What We Learned: The Results of the Study

Received budget theory is still partly usefulgig
conditions of fiscalfistress. When we looked at the various
components of contemporary budget theory, we found that half
of it held up rather well in conditions of fiscal stress as
experienced in Michigan during the twenty-one year period,
1963—1984. The components that tended to erode were in the
area of the annual cycle, budgetary roles and the role of
the budget, although these were admittedly the areas of most

subjective analysis. The components which were tested are:

231
Linearity. The analysis shows that the linear model as
developed by Davis, Dempster and Wildavsky (1966) and
interpreted by Hoole, Handley and Ostrom (1979) and its
variations as developed in this study explain changes in the
total budget well. These changes came primarily at the

margins. The model functioned less well with subsets of the

U‘
(1*

ud e displaying greater volatility generally and

(I

substantial deviation between regular and cutback budgets.
But these were extremes within an extreme case and their
relative rarity should not tempt us to conclude that the
linear component necessarily, therefore, is useless.

The State of Michigan riffed twelve percent of its
employees and made cuts in a relatively short time that
constituted almost a quarter of the GF/GP budget. However,
in general, the core of state programs continued. For this
core, expenditures still looked a lot like appropriations in
the prior budget year and the model was still robust.

Fair Shares. The concept of fair shares was not
undermined in the cutback process. Although the goodness of
fit model as developed by Natchez and Bupp (1973, as
interpreted by Hoole, Handley and Ostrom, 1979) did not
perform well with this data, other techniques showed that
fair shares continues to be supported on the broadest levels
when we compared change across departments.

This is somewhat surprising when we consider that the
bureaucratically articulated preferences seen in the
management plans were apparently ignored. We would have

expected that these preferences would reinforce fair shares.

232

It is also surprising when we consider that other
less-fiscal factors figured in the distribution
decisionmaking. According to our respondents, these were:

° The size of cut needed and its companion factor,

annoying the fewest in the neighborhood.

° Timing of cuts, i.e., at certain times of the

year some accounts were simply fuller than others
and thus more easily siphoned.

° The recent-commitment commitment, i.e., the

tendency to avoid cutting into decisions newly
settled.

° Exhaustion and information overload.

° Pure partisanship, i.e., when nothing else is

possible, take it from the other party's larder.

In some measure this can be attributed to that other
critical factor, i.e., structural constraints, which put
different types of restrictions on the whole process. Court
-orders prevented cutbacks in state penal and mental health
institutions. Legal mandates required adequate notice of
cuts in social services payments. Federal match formulas
and other restrictions tended to limit choices that could be
made across departments and funds. These perhaps forced
cuts from some categories more than would otherwise have
been the case. What the independent impact of these
constraints might have been, however, is difficult to assess
as some were added throughout the process and clearly as a
result of the crisis.

The effect of the court decisions and attorney general

233
opinions, in particular, was mixed. Some tended to increase
rigidity in the budgeting process while others helped to make
it more flexible. For example, the court decisions fixing
staff ratios in state institutions imposed often crucial
constraints and tended to reinforce the trend of adopting ever
more constraints. Two which encouraged flexibility were the
1975 attorney general's opinion which held that school aid
funds were not protected from cuts even if their impact
distorted school aid formulas, and the 1984 court decision
which held that guaranteed revenue sharing with local
governments (the Headlee Amendment warrantee) did not extend
to cutbacks. It is possible that these two decisions do more
to guarantee that funding cuts will be taken from the schools
and from revenue sharing funds than any other factor because
in handing them down the courts have clearly given
"permission" to look for cuts in these areas.

There was only minor support for the reverse redistri-
-bution argument i.e., that the powerful are protected and the
weak succumb (Schick 1983 and Lipson and Lavin 1980). Within
departments there was some evidence that activities having
less immediacy such as research and development and those
serving weaker groups did tend to suffer. Also, across
divisions of government, finer shades of marginal change did
show some protection for constitutionally established units
such as the legislative and judicial branches.

Marginality; Marginal change is still a strong
descriptor of budgetary behavior when comparing budgets in

growth periods and cutback. The findings showed there is

234
heightened interest in the base in cutback times. However,
they do not fully uphold Bozeman and Straussman's (1982),
Schick's (1983), or May and Meltsner's (1981) thesis that in
these periods the focus of budget policymakers turns from
the increment to the base.

The Michigan behavior shows concern with both the

3

I

p

.argin and the base. Some interest in the base existed in
the beginning, i.e., some of the most serious attempts to
introduce economic rationality into the cutback process were
taken early on in the crisis, and some of the "quick fix"
behavior associated with marginal change decisions carried
on through to the end. It may be that Michigan's
historically volatile economy forced policymakers to deal
with the base at an earlier stage than theory would
otherwise have predicted. Or, perhaps our time frame is too
short. A retrospective look across several decades might
show us that, at some point, there was a shift in concern
from increment to the base. Or, it may mean that volatile
economies produce budgetmakers who are a bit different from
the norm, i.e., who may take less for granted.

Where evidence is strongest for the Straussman/Bozeman/
Schick/May/Meltsner thesis is in the impact of rules on the
cutback decision process. If we regard the base as a
collection of rules or constitutional, statutory and
procedural requirements which are or may be intervening
variables affecting budget decisions, the analysis shows
that they shaped a good deal of the budgetary outcomes,

procedurally and substantially. Indeed, as we just

235
mentioned in our discussion of fair shares, it may be their
effects that largely voided the Schick redistribution
argument.
Annual Cycle. There is some breakdown in this
dimension of budgetary theory. Funds were clearly
reprogrammed adding further corroboration to the Wildavsky

tion that in periods of cutback there is greater incidence

"3
O

of repetitive budgeting. But payment schedules, however
partial, tended to hold firm.

Some might argue that here as well, our time frame is
too limited, i.e., that we may not have enough information
of a precise enough character to appreciate when different
consequences happen. At some point, a sharp cutback would
surely affect payment schedules. It is our suspicion,
however, that Michigan bureaucracy being as professional as
it is, payments would continue on a regular basis down to
the last shared mil.

Centralization. The traditional interplay of budgetary.
roles between the executive and legislative did change
somewhat. The executive fiscal agency did tend to gain
power. The role of the legislature became more ambivalent
but its abandonment of power was not uniform nor consistent.

These findings do not uphold the Levine and Rubin
(1980) thesis that under stress, the strategies of budgetary
politics weaken central control just when it is needed most.
For this data, at least, scarce resources did not fragment
authority. On the contrary, Bozeman and Straussman's (1982)

argument is supported. In periods of cutback, the budgetary

236
process did become more centralized. Knott's (1981)
observations are also supported. Negotiations between the
individual departments and the legislative body became less
important.
We also found some similarities to Meltsner's (1971)

findings that policymakers faced with scarce resources

practiced ”politics of avoidance," in that efforts were made
to take cuts from the least politically costly sources, and

from the fewest sources, in order to avoid conflict. There
was also a tendency in the reform administration which
followed to keep the peace by deliberately underestimating
revenue and overestimating expenses.

Role of the Budget. Our analysis shows that the
traditional uses of the budget for planning, management, and
control changed, but not entirely predictably. Schick
(1980) hypothesized that budget-related planning would
diminish in a period of fiscal uncertainty because of the
,sense that events are out of control. We found that
policymakers developed a most innovative planning
instrument, the budget stabilization fund, in the midst of
one crisis. Then, however, they proceeded to ignore the
management plans, so useful in budget building, when it came
time to cut back in the next crisis.

Schick also said that the use of the budget for control
would increase in stressful times. We found that to be true
in the sense that the ultimate rule, the balanced budget
requirement, drove budgetary decisions again and again.

Because of this, and because of the ever changing cuts

23?
resulting, the budget itself became a vehicle which hit and
overran management and planning. In this sense, we found no
corroboration for Alexander's (1984) thesis that the budget
becomes a stabilizing instrument to accommodate
uncertainties arising from changing legislative priorities
and a shifting economy. Quite the contrary, the budget
became a destabilizing force itself.

We did find some support for the Caiden and Chapman
(1982) thesis that there is no commitmen to facing budget
problems and no systematic response to budget crisis. We
found that use of ad hoc remedies riddled the entire
process. Insiders admitted that there was too much focus on
the fires of the moment. Pressures from outside financial
interests were critical in forcing the state to deal with
its financial problems. But fiscal policy changes did come.
even though in small and tardy doses. Eventually they,
together with a new administration-~and an improving
economy-—helped to restore order.

IV. Questions Raised: Implications for Political Science,
Policy Analysis and Public Budgeting.

The foregoing suggests mixed support for the predictive
value of contemporary budget theory in conditions of fiscal
stress. The findings also suggest we need to take a longer
look at several key questions.

A. Are structural constraints in budgeting helpful
policy tools in the long run? What is the impact of the
increasing predilection for rigid budgeting frameworks such

as caps and distribution formulas? Michigan had a

233
constitutional balanced budget requirement and a line-item
veto. Neither prevented the state from getting into a
financial quagmire that lasted almost a decade. On the
other hand, had they not been there, would the situation
have been worse?

There were also numerous other constitutional,

ff
(1’
:3

a‘
G

(a)

utory, and ti.‘ng constraints in Michigan which tended

to direct the focus of cuts into higher education and.
especially, school aid. This occurred just at a time when

the state needed to tool up for increasing technological
competition from other states and abroad. Although these
policy areas ended up taking their fair share of cuts, some
argue that these were precisely the areas that needed'
protection to buffer Michigan's economic decline and.
perhaps, generate a resurgence. Spending in these areas
might prevent further growth of what some see as an
underclass in Michigan society and thereby protect the
social base which supports its democratic institutions.

Why does a polity like Michigan have so many budgetary
constraints? There are some (see, e.g., Krauthammer 1988)
who argue that societies are naturally drawn toward extremes
in times of crisis. That may explain why the anthropologist
Malinowsky found that in times of uncertainty, rules and
ritual become more important. It may be that the volatile
economy which Michigan inhabits has produced an environment
in which many budgetary rules are a natural response. In
other societies, the same uncertainties have produced other

forms of authoritarianism, but in a liberal democratic

239
society like Michigan's. budgetary rules are one permissible
manifestation.

It may also be that increased dependence on rules is a
natural response to a political environment in which the
leadership constitutionally charged with control of the
budget is immobilized by lack of consensus on what to
protect and fearful of exercising other options (e.g.,
raising taxes). There is some evidence of this at the
federal level wit. the Gramm-Rudman-Hollings legislation.

The irony is that our attempts to control our
environment may be more destabilizing than the uncertainty
we seek to eliminate. Like the programmed trading which
destabilized the stock market, numerous budgetary rules may
have added more uncertainty than the environment they were
designed to order.

B. What does budgetary planning look like when
planning for decline or dramatic change? Another question
'that arises from this study concerns the real validity of
the management plans for deciding cutbacks. The evidence in
our sample was divided. Most respondents we talked to said
the plans were not used. A few said they were. A bigger
sample is needed to determine where and under what
conditions these kinds of plans proved helpful and the
threshold at which they were disregarded.

A further question relates to the reserve. In the
mid-19703 Michigan lawmakers adopted a Budget Stabilization
Fund. The experience of the fiscal crisis showed that it

clearly was a good idea but inadequate. Controversy now

240
centers on how large the reserve should be. If Michiganfls
economy is such that it will continue to experience dramatic
change, should the reserve be larger than normal? What is
normal? How much would be larger? Respondents said that
there were political limits to economic caution.

Do democratic institutions have to be more prudent than

*7:

the people they serve? I not, then the reserve need be

only about four percent of the GF/GP (or $214 million at
1984 revenue estimates), which is approximately the current
propensity to save in the United States. On the other hand.
the low propensity of Americans to save is often cited as an
economic danger to the economy. From an institutional
viewpoint, the Federal Reserve system requires banks to
reserve 16.25 percent of their total deposits.

Given 1984 GF/GP revenue estimates, a rainy day fun of
the size required by the Federal Reserve would be about $865
million. Do states with volatile economies like Michigan's
need to adopt a banking model? Do such states need to think-
in terms of a kind of monetarist policy as well as fiscal
policy?

Further, given the reinforcement that this study
supplies to the centralization thesis, do we need to expand
our theories about budgeting under crisis to take into
account centralization's next of kin, the leadership issue?
If legislatures tend to be ambivalent at best or
incapacitated at worst when confronting fiscal crises, do we

need to identify and demand new roles for those executives

who are left with the task? Do we need new expectations

241
regarding those executives who must deal with such crises?

There are some (see, e.g., Behn 1980a) who call for the

la
is

"S

ultra-rational leader, one who can specify an organizatio
goals. programs and resources, persuasively mobilize staff

and constituency for change, and know at what point the

resource decline will level off. Our study shows th t such
leadership in government is unlikely. Even Behn (1980b) in

other articles has had second thoughts.

H1 {a -\ w vva’n; w a.“ as“ +1fi; k4wm
Q; .LD Cl LEV$OAOA£ J.“ Uhl. \Llirs many

0

What seems more practi
about fiscal strategy, one which builds on existing
knowledge and lays fewer claims on heroic statesmanship. In
a recent study for the Organisation for Economic Cooperation
and Development (OECD), Schick (1986) found that several
countries have adapted to fiscal stress within existing
budgeting frameworks by allowing fiscal demands rather than
program needs to drive the budget. This is what Michigan
did and we saw how destabilizing it was. What is different
about the approaches described in the OECD study is the use
of multiyear budgeting, especially for forecasting
expenditure estimates. While forecasting is chancy business
as we have just shown, forecasting expenditures may be
somewhat more predictable than forecasting revenue.

States like Michigan are still left with the problem of
forecasting demand on welfare services and unemployment
compensation (the reverse side of revenue downturn). New
insights, however, can be gained from this alternative
emphasis on multi—year expenditures and their consequences

for revenue needs. Policymakers and citizens alike can have

242
a better understanding of the coming consequences of
budgetary decisions, even if the extremes such as we found
in Michigan in 1980-82 are never likely to be fully
predictable or controllable.
This strategic shift would also place more emphasis on

th'

.4.
:3

another role of the budget, one mentioned earlier

1.:
0)

LI.
:3

udy. The budget could be used much more effectively

rt

4‘
L

rt

ts communication role to say someth‘ng abou ure

i

directions of government based on projections of current
policies. In doing so, we might shift our budgeting
perspective a bit to the future. This could bolster some of
the budget's more traditional uses for planning, management
and control when cutback comes.

A legislature committed to the annual budget process
could still use some of the features of expenditure
projection analysis. The perspectives gained could enhance
insight into current year decisions.

C. What should budgetary management look like when
dealing with decline or dramatic change? Another finding in
Schick's (1988:530) OECD study was that fiscal stress did
not cause tightening of financial controls by central fiscal
units. The dominant adjustment was toward managerial
flexibility under the theory that resources would be more
intelligently distributed by the manager in charge and the
destructive consequences to morale which cutback brings
would be mitigated.

Although the Michigan legislature was roundly

criticized by financial houses for abdicating responsibility

243
to the state's budget director in the fall of 1980, it may
be that the legislature was acting in the most intelligent
way possible by granting the budget director the flexibility
he needed to deal with a rapidly changing revenue
environment. If so, this challenges some of our thinking
about centralization in that the legislature devolved some
power to the budget director. It also raises some questions

about legislative responsibility in democra ic

separation—of~power regimes. Is such devolution to be
encouraged?
D. What is the role of information in a crisis? A

corollary to the budgeting questions above concerns the role
of information in dealing with crisis. Given the enormous
capacity of information technology to supply data, but given
its cost, the unreliability of forecasts and the ambivalence
exhibited by some decisionmakers toward receiving more
information generally in the worst of the crisis, is there a
'role for better information in a crisis? What kind? At what
point?

E. What is the role of state government in a
globalizing economy? It can be argued that the fiscal
crisis was not truly of Michigan's making-~although the
state's response in some respects made it worse. Some of the
most significant pressures leading to the resolution of the
crisis were also external to the state. Therefore, what
role if any, remains to state government? If the state's
economy is dominated by multinational corporations locked in

international competition with other multinationals far

”IA/1
4."!

away, and the state's fiscal capacity is shaped by decisions
in Washington and Wall Street, are its political structures
adequate for dealing with these realities?

What can we reasonably expect of our state leaders in
such a situation? As one writer recently noted,

”Of all the lessons (the former governor) learned
n 3 years in office, the relationship between
conomy and his political agenda was to

ome the m st salient.... 'He learned in his

e he implications of the economy as a
‘ ,' said (his former budget

.. 'If anything led to his

ement, it was his frustration over that.'"

w
J-
t“ ).

Budgeting lies at the heart of politics and governance.
This study illustrates that part of contemporary budgeting
theory still works in conditions of fiscal stress. Much of
budgetary change still remains linear and significant at the
margin. Fair shares still holds. But we must expand our
theory to account for changes in the annual cycle, budgetary

roles and the role of the budget itself in crisis.

APPENDIX A

Abbreviations

The following is a list of abbreviations used in some

tables and figures in the text:

Abbreviation

 

AVE
AG
ATT
CO
COM
COR
CR
CS
DMB
DMH
DNR
DPH
DS
DSS
ED
EXE
HED

JUD
LAB
LEG
L&R
MIL
POL
REV

SCH
ST
TRS

Full Name

 

Average (of 25 categories)
Department of Agriculture
Department of the Attorney General

Capital Outlay

Department
Department
Department
Department
Department
Department
Department
Department

of
of
of
of
of
of
of
of

Debt Service

Department
Department

of
of

Commerce

Corrections

Civil Rights

Civil Service
Management and Budget
Mental Health

Natural Resources
Public Health

Social Services
Education

Executive (Governor's) Office
Higher Education Fund (universities and

colleges)

Judiciary
Department

Legislature

Department
Department
Department

State Revenue

of

of
of
of

Labor

Licensing and Regulation
Military Affairs

State Police

Sharing with Local Units

of Government
School Aid Fund
Department of State
Department of Treasury

245

Appendix B

A Selected Chronology of Events
Surrounding Michigan's Fiscal Crises: 1963-1984

1963—64——Michigan adopts a new constitution, the fourth
in the history of the state.

1965-66--The executive branch is restructured effective
January 1, 1966 in the Reorganization Act of 1965, Public
Act 380.

19§3:10—-The House Fiscal Agency is established. (The
Senate Fiscal existed prior to this.)

January, 22, 1969. William Milliken is sworn in as
governor.

The United Auto Workers strike General Motors during
1970.

1970-71--Revenue depletion caused by the record-length
autoworkers' strike strains the state budget. Lawmakers
increase the state income tax rate from 2.6 to 3.9 percent
(a 50 percent increase for both business and individuals),
reduce property tax credits saving $60 million, generate
another $22 million through accelerated tax collections, and
borrow $45 million from the Motor Vehicle Accident Claims
Fund.

Nbvember 17, 1970. An executive order is issued mandating
budget reductions in the amount of $41 million. The order
also mandates the Liquor Control Commission to defer
'payments to vendors by one month, saving state $18 million.

January 1971. The House Fiscal Agency requests all
departments to submit detailed descriptions of ongoing
programs with intent of implementing a program/budgeting
system. The governor's office asks forbearance as a similar
plan is already being developed there (House Fiscal Agency
1976).

February 18, 1971. An executive order is issued requiring
$34.73 million in budget cuts.

June 2, 1971. An executive order mandates $10 million in
budget cuts.

1971-72—-Property tax credits are restored to former levels
(House Taxation Committee 1983).

August 1971. A law goes into effect increasing the state
income tax from 2.6 to 3.9 percent to aid education and
balance the budget (Davis 1982).

246

247

1972—73-—A good recovery year. Buoyed by the expanding
economy, the 1971 tax increase generates record revenues.
GF/GP spending increases 13 percent. The executive office
introduces a program budget evaluation system. The fiscal
year ends with surplus of $200 million (House Taxation
Committee 1983). The governor proposes a tax cut (1).

1973—74—-The $200 surplus from the prior year is used to
balance the budget. Michigan begins to feel the initial
effects of tax cuts for individuals (circuit breaker,
personal exemption) and business (intangibles, inventory
credit) (House Taxation Committee 1983). The cuts are
partially effective in 1973 and fully effective in 1974. The
surplus permits significant expansion in the FY 74 budget
and policymakers create an expenditure base larger than the
revenue base that was being trimmed (1). The recession that
is to last into early 1977 begins (The Detroit Free Press,
January 2 , 1977).

The Senate changes its appropriations procedures. The sheer
complexity of the state budget plus the fiscal crisis forces
the Senate Appropriations Committee to give its
subcommittees more power and this tends to democratize the
process. With that comes more staff, particularly more
professionals (2).

The Department of Management and Budget is created by
executive order by combining the Department of
Administration and the Executive Office's Budget Bureau.

1974-75--Michigan's public revenues are now experiencing the
full impact of the tax cuts plus a franchise fee cut, income
tax exemptions for pensions, and a sales tax credit. In
addition, Michigan also begins to feel the effects of the
'Arab oil embargo.

November 5, 1974. Voters remove the sales tax on food and
prescription drugs. Lawmakers respond by replacing lost
revenues with increased income taxes, raising the rate 50
percent from 3.9 to 4.6 percent.

December 4, 1974. The governor issues an executive order
mandating $66.93 million in budget cuts. The legislature
does not approve.

December 16, 1974. The legislature approves a revised
executive order. Total cut is $78.20 million.

March 4, 1975. An executive order is issued mandating
$31.50 million in budget cuts.

June 30, 1975. Anticipating an end-of-year deficit, state
budgeters change the method of accounting for sales, use and
withholding taxes accruing an additional $200 million (or
one month's) revenues (The Detroit News, December 1, 1985),

248

finds an additional $51 million of unobligated capital
outlay money (House Taxation Committee 1983), and borrows
from the Veteran's Trust Fund and the Uninsured Motorist
Fund to make up the shortfall (Bryan and Howard 1979). The
state begins what becomes popularly known as "Chinese
bookkeeping." (1)

1975. Attempted introduction of a legislatively sponsored
program evaluation zero-base budget system.

1275-76—-The previous tax cuts continue. The economy is in
a recession. Short—term borrowing adds $68 million. Utility
property tax collections are put on an accrual basis
yielding $60 million. An "extraordinary" lapse by the
Department of Social Services (DSS) saves $55.3 million.
Teachers' pension fund contingency reserves are used, adding
$34.6 million (House Taxation Committee 1983

The Michigan Economic Action Council is created. The
Council recommends adoption of a budget stabilization fund.

The state signs a contract with the University of Michigan's
Research Seminar in Quantitative Economics to develop the
Michigan model for forecasting tax revenue and the Michigan
economy (1). This model builds on work that had been‘
originally funded with state research grants in the
mid-19609 (Hanieski 1981).

August 1975. The need to cover a looming deficit among
other things forces lawmakers to adopt the Single Business
Tax. The tax adds a one-time cash flow boost of $240
million (Bryan and Howard, 1979, say $210 million) because
the state "overlaps the final annual payments on the
repealed corporate franchise tax, one of the taxes which was
'replaced, with the quarterly estimates of the SBT" (1).

October 29, 1975. The governor issues an executive order
mandating $149.50 million in budget cuts. The legislature
does not approve.

December 9, 1975. The legislature approves an executive
order mandating $123.70 million in budget cuts.

January 1976. The governor presents the 1976-77 executive
budget developed for the first time according to target
budget concepts. In this approach, each department submits
requests based on 95, 100, and 108 percent support of prior
year appropriations, not including inflation. Programs are
also ranked according to priority. (Budget Message of the
Governor for Fiscal Year 1976-77:1)

May 14, 1976. Just six weeks before the end of the budget
year, Michigan extends its fiscal year by three months (to
September 30), adding $207 million (the Oakland Press says
it was $267 million). In addition, $50 million is borrowed

249
from the state veterans' trust fund.

These adjustments (including the accounting shifts and fund
borrowings mentioned above) amount to $758.6 million, or
about one-fourth of the total annual budget. While the
books are closed with a $28 million surplus, there is a
negative cash flow in GF/GP monies approaching $400 million
at times during the year (Bryan and Howard 1979). State
officials congratulate themselves on "exceptionally good
management" by the executive branch departments and the
legislature, saying that the surplus was predicted and is a
result of good management and lower than expected welfare
caseloads (The State Journal, January 13, 1977).

1976~77——Prior tax cuts are retained. The fiscal year ends

with a $68.4 million surplus.

Fall 1976. The Michigan Efficiency Task Force, a nonprofit
corporation set up at the governor's request and funded by
scores of Michigan labor and business groups, reports
findings on operations of state government. Among the
observations: "In general, the Task Force was favorably
impressed with the overall management of the affairs of the
State of Michigan and with the quality and dedication of
government personnel" (cited in Heckman 1983). But the
report calls for various cost-cutting projects and a
follow—up study by the same group three years later will
show that only some of the recommendations are implemented,
the remainder being resisted by various state colleges and
state agencies including the legislature (Detroit News, May
3, 1979).

January 24, 1977. The governor presents the executive
budget. He asks that the legislature not return to the old
"fiscal year because, "it would reverse the one-time gain
made possible by extending the 1975—76 year and eliminate
the program improvements I am proposing in this budget." The
governor also asks that legislators heed cash flow problems
and not commit all revenues to program demands. In
addition, the governor asks that the GF/GP budget be
considered in context with the school aid fund in order to
have a more comprehensive view of state spending (Budget
Message of the Governor for Fiscal Year 1977-78:1).

Spring 1977. Michigan lawmakers adopt a budget
stabilization fund. As the FY 78 budget is being written.
some lawmakers are so concerned that funds be restored to
programs out in 75-76, that they argue the full—formula
funding of stabilization fund should not be allowed (1).

1977—78--The governor introduces the budget with glowing
predictions for the economic future. The Director of the
Department of Management and Budget (DMB) calls the new
budget, "The Road to Recovery and Stability." For the first
time in several years, the budget includes new programs such

250

as an urban youth job program and more money for higher
education and social services (Detroit Free Press, January
25, 1977), but the prior tax cuts are continued. There is a
shift to accrual accounting for Medicaid. Reforms in the
Single Business Tax cost the state $20 million but the
Stabilization Fund collects $108.7 million which. with
interest and no payouts, nets the state almost $115 million
(House Taxation Committee 1983).

January 5, 1978. The governor predicts a good year: says
good times should last through the third quarter of 1980. He
is said to be considering a modest tax cut or rebate (The
State Journal).

January 23, 1978. The governor presents his budget message,
again asking the legislature not to allocate all available
revenues to increasing program expenditures. He again asks
the legislature to take a more comprehensive view of the
state budget by combining the GF/GP and School Aid Fund
recommendations (Budget Message of the Governor for the
Fiscal Year 1978-79:1).

April 1978. Realizing that their revenue estimates were too
high, lawmakers confront the possibility that $200 million
will have to be cut from their budget bills. A local
newspaper reports, "Just as in every other year--early
versions far exceed recommendations from Gov. William
Milliken and the projected revenues for the fiscal year."
(The State Journal, April 24, 1978).

The state borrows $200 million in general obligation notes
to bolster cash flow (The Detroit News, December 1, 1985).

September 29, 1978. Despite party opposition the governor ‘
signs a revenue measure increasing license-plate fees by
thirty percent and adding a two cents-per-gallon fuel tax
(Davis 1982).

November 1978. The governor orders cuts in hiring,
equipment purchases, out-of-state travel, and tells
department heads to prepare for a four percent cut. The
Detroit News (November 23, 1978) quotes the governor as
saying, "I must act now to anticipate an economic downturn
in order to meet the constitutional obligations of a
balanced budget." The budget director says there is a 50-50
chance of a recession, but if it comes it will not be so
severe as the one in 1975.

1978-79—-A quiet fiscal year. There is no consensus to
change prior tax cuts and they continue.

Nbvember 7, 1978. The constitutional Tax Limitation
(Headlee) Amendment, a question placed on the ballot by
voter initiative, is passed.

251

January 29, 1979. The governor presents his 1979—80 budget.
He refers to difficulties in formulation because of economic
uncertainties and expresses pleasure that no general tax
increase is needed (Budget Message of the Governor for
Fiscal Year 1979-80).

April 1979. Ballooning costs in Medicaid, the program
paying medical and prescription costs for about nine percent
of the state's population, force an emergency meeting of
lawmakers to confront a possible shortfall of $20-$30
million in state revenues (The State Journal, April 22.
1979).

Spring 1979. Budgeters borrow $25 million from the Liquor
Control Commission revolving fund.

May 1979. The governor recommends cuts of $100 million in
his own proposed budget for the 1979-80 fiscal year. The
largest proposed cut would come from the home-heating
assistance plan which helps the poor pay fuel costs.
Legislators are beginning to criticize the governor for not
submitting a realistic budget in the first place (Detroit
News, May 22, 1979).

June 1979. About 8.5 percent, or 781,386, of the state's
population is now receiving welfare benefits (Hollister
1982a).

July 15, 1979. The state budget director, in commenting on
the 1979~80 budget passed by the legislature, is pleased
with the outcome. "Absolutely, it's the best we've ever
done," (Detroit Free Press, July 15, 1979).

Social Services are out $80 million to balance the budget
'(The State Journal, July 18, 1979).

July 27, 1979. The House Minority Leader accuses the
Speaker of secretly raiding the Budget Stabilization Fund in
order to balance the budget (The State Journal).

Another $104.1 million is put in the Stabilization Fund

which now shows a balance of $241.1 million. The state

borrows $450 million in short-term loans (House Taxation
Committee 1983).

1979-80--Previous tax cuts continue and the Tax Limitation
(Headlee) Amendment also takes effect (3): borrowing from
the Hammer Trust Fund yields $26 million, from Budget
Stabilization Fund another $263.6 million (4); the Single
Business Tax is now put on an accrual system yielding
another $159 million and insurance premium accruals produce
another $31 million (5) and short term borrowing brings in
another $500 million (House Taxation Committee 1983).

November 11. 1979. In order to close an anticipated $300

252

million gap in the budget, the governor asks department .
heads to identify 20 percent cuts in their budgets for the
1980—81 budget, with the understanding that not all cuts
would be used. The budget director says, "The plan will not
necessarily mean equal pain for everyone." Department heads
are warned not to play games. Response from directors is
grim (The State Journal).

January 21, 1980. The governor presents his 1980—81 budget.
Again he refers to difficulties of formulation but expresses
pleasure that the budget can provide for health, safety, and
welfare of Michigan's citizens, saying "I am particularly
pleased that, for the ninth straight year, my budget
recommendations include no general tax increase," (Budget
Message of the Governor for the Fiscal Year 1981).

January 22, 1980. Detroit News headlines say hundreds face
layoffs in state's tight budget. .

January 23, 1980. The Detroit Free Press announces that
"the real sacrifices proposed by the Milliken administration
in its 1981 state budget will be made by the poor, the
unemployed, the outlaws and the outcasts." Of the $171
million in proposed cuts, $127 million will come from social
services programs.

January 23, 1980. The State Journal reports disagreements
in revenue projections between the state's budget office and
the University of Michigan model makers.

May 4, 1980. The welfare caseload is now up to 218,000 and
Michigan's budget problems are compounded by news that
Congress will out $125 million or more, mostly in revenue
sharing, to help balance the federal budget. Newspapers say
'Michigan "feels ignored by rest of the nation" (The State
Journal).

Capitol observers point out that adoption of the tax
limitation (Headlee) amendment, which requires 41 percent of
state revenues to be shared with local governments, is
forcing policymakers to take funds out of education programs
in order to keep up with social services demands (The State
Journal, May 4, 1980).

May 16, 1980. State budgeters reveal that the drop in
income tax withholding collections is almost twice as bad as
the June 1975 dip, previously the worst month on record. The
state budget director says the decline comes as a surprise
and that budget cuts will be large. "There will be no
sacred cows" (Detroit Free Press).

May 21, 1980. The governor says, "Things continue to look
very bad." Newspapers say education programs will bear half
of the next round of budget cuts (The State Journal).

253

May 28, 1980. An executive order is issued mandating $97.50
million in budget cuts.

June 5, 1980. The Detroit Free Press reports state revenues
are plunging. The budget director says the dearth of funds
will force the state to spend less in 1981 than in 1980,
forcing program cuts of $600 million in real dollars. The
Michigan Senate adopts new budgeting procedures which
require targets to be set before appropriations are
approved. The House declines to introduce the same
innovation.

June 10, 1980. The Detroit Free Press reports Standard and
Poor's Corporation drops Michigan's bond rating from AA to A
plus. Some estimate the drop will increase interest costs
up to one—half percent.

June 10, 1980. Officials at the Michigan Unemployment
Security Commission (MESC) say the state may have to borrow
over $1 billion to cover jobless benefits (The State
Journal).

July 9, 1980. Michigan's "red ink worsens" and budget
officials say "there's nothing left to cut." Fiscal
authorities are said to be studying bookkeeping tricks to
eliminate the red ink (The Detroit News).

July 24, 1980. Michigan's deficit catapults to $120
million. Over 13 percent are on welfare. Faced with a
deficit or more cuts, officials say they will opt for
accounting manipulation, even if it raises interest rates
(The Detroit News).

July 30, 1980. The governor asks state workers to take days
Toff with no pay (Davis 1982).

September 30, 1980. Unable to formulate and adopt a budget
for the coming fiscal year, lawmakers pass an interim
measure, Public Act 268, equal to one-fourth of the going
rate for the previous fiscal year. The state budget
director is given extraordinary allotment powers with
special 5-member committees of the House and Senate acting
in an advisory capacity.

1980—81——Previous tax cuts are continued. By the time the
budget winds through the legislative approval process in
mid—summer, it is $473.3 leaner than what the governor
proposes in January. Further executive orders and mandated
lapses carve out another $148.7 million. The Hammer Fund is
tapped for another $46.2 million and capital outlay for
another $46.7 million (6). Also, $20.1 million is taken
from the Railroad Delinquent Tax Fund and $16.9 million from
the Budget Stabilization Fund. These raids yield $129.9
million. Medicaid expenditures are shifted back to a cash
basis, adding $87.4 million more. Short-term borrowing

254
provides $500 million more (House Taxation Committee 1983).

The Citizens Research Council (1982) estimates that the
obligations payable at the end of the fiscal year exceed
cash by $750 million.

October 16, 1980. The Detroit News says Michigan's
financial woes worsen just when the economy was supposed to
be improving. Lawmakers abandon plans to pass a full-year
budget and begin to operate on a 90—day continuation budget
instead. This causes the state's bond rating to fal from
AA to A.

October 25, 1980. Faced with a cash crunch, Michigan delays
payments to most of its contractors. Banks cut off the
state's short~term credit. The Chief Deputy Treasurer says
no one will lend money to the state because there is no
annual budget available to show how the funds would be
repaid.

November 4, 1980. Voters defeat a radical property tax-cut
(Tisch) proposal which some claim would cost the state $2
billion.

December 1980. Another $26 million is borrowed from the
recreational land acquisition (Hammer) trust fund.

January 26, 1981. The governor presents his executive
budget for 1981-82, saying it is "one of the most arduous
and painful experiences we have ever shared." He notes that
formulation of this budget proceeded from a new approach
based on minimum operating levels defined as "the level of
support below which no constructive contribution toward a
program's goals and objectives could be made." The budget
includes a proposal for reductions in property taxes (Budget
Message of the Governor for Fiscal Year 1982).

In retrospect, a member of the House Appropriations
Committee calls the budget message "optimistic, upbeat" and
sees the budget as a "modest restoration" budget. He faults
the governor for endorsing the President's supply—side
economics (Hollister 1981b).

1981. Michigan adopts Public Act 18, a statute which
regularizes appropriation, allocation and expenditure
procedures and provides for overall legislative oversight of
the budgetary process.

January 27, 1981. Budget analysts report that a budget
shortfall is likely but that most of it will be covered by
bond interest, good management, and "adjustments in the
methods of reporting expenditures and projected
appropriations." Yet, $21 million more in cuts are likely
(The State Journal).

255

February 1981. A member of the House Appropriations
Committee charges that the governor's budget is "built on
sand. The assumptions are faulty and already in question"
(Hollister 1981).

February 1981. Michigan borrows $500 million to cover its
obligations for the remainder of the fiscal year (The
Oakland Press, December 20, 1981).

April 1981. The legislature adopts the 1981-82 budget three
months earlier than usual. A key member of the House
Appropriations Committee says the legislature, stung by
criticism for delayed passage of the previous budget, passed
the budget too quickly so that local units of government and
educational institutions could plan for the coming year.
(Hollister 1981b)

April 2, 1981. The American Society For Public
Administration announces a series of workshops on managing
fiscal stress.

June 7, 1981. Newspapers announce that Michigan's economy
brightens. Employment gains and unemployment declines to
11.5 percent (The Detroit News). -

June 1981. Michigan changes its accounting method for
Medicaid back to the cash method, thereby voiding $71
million in accrued obligations for that fiscal year (The
Oakland Press, December 20, 1981).

June 24, 1981. State agencies are ordered to return $40
million in previously appropriated funds to keep the budget
balanced. An $80 million shortfall is predicted,
three-fourths from welfare costs generated by the previous
'year's high unemployment (Detroit Free Press).

July 28, 1981. The Citizens Research Council blasts
Michigan's cash-flow management procedures. Their report
states the cash—flow problem is a growing, accumulating
financial deficit that must be refinanced each year. The
deputy budget director agrees it is a "legitimate,
significant problem" but that "corrective action is " 'a
difficult concept to sell' to the Legislature when times are
tough" (The Detroit News).

September 1981. State budget officers go to Wall Street to
request an additional $500 million in short—term notes for
the third year in a row. Saloman Brothers, Inc., the main
underwriter, demands huge budget cuts in return. The state
budget director also promises Moody's Investors' Service to
correct the state's accounting practices. Promises are also
made to reduce the cash-flow deficit by at least $100
million, or about one-fifth of the cash deficit (The Oakland
Press, December 20, 1981).

‘

256

September 2, 1981. The governor convenes talks with key
lawmakers, anticipating an end-of—fiscal-year deficit of
$135 million. Education and local government revenue
sharing are expected to be prime target areas. The Governor
is expected to propose a new property tax out plan for
homeowners, farmers, business and industry (The Lansing
State Journal).

September 16, 1981. The governor issues an executive order
cutting $125.90 million from the budget. The Legislature
rejects it.

September 29, 1981. The Senate seeks to avoid deep cuts in
education by attempting to use a $21 million railroad
subsidy fund. Efforts fail when lawmakers learn that some
of the fund is already committed elsewhere (Lansing State
Journal, September 30, 1981).

September 30, 1981. The Legislature faces a marathon
session to fund the end-of—year deficit. Legislators want
to protect education programs from further cuts. but argue
that if cuts have to be made, they "...should make the cuts
even across the board" (The State News).

The Legislature approves a revised executive order cutting
$101.80 million from the state budget.

Analysts learn that the proposed property tax out plan will
make school districts absorb 35 percent of the slashes
without assistance from state funds (The Lansing State
Journal, September 30, 1981).

1981-82—-The budget year begins with $167 surplus tagged for
property tax relief if Proposal A is approved by voters, but
.this surplus evaporates as the economy worsens and previously
approved tax cuts remain. The legislature adOpts a budget
$187.2 million less than what the governor recommends. A
shortfall of $669 million has to be made up. Actions to
balance include: accrual of oil and gas tax collections and
beer and wine tax collections totalling $9.3 million. The
legislature adopts a six—month tax increase to the end of
September 1982 yielding $286 million. Twenty-five percent of
this is pledged by the governor to correct book keeping
manipulation. Capital outlay is cut $13.4 million; mandated
lapses capture another $31.8 million. Four executive orders
totalling $778 million are issued. A cigarette tax increase
of 10 cents per pack adds $54 million but that is set aside
for accounting corrections (actually to accrue the property
tax credit liability over 7-8 years) in a Working Capital
Reserve Account also created this year. There is more
short-term borrowing in the amount of $500 million, the
maximum allowed by lending institutions (even through the
constitution allows more), but it costs the state $94 million
to do so. The fiscal year ends with a year end balance of $13
million (House Taxation Committee 1983).

257

Other actions to reduce the imbalance involve changing
accounting procedures for utility bills of welfare
recipients to cash basis which temporarily erases $19
million in liabilities. In addition, $80 million in ,
fourth-quarter payments to universities are withheld with
understanding that this would be paid the following year
(Citizens Research Council 1982).

A further $88 million in GF/GP funds is "saved" by
substituting federal funds and user fees in programs
administered by the Departments of Social Services and
Mental Health (Citizens Research Council 1982).

Michigan experiences a mild economic recovery in the first
half of 1981 (Wall Street Journal, August 6, 1982)

Fall 1981. The governor offers a package of bills aimed at
stimulating economic recovery. Elements focus on regulatory
relief to business, increasing capital availability,
bettering the tax structure for business, and improving
state business assistance programs.

October 1, 1981. The federal Omnibus Reconciliation Act
takes effect forcing Michigan to reduce its state budget by
$50 million. The impact of social services reductions is
such that 35,000 people have ADC grants cut or ended; 25,000
suffer cuts or cessation of food stamps; 18,000 lose CETA
jobs; 50,000 lose unemployment and trade readjustment act
benefits (Hollister 1982a).

October 12, 1981. The Brazer Report, the first
comprehensive study of Michigan's finances in twenty-five
years, is released. The report finds that Michigan is not a
.high tax burden state, that business taxes dropped from 42
percent of revenue in 1957 to 29 percent in 1982 and
concludes that there is no justification nor demand for
major changes in the state's tax structure. Diversification
is the key to a more stable economy (Brazer and Laren 1981
and Hollister 1983a).

October 15, 1981. The governor withdraws his proposal for
property tax cuts (The Detroit News, October 16, 1981).

October 16, 1981. Only two weeks into the fiscal year,
Michigan finds its budget already $270 in arrears. The
cause is pressure by New York City bonding houses which
disapproved of the means by which Michigan closed its books
on the 1980-81 fiscal year by accounting for Medicaid
payments on a cash basis.

The Speaker of the House, a Democrat, refuses to blame the
Republican administration for the new crisis. He says, "We
were all a part of it" (The Detroit News).

258

October 21, 1981. The Michigan Capitol Area Chapter of the
American Society For Public Administration inaugurates a
meeting series on impacts of state and federal budget cuts.

October 21, 1981. Public Sector Consultants, a Lansing-area
firm, claims that the coming 1981—82 budget is $650 million
out of balance, more than twice official estimates. The
deficit is attributed to federal budget cuts, declining auto
sales (the lowest in 23 years), high interest rates, and a
growing welfare caseload caused by the continuing recession.
Calling the coming year the "toughest year of the century,”
the firm's director says, "We're not calling people names

with this.... Michigan is just in a situation where it has
no control of what is happening to it" (The Detroit News)
(7).

October 22, 1981. Just weeks into the new fiscal year,

legislators approve the governor's executive order proposing
a $270 million budget cut. The Speaker of the House says.
"It'll be tough, hard, difficult, but we all agree that we
have to do it. I don't see how the amount (of the order) is
negotiable, and there's no way to make major changes in it"
(The Detroit Free Press).

Nbvember 30, 1981. The state's cash flow is estimated to be
$200 million in deficit. November returns on October income
tax withholding collections are $30 million below estimates.
The state budget director issues a memo to all department
heads asking for a voluntary spending reduction of four
percent (The Oakland Press, December 20, 1981).

December 9, 1981. The state budget director, appearing
before the Senate Appropriations Committee, says Michigan
cannot change its Medicaid accounting methods and return to
accrual because there are no funds to do so.

December 15-17, 1981. The Legislature passes a $155 million
tax-cut bill. Lawmakers agree to borrow another $46 million
from the Kammer trust fund to help balance the 1980—81 books
(The Oakland Press, December 20, 1981).

December 20, 1981. Michigan's credit rating drops to lowest
in the nation, only exceeded by Puerto Rico. Newspapers say
the state's lifeline to loans is about to be severed
(Oakland Press).

December 22, 1981. The governor announces he will not seek
re-election (Davis 1982).

January 11, 1982. Newspapers announce that Michigan is
"$600 million in the hole." Fiscal experts say it is a
"hidden deficit" caused by accounting changes and a state
law which permitted one fiscal year to be stretched to 15
months. In addition to the hidden deficit, experts say
Michigan owes $500 million plus $70 million in interest in

259

short—term notes to New York banks. The state also owes
$502 million plus $30 million in interest to various
restricted funds. The budget director says, "We have a
balanced budget. We have always had a balanced budget. We
do have a cash deficit. The reason we have the deficit is
accrual accounting," (The Detroit News).

January 24, 1982. The governor continues to oppose any
general tax increases. He is expected to propose a 10
percent increase in GF/GP spending, primarily to make up
cuts in education, but also for revenue sharing and economic

development projects. The increase is based on forecasts
for gradually improving economic conditions, The Detroit
News).

January 25, 1982. The governor presents his executive
budget for fiscal year 1982—83. He is optimistic that an
economic recovery will develop "midway through the fiscal
year," and that the "recovery will allow us to restore our
support for some critical areas in which we have had to make
substantial cuts over the last two years." He asserts that,
through difficult decision making, "we have balanced our
budget each year as required by the State Constitution,"
(Budget Message of the Governor for Fiscal Year 1983).

February 25, 1982. President Reagan admits that Michigan is
in a "first—class depression." The national unemployment
rate stands at 8.5 percent; Michigan's at 14.9 percent,
(Detroit Free Press).

February 27, 1982. Michigan delays $225 million in payments
to schools, colleges, universities and local governments
because of cash flow problems. The state budget director.
state treasurer, and several legislators meet with Wall
Street lenders to reassure them that Michigan will meet its
loan repayment schedules, (The Detroit Free Press).

March 3, 1982. The state budget director says about Wall
Street lenders: "They have immense power over this state.

If they drop my rating and I can't borrow, then we can't pay
our bills in October, we have payless paydays, we have
chaos," (The Detroit News).

March 4, 1982. "State's woes deepening." February tax
collections are $38 million below revised estimates. The
state budget director says, "there is no escaping the fact
that the short-run outlook is not good and that the effect
of national factors on the state economy and on state
government will be substantially more severe than we had
anticipated," (The State Journal).

The state budget director is said to be backing away from
the governor's no-tax-increase policy. He says, "We're

260

looking at everything and not ruling anything out," (Detroit
News). ‘

March 7, 1982. The governor proposes a "rescue plan": a‘
budget cut of $451 million, the largest in Michigan's
history. The legislature rejects it. The governor also
asks employee concessions of $20 million, a 10-cent
cigarette tax to be earmarked for a cash—flow fund, and a
one percent increase in the personal income tax for six
months (Hollister 1982a and 1983a).

March 29, 1982. Unemployment in Michigan now stands at 16.1
percent. Attempts by Michigan and other recession-

bound states to balance budgets will curb spending by both
taxpayers and governments, slowing the national economic
recovery and President Reagan's drive to shift new fiscal
responsibilities on the states (Business Week).

April 1982. Welfare recipients now total 1.09 million, or
nearly 12 percent of the population. Michigan is among the
top five states in sending tax dollars to Washington and
last in receiving them. Legislators regard the governor's
proposals as "politically distasteful" because they call for
budget cuts and a tax increase in an election year. Even so,
some believe the governor has understated the problem
(Hollister 1982a).

April 7, 1982. The legislature approves a revised executive
order. Budget cuts now total $308 million.

April 28, 1982. The Michigan Senate rejects the governor's
plan which the House has approved to raise income taxes from
4.6 to 5.6 percent until September 30. A Senator is quoted
as saying, "You know, these people are looking for any ‘
.excuse to vote the thing down, what with reapportionment and
this being an election year. And if they can't think up an
excuse on their own, darn it. it looks like the governor is
giving it to them," (Detroit Free Press, May 9, 1982).

May 1982. The legislature approves a hike in the cigarette
tax and earmarks the increase for rebuilding cash reserve
accounts (Wall Street Journal, August 6, 1982).

May 5, 1982. The state budget director says the governor
absolutely will not issue another budget—cutting executive
order until the Senate votes again on his proposed tax
increase (Detroit Free Press, May 9, 1982).

May 7, 1982. Moody's Investors Service, Inc., a principal
Wall Street financial analysis group, says it will lower
Michigan's credit rating (Detroit Free Press, May 9, 1982).

May 9, 1982. The state budget director's projections are no
longer trusted; the governor's effectiveness to manage the
fiscal crisis is in doubt. Critics say the budget director

261

and the governor's office are issuing inconsistent
statements. Many believe the governor is crying wolf. The
director of the Board of Michigan Businessmen calls the
governor's threat to cut school aid, "another political
ploy." The Senate Majority Leader says, "In spite of
everything we've said and everything we've done, there's
still a vast body of people out there who don't believe this
state is in a crisis.... It obviously doesn't help matters
that this body (the Senate) doesn't believe the governor,"
(Detroit Free Press).

May 17, 1982. In an all—night session, the legislature
finally approves a temporary six—mont. tax increase (Public
Act 155).

May 20, 1982. The legislature approves $50 million in
budget cuts. Rumors persist that the governor reduced the
original request to $50 million in order to gain Senate
votes on a tax increase. The governor endorses a ballot
proposal permitting voters to decide to cut school property
taxes in exchange for an increase in the state sales tax
(Detroit Free Press, May 21, 1982).

May 27, 1982. Local government leaders charge that schools,
local governments, and state colleges and universities have
taken the brunt of state budget cuts, that the state has
violated the terms of the Headlee Amendment. They say that
state government has made no major layoffs, major
reorganizations nor significant reordering of spending
priorities. A budget office spokesperson says layoffs of
more than 100 persons have occurred in only eight
departments: Commerce, Education, Labor, Mental Health,
Natural Resources, State, Social Services and the State
Police (Lansing State Journal).

June 3, 1982. Key lawmakers and budget officers meet with
Moody Investment rating officials in New York City. They are
told that credit worthiness is determined by evaluations of
four criteria: debt level, financial operations,
administrative/governmental effectiveness, and the general
economy. They are told that Michigan is regarded as a "low
debt state...below the average in relationship to other
states." They are also told that Michigan's financial
operations are too dependent on the performance of the auto
industry but that the state government is well regarded for
acting responsibly to the fiscal crisis. In short, Michigan
is given credit for controlling what it can control
(Hollister memo to Speaker Bobby Crim, June 7, 1982).

Ju1y 19, 1982. A prominent Michigan economist says the
gloom in the economy may break by the end of the year. Lower
wage contracts negotiated in the auto industry are seen as
making the area more competitive and technological
innovations in other industries are key (Lansing State
Journal),

b.)
C”
1‘.)

August 6, 1982. In a wide-ranging analysis of Michigan's
fiscal crisis, the Wall Street Journal faults adoption of
the Economic Stabilization Fund as postponing the need for
budget discipline. making eventual adjustments more painful.

August 10, 1982. The State Civil Service Commission
reverses its April 1982 decision to approve a five-percent
pay increase for 17,000 state workers and decides to delay
the increase until the beginning of the new fiscal year.
Three public employee unions file suit that the commission
has violated constitutionally set procedures for setting
civil service wages.

August 11, 1982. The state budget director announces he
will leave state government at the end of the year.

August 19, 1982. The state budget director says Michigan's
economy will not improve for at least two more years. "Our
economy has collapsed," he says. "The '83 budget is
painful, even worse than the '82 budget. And the worst is
still not here."

The governor says he will ask for another $150 million out
before the end of the fiscal year. Auto sales are now the
worst in 24 years, interest rates remain high and state tax
collections remain low. Cuts are predicted to hit local
governments, schools, and colleges and universities because
state departments are at the end of their fiscal year and
have spent all their money (Detroit Free Press).

September 1982. A consortia of five Japanese banks agree to
back the state in borrowing $500 million (Washington Post.
September 7, 1982). State officials turn to Japan after U.
VS. banks refuse to lend Michigan any more money. Japanese
banks charge a $60 million credit fee (The Detroit News,
December 1, 1985).

September 1, 1982. The Citizens Research Council of
Michigan issues a highly critical report on state budget
practices, 1975-1982. The analysis says deficit spending
practices began during the 1975—76 recession and now hide an
estimated $1 billion debt.

September 1, 1982. The legislature rejects a proposed
executive order mandating $150 million in budget cuts.

September 2, 1982. Facing further demands on the state for
welfare assistance, the legislature approves transfer of $70
million from the Medicaid fund to General Assistance and Aid
to Dependent Children by emptying the Medicaid fund: it
subsequently passes supplemental appropriation of $70
million to cover Medicaid payments (Hollister 1982b).

September 15, 1982. A revised executive order still

263

totalling $150 million in budget cuts from higher education.
school aid and revenue sharing is approved by the
legislature. School districts extract a promise from
legislators to restore their cuts by June 30 the following
year, thus sparing them no actual loss within their fiscal
year which runs from July 1 to June 30 (Hollister 1982c).

September 22-2 . 1982. The legislature passes a 1982—83
budget, ten weeks later than usual. The GF/GP target
approved is $4.6 billion, the same as the 1980 budget and,
in "real" dollars, 20 percent less than the 1980 budget. The
state budget director says, "This is the tightest, most
constrained budget ever." A "major war" developing between
education and social services for what remains of the budget
is quelled when ADC grants are cut to levels below the
surrounding state average (Hollister 1982b, 1983a and The
Lansing State Journal, September 29, 1982).

H
0

«82-83. Borrowing of another $500 million in short-term
monies is made possible by action of a consortia of five
Japanese banks which produce a letter of credit (House
Taxation Committee 1983). The legislature adopts a budget
almost $500 million under the governor's recommendation.
Another $225 million cut is proposed by the governor's
executive order. and another .25 percent increase in the
cigarette tax (yielding $112 million) to further supplement
the Capital Reserve Account for accounting corrections
(House Taxation Committee 1983).

 

 

The legislature also approves an additional 1.5 percent
increase in the income tax (which is expected to bring in
another $675 million) for six months only. According to one
analyst, "In retrospect, in terms of how the politics played
out with (the governor) in 1983, it is clear that letting
.the tax come off in September 1982 probably was a very bad
thing to do." This increase raised the personal income tax
rate from 4.6 to 6.35 percent (1).

October 13, 1982. The Senate Fiscal Agency Director tells
the Senate leadership that the 1982-83 budget is already
$170 in deficit even though the budget officers claim the
budget is still in balance.

October 22, 1982. A Lansing State Journal headline says
"State Budget Ink Already Red." The deputy budget director
says improvements in the economy are near."

November 2, 1982. A new governor is elected. Democrats will
now control the executive and the legislature.

December 15, 1982. The Senate Appropriations Committee
approves continued use of a cash accounting system for
Medicaid payments. The state budget director says, "We
don't have any other choice," but recommends the incoming
administration change to accrual as soon as possible

264
(Lansing State Journal).

December 2, 1982. Senate Fiscal Agency analysts say
Michigan's deficit is twice what was predicted. The state
is more than $300 million in debt. The national economic
recovery has had no impact on Michigan's tax revenues nor
welfare caseloads (Detroit Free Press).

December 22, 1982. The outgoing state budget director says
Michigan's economy is "in a free—fall; we're going to need a
permanent tax increase...the governor—elect has no option
but to increase taxes." Unemployment rates now stand at
17.2 percent (Lansing State Journal).

December 28, 1 82. In testimony to the in—coming governor's
Michigan Financial Crisis Council, the Senate Fiscal Agency
Director says that each one percent increase in the state
unemployment rate translates to over $100 million in added
GF/GP deficit. He says that the current cumulative deficit
approaches $2 billion.

January 8, 1983. The Michigan Financial Crisis Council
issues its report calling for urgent action. The Council
says that the cash flow deficit is $750 million, that the
state may be unable to pay its bills by February. Democratic
leaders in the legislature say a tax increase is the only
solution: Republicans say a case is yet to be made.

January 1983. Michigan now owes the federal government $2.2
billion in loans for unemployment benefits. The state makes
new efforts to stimulate economic development through
assistance programs, tax policies, and a more aggressive
presence in Washington (State Legislatures).

vJanuary 10, 1983. The new governor sets an immediate hiring
freeze, defers aid payments to schools, colleges and
universities, and revenue sharing with local governments.

January 28, 1983. The governor calls for more program cuts
and a 1.75 percent increase in the state income tax, moving
the tax from 4.6 to 6.35 percent, the highest flat rate of
any state in the nation, the District of Columbia excepted.
But national experts say the overall tax picture is still
moderate (Detroit Free Press).

February 1983. Legislators point out that Michigan
continues to be a net donor of funds to the federal
government. Tax contributions exceed assistance by $7
billion, more than the state's General Fund budget.
Estimates are that the President's New Federalism has cost
Michigan $3.2 billion in federal support. Welfare rolls now
include 15 percent of the population: 20,000 workers per
month exhaust unemployment insurance (Hollister 1983a).

March 1983. Public Sector Consultants say the new governor

265

will be forced to continue cash—flow gimmicks and delayed
aid payments to educational institutions and local
governments because revenue generated by the income-tax
increase will not flow into the Treasury until the last half
of the fiscal year (The Lansing State Journal).

March 29, 1983. The legislature, with help of only one
Republican lawmaker, passes a temporary personal income tax
increase which is tied to the unemployment rate, and a
special .25 percent increase in the cigarette tax to fund
corrections caused by accounting deviations (Public Act 15
of 1983). The package is expected to raise $3.2 billion in
revenue over three years.

ch 30, 1983. An executive order is issued totalling $225
lion in budget cuts. Major targets are social services
e ucation, and construction.

I

Spring 1983. Of the nation's five most expensive
state-supported universities, three are now in Michigan: the
University of Michigan, Michigan State University, and Wayne
State University (Hollister 1983b). Proposals emerge to
limit the legislature to a part—time body, make the
legislature one house, reduce legislative pay, lower taxes,
and make any legislatively sponsored tax increase virtually
impossible (Hollister 1983b).

April 21. 1983. The new governor delivers his executive
budget for 1983—84, three months later than normal. Analysts
note that the budget reflects the most pessimistic forecasts
for revenue flows and expenditure demands. He says, "We
have begun the long and arduous process of restoring
Michigan's fiscal balance. We have taken the first of the
many steps that will be necessary to ensure financial
rsolvency" (Budget Message of the Governor for Fiscal Year
1984 and Hollister 1983b).

May 1983. Standard and Poors analysts tell Michigan leaders
that the state has been removed from the S and P "credit
watch" list (Hollister memo to Democratic Caucus Members.
May 5, 1983).

June 15, 1983. The Citizens Research Council of Michigan
issues a report on the state fiscal plan saying that 1980—83
problems stem from 1977-79 policy failures when the state
failed to repair damage from the 1975-76 recession. Instead.
all funds were committed to current or future spending.

1983-84-- Michigan rewrites its accounting and budgeting
acts and puts them in a consolidated package. Public Act 431
of 1984. Although most see this as a consolidation, reforms
are included. For example. by this act departments have to
report encumbrances and receivables at least monthly and
these have to be recorded on the central accounting system
and reported against the pertinent appropriation account.

266

All revenues also have to be reported against each source of
financing. It is anticipated that this system will take two
years to implement. but when in place will give the
appropriations committees much clearer ability to monitor
the flow of dollars (Kennedy & Harris 1985:12).

The governor signs PA 236 of 1983 which requires the state
to pay interest when state aid payments are delayed (Bowman
1984). The new law is intended as a disincentive for the
state to use a delay in state aid payments as an alternative
short-term credit mechanism.

January 1, 1984. The income tax drops to 6.1 percent as
scheduled by law.

February 1984. Republicans take control of the Senate in
replacing two recalled Democratic Senators who supported the
tax increase. Twelve Representatives also faced recall
petitions.

July 10, 1984. The author of the tax-cut initiative passed
in 1978 charges that the state is welshing on its
requirement to share 41 percent of its income with local
governments by redefining state mental health programs as
local. The redefinition "cheats" school districts and local
governments out of $300—$400 million annually (The Detroit
News).

September 1984. The income tax drops to 5.35 percent. State
borrowing drops by $50 million from $500 million and
Michigan's credit rating improves (December 1, 1985).

March 29, 1985. Public Act 431 of 1984, the Management and
Budget Act, goes into effect.

September 1985. Michigan gains the highest short—term
credit rating in the nation, borrowing only $350 million to
offset cash-flow problems. The state no longer needs
outside credit backing and can borrow on its own security.
The long-term credit rating for the state, however, remains
lowest among the states (The Detroit News, December 1,
1985)

November 6, 1985. One of the leading investment banking
firms raises Michigan's general obligation (long—term) debt
rating from mid-BAA to mid-A stable, putting Michigan in the
"low risk" investment category for the first time in several
years," (The Lansing State Journal, November 7, 1985).

Nbvember 8, 1985. The governor declares "solvency day"
having retired a $1.7 billion debt. The unemployment rate
remains at 10.3 percent (The Detroit News, December 1,
1985).

267

November 9, 1986. General Motors announces new layoffs of
18,750 workers. Experts say it will cost the state $1.5
billion in revenues (The Lansing State Journal).

*4

P.)

(0

Notes to Appendix B

Interview with Douglas Drake, Director of the Office
of Revenue and Taxation, Department of Management and
Budget, and former Democratic Staff Director to the
House Taxation Committee, September 25, 1986.

Interview with Leo Kennedy, Supervisor, Research
Division, Legislative Service Bureau, October 4, 1984.

Heckman (1981b) puts this at $60.8 million saved in
mandated lapses and $79 million in executive order
reductions).

Heckman (1981b) puts this figure at $204.6 million.

Heckman (1981b) says accounting adjustments in changing
from cash to accrual saved $165.4 million.

Heckman (1981b) says that by not setting aside funds
for the capital outlay reserve. $27 million was saved.

This private firm founded in 1980 specializes in
policy analysis and gained a fair amount of celebrity
during the fiscal crisis with its economic forecasts.
Its "Fiscal Awareness Service" offers independent but
informed and detailed running commentary on Michigan's
revenues and expenditures, among other things.

REFERENCES

llison, Graham. Essence of Decision: Explaining the
Cuban Missile Crisis. Boston: Little, Brown, 1971.

 

 

Al-xan

ma

0

A

’3 (L

er, James R. "Curriculum Reform in Budgeting and

ial Management: Preliminary Thoughts on the

of the Field." Paper prepared for the annual
the American Society for Public Administration.
. April 1984.

S

Q *1.

h

C

:5

C) H. 0)

A

’3 U '11 O

in

xme o
.eetin 0
Denver, C
Anderson, Richard G. "An Examination of TSP 3.5 at
Michigan State University Conducted for the Department of
Economics, Michigan State Universit ." Unpublished paper.

June 1981.

Behn, Robert D. "Cutback Budgeting." Journal of Poligy
Analysis and Management 4/2 (Winter 1985): 155-177..

 

 

"Leadership for Cut—back Management: The Use of
Corporate Strategy." Public Administration Review 40/6
(November/December 1980): 613-620.

 

 

"Can Public Policy Termination be Increased by
Making It More Businesslike?" In Charles H. Levine and
Irene Rubin, eds. Fiscal Stress and Public Policy, pp.
249—280. Beverly Hills, CA: Sage, 1980.

 

 

Blaustein, Saul J. "UI Fund Insolvency and Debt in
Michigan." The Michigan Economy 1/5 (November 1982):
1—8.

 

Bowman, Robert A. "Michigan Treasury Strives for Financial
Soundness for State and Local Governments." Michigan
Municipal Review 57/4 (May 1984):85,90.

Bozeman, Barry and Jeffrey D. Straussman. "Shrinking
Budgets and the Shrinkage of Budget Theory." Public
Administration Review 42/6 (November-December 1982):
509-515. “f”

Brazer, Harvey E. "Anatomy of a Fiscal Crisis: The
Michigan Case." Public Budgeting_and Finance 2/4 (Winter
1982): 130-142.

 

Brazer, Harvey E. and Deborah S. Laren, eds. Michigan's
Fiscal and Economic Structure. Ann Arbor: University of
Michigan Press, 1982.

 

 

268

269

Break, George F. Financing Government in a Federal
System. Washington, DC: Brookings. 1980.

"State and Local Finance in the 1980s." In
Boskin. Michael J., ed. The Economy in the 19803: A
Program for Growth and Stability, pp. 223-254. San
Francisco: Institute for Contemporary Studies. 1980.

 

 

Broder, John. "Milliken--the governor, the image, the man."
Michigan, The Magazine of the Detroit News, December 5,
1982, p. 19.

 

Bryan, Tom and Dick Howard. "Michigan's Budget And
Economic Stabilization Fund." Innovations. Lexington,
KY: The Council of State Governments, 1979:1-11.

 

Caiden, Naomi. "The New Rules of the Federal Budget Game."
Public Administration Review 44/2 (March—April 1984):
109-118.

 

"The Myth of the Annual Budget." Public
Administration Review 42/6 (November-December 1982):
516-523.

 

 

Caiden. Naomi and Jeffrey I. Chapman. "Constraint and
Uncertainty: Budgeting in California." Public Budgeting
and Finance 2/4 (Winter 1982): 111-129.

 

Caiden, Naomi and Aaron Wildavsky. Planning:and Budgeting
in Poor Countries. New York: Wiley, 1974, 1980.

 

Citizens Research Council of Michigan. "The State Fiscal
Plan." Council Comments 941 (June 15, 1983).

. "Michigan's Key Fund Fiscal Problem."
Council Comments 933 (September 1, 1982).

 

. "The 1979-80 Executive Budget." Council
Comments 909 (April 30, 1979).

 

Clark, Terry N. and Lorna C. Ferguson. City Money:
Political Processes, Fiscal Strain, and Retrenchment.
Chicago: University of Chicago (1983).

Cline, Robert J. "An Econometric Study of State Budgeting:
The Michigan General Fund-General Purpose Budget." Ph.D.
Dissertation, University of Michigan, 1977.

Comparative State Politics Newsletter. 2/2 (March 1981).
Crecine, John P. Governmental Problem-Solving; A Computer

Simulation of Municipal Budgeting. Chicago: Rand-McNally.
1969.

270

Cross, John G. et al. "Michigan State Expenditures and the
Provision of Public Services." In Harvey E. Brazer, ed..

Michigan's Fiscal and Economic Structure, pp. 332-383. Ann
Arbor, MI: The University of Michigan Press, 1982.

utts, Jane, ed. The State We're In. Lansing: The League
of Women Voters of Michigan, 1982.

 

Davis, Larry. "The Milliken Years." Michigan: The Maga
of the Detroit Free Press. December 5, 1982, p. 13.

‘ne

N

 

 

 

 

 

"On the Process of Budgeting II: An Empirical
Study of Congressional Appropriations." In R. F Byrne,
et al, eds. Stgdies in Budgeting. Amsterdam:
North-Holland, 1971

Davis, 0 to A., M. A. H. Dempster and Aaron Wildavsky.

"Toward a Predictive Theory of Government Expenditures:
U.S. Domestic Appropriations." British Journal of
Political Science 4/4 (October 1974):419-452.

 

"A Theory of the Budgetary Process."
American Political Science Review 60/3MTSEptember 1966):
529-547.

 

 

Davis. William G. "Major Issues of the 1984 Legislative
Session: Politics, Tax Rollback and The State Budget."
Michigan Municipal Review 57/8 September/October 1984):
219-220.

 

Dempster, M. A. H. and Aaron Wildavsky. "On Change: Or,
There is No Magic Size for an Increment." Political
Studies 27/3 (September 1979): 371-389.

 

‘

Ferris, Theodore A. "Testimony Before Governor-Elect James
J. Blanchard's Michigan Financial Crisis Council,
Subcommittee on the Deficit, Patricia Shontz Longe,

Chair." December 28, 1982.
Cast, Harry. "How to Work with the Senate Appropriations
Committee." In State of Michigan. Senior Advocacy in

 

Action. Lansing: Commission and Office of Services to the
Aging. 1986.

Gist, J. R. "Stability and Competition in Budgetary
Theory." American Political Science Review 76/4 (December
1982): 859-872.

 

Gorwitz, Kurt. "Michigan Population Trends." East Lansing.
MI: Public Sector Consultants, March 22, 1983.

. "Michigan's Emerging Work Force." East
Lansing, MI: Public Sector Consultants, February 4, 1983.

 

271
"Michigan's Current and Projected Population
Trends." East Lansing, MI: Public Sector Consultants,

September 1, 1982.

 

Gujarati, Damodar. Basic Econometrics. New York:
McGraw-Hill, 1978.

 

 

 

 

 

Hall, Bronwyn H. and Robert E. Hall. Time Series
Processor, Version 3.5. Stanford, CA: Hall and Hall,
1980
.ammond, Thomas H. and Jack H. Knott. A Zero-Based Lgok
at ZQEO:BQS§W§E§"§fi13§; New Brunswick: Transaction Books,
1980.
Haniesk1, John F. "Diversifying the Michigan Economy ” The
Miphig_n St te_Economic Record 23/2 (February 1981): 1-8
Hansen, Susan B. "Public Policy Analysis: Some Recent
Developments an Current Problems" In Finifter, Ada W.

Political Science: The State of the Discipline, pp.
217—245. Washington, DC: The American Political Science

Association, 1983.

Hanushek, Eric A. and John E. Jackson. Statistical Methods
for Social Scientists. New York: Academic Press, 1977.

 

Hayes, M. D. "Policy Consequences of Military Participation
in Politics. An Analysis of Tradeoffs in Brazilian Federal
Expenditures. " In Liske, C., et al, eds. Comparative

 

Public Poligy. New York: Halsted, 1975.

 

Heckman, James C. ”Management in_ay§eclining Economy."
Speech prepared for presentation to employees of the State

of Michigan, May 11, 1983.

"Michigan's Budget Reduction Experiences."
Paper presented to the House Appropriations Committee,
State of Maryland, December 8, 1981a.

 

"Budget Cutting Techniques." Paper presented
to the National Conference of State Legislatures, Atlanta,
Georgia, July 29, 1981b.

 

Hendrick, Rebecca. "Towards'a Theor ry of Budgeting. An
Explication and Empirical Test of the Elements of
trategic Thinking. " Ph. D. Dissertation. East Lansing,
MI: Michigan State University, 1986.

 

Hollister, David. "Michigan's Current Economic Crisis."
Reports No. 1-6. Lansing: State House of Representatives.
February 1981, September 1981, April 1982, October 1982,
February 1983, and December 1983.

272

 

Hoole, Francis W. Politics an Budgeting in the World
Health Organization. Bloomington, IN: Indiana University
Press, 1976.

 

Hoole, F. W., D. H. Handley and C. W. Ostrom.
"Policy-making Models. Budgets and International

 

Organizations." Journal of Politics 41/1 (August 1979):
923-932.

Hoskins, Ronald B. "Within Year Appropriations Changes
and Budget Theory." Paper presented at the annual meeting
of the American Political Association, Washington, DC,
ULth “U L A, A U 0

House, Alvin. "Managing More With Less - The Public
Administrator's Role in an Era of Cutbacks." Panel
discussion for the Michigan Capital Area Chapter of the
American Society for Public Administration, November 18,
1981

Howard, S. Kenneth. Changing State Buggeting. Lexington.

 

KY: The Council of State Governments, 1973. Cited in
House Fiscal Agency. "Review of the State of Michigan
Fiscal-Budgetary Process." Lansing, MI: Michigan House of

Representatives. 1976.

"The Real World of State Budgeting." (1973) In
Hyde, Albert C. and Jay M. Shafritz, eds. Government
Budgeting; Theory, Process, Politigs: pp. 494-513. Oak
Park, IL: Moore, 1978.

 

 

Hyde, Albert C. and Jam M. Shafritz, eds. Government
Epdgeting: Theoryy Process, Politics. Oak Park, IL:
Moore, 1978.

 

 

‘Jacobetti, Dominic. "The Budget Process." In State of
Michigan. Senior Advocacy in Action. Lansing: Commission
and Office of Services to the Aging, 1986.

 

Kennedy, Leo and Sheila A. Harris. "Legislative Oversight
in the Michigan Legislature." Paper prepared for the
Annual Meeting of the Michigan Academy of Science, Arts
and Letters, East Lansing, MI, March 22-23, 1985.

Key, V. O. "The Lack of a Budgetary Theory." American
Political Science Review 34/4 (December 1940): 1137-1140.

Kmenta, Jan. Elements of Econometrics. New York:
Macmillan, 1971.

 

Knott, Jack H. and Gary J. Miller. Reforminngureaucragy:
The Politics of Institutional Choice. Englewood Cliffs,
NJ: Prentice-Hall, 1987.

 

273

Knott, Jack H. "Political Theory and Budget Reforms.”
Society 20/4 (May-June 1983): 11-15.

Managing the German Economy: Budgetary
Politics in a Federal State. Lexington, MA: Lexington
Books, 1981.

 

 

Krauthammer, Charles. "Rise of the Extremes." The
Washington Post, March 4, 1988, p. A25.

 

Lakatos, Imre. "Falsification and the Methodology of
Scientific Research Programs." In Lakatos, Imre and A
Musgrave, eds. Cripicism and the Growth omeggwledge, pp.
91-195. Cambridge: Cambridge Universi y Press, 1970.

:3

1‘
(2

'11.:

 

5

La

.-

A

 

 

 

Hana Umlauf, ed. The World Almapac and Book of Facts,
5. New York: Newspaper Enterprise Association, Inc

(0‘

e
9

5.5 ”.4

LI)
(0
.31

LeLoup, Lance T. "The Myth of Incrementalism: Ana1ytical
Choices in Budgetary Theory." Polity 10/4 (Summer 1978):
488-509.

Levine, Charles and Irene Rubin. "Volume Editor's
Introduction." In Charles Levine and Irene Rubin, eds.
Fiscal Stress and Public Policy, pp. 111-20. Bever1y
Hills: Sage, 1980.

 

Lijphart, Arendt. "Comparative Politics and the
Comparative Method." American Political Science Review
65/3 (September 1971): 682-693.

Likens, T. "Models of Budgetary Competition: Conflict,
'Trade-offs' and Interdependence in Governmental Resource
Allocation." Paper presented at the annual meeting of the
Midwest Political Science Association, 1978.

Lindblom, Charles E. "The Science of Muddling Through."
Public Administration Review 19 (Spring 1959): 79-88.

Lipson, Albert J. and Martin Lavin. Political and Legal
Responses to Proposition 13 in California. Santa Monica,
CA: Rand, 1980.

 

Lowery, David. "Book Reviews." Public Budgeting and
Finance 3/2 (Summer 1983): 114-119.

 

Marz, Roger. "Myth, Magic, and Administrative
Innovations." Administration and Society 10/2 (August
1978): 131-138.

May, Peter J. and Arnold J. Meltsner. "Limited Actions,
Distressing Consequences: A Selected View of the
California Experience." Public Administration Review
41/SI (January 1981): 172-179.

 

274

Meltsner, Arnold. The Politics of Citngevenue.
Berkeley: University of California Press, 1971.

 

gichigan Compiled Laws Annotated. St. Paul: West, serial.

Michigan, State of. Michigan Compiled Laws 1979. Lansing:
Michigan Legislative Council, 1979.

Detailugf_Current Operations of the Executive

 

 

 

 

 

 

 

 

Budget. Lansing: Department of Administration, series.
EKEEQEAX§1§§§§§E- Lansing: Department of
Management and Budget, series.

. House Fiscal Agency- llgemptshsaeive_8udget
Reductions ReportL Fiscal Years 1980 Through_1982L
Revised; Lansin , MI: State House of Representatives,
April 2 , 1982 and Addendum of December 1982.

House Journal. Lansing, MI: State House of
Representatives. serial.

Review of the State of Michigan
Fiscal-Budgetary Process. Lansing, MI: State House of
Representatives, November 1976.

 

 

 

House Fiscal Agency. "Budget Cycle." mimeo.
Lansing: State House of Representatives, April 1986.

 

House Taxation Committee. "The
Michigan State Budget: Background and Current Issues."
Lansing: State House of Representatives, February 2. 1983.

 

Legislative Service Bureau. "Development of
the State Budget." Legislative Service Bureau Document
4/2. Lansing: Michigan State Legislature, October 1987.

 

Office of the Budget. Capital Outlay Manual,
third edition. Lansing: Department of Management and
Budget, n.d.

 

Office of the Governor. Budget Message
of the Governor. Lansing, State Capitol, series.

 

 

Office of the Budget. "General Fund General
Purpose Expenditures." mimeo. Lansing: Department of
Management and Budget, n.d.

 

Office of the Budget. "Instructions for
Preparing Department Management Plans." Lansing:
Department of Management and Budget, mimeo, n.d.

 

275

. Office of the Budget. "State Budget
Development Process (State Fiscal Year: October 1-
September 30). Lansing: Department of Management and
Budget, mimeo, n.d.

 

Office of the Budget. "The Executive Budget
Process." Lansing: Department of Management and Budget,
mimeo, n.d.

 

 

 

 

Office of the Director. "Budget Letter." To
Directors of State Departments on Fiscal Year 1982
Management Plans. Lansing: Department of Management and
Budget, May 20, 1980.

Senate Fiscal Agency. 1985 Statistical
Report. Lansing, MI: Michigan Senate, October 1985

Senate Journal. Lansing, MI: Michigan Senate.

 

 

tate Constitution of 1963.

 

Morris, Susanne R. The Legislative Process in Michigan.
Hillsdale, MI: Hillsdale Publishers, 1979.

 

Mowbray, Carol T., Betty Tableman and Rubyjean Gould.
"Reduction in Force: A Summary and Analysis of One State
Agency's Experience." New Englan Journal of Human
Services 4/2 (Spring 1984): 24-33.

 

Nagel, Stuart. "Series Editor's Introduction." In
Charles Levine and Irene Rubin, eds. Fiscal Stress and
Public Policy, pp. 8-10. Beverly Hills: Sage, 1980.

 

 

(Natchez, Peter B. and Irvin C. Bupp. "Policy and Priorit'
in the Budgetary Process." American Political Science
Review 67/3 (September 1973): 951-963.

 

Oates, Wallace E. Fiscal Federalism. New York: Harcourt
Brace Jovanovich, 1972.

Ostrom, Charles W., Jr. Time Series Analysis: Regression
Techniques. Beverly Hills: Sage, 1978.

 

 

O'Toole, Daniel. "Managing with Less: What Managers Can
Expect." Public Management 66/6 (June 1984): 20-21.

Padgett, John F. "Bounded Rationality in Budgetary
Research." American Political Science Review 74/2 (June

 

1980): 354-372.

Pilcher. Dan. "Michigan: The Road to Recovery." State
Legislatures 1/1 (January 1983): 17-21.

 

 

276

Pindyke, Robert S. and Daniel L Rubinfeld. Econometri
Models and Economic Forecasts. New York: McGraw-Hill,
1981.

r‘
L;

 

Press, Charles and Kenneth VerBurg. State and Community
Governments in the Federal System, 2nd ed. New York:
Wiley. 1983.

 

 

Rosen, L urence S. and Ching-Li Wang. "Michigan."
American Demographics 15/3 (March 1983 : 46-48.

 

U)

01,3) (0 If

[.J
0‘)
C)
9)
L4

len. "Micro—Budgeting Adaptations to F
n ndustrialized Democracies." Public

ion.Reyiew 48/ (January/Februar' 1988):

'1 0
i‘

3’

1.;

-(D 7
' ‘rf H:

'SU)~
(a)

01
(QiLJ. ‘
‘0)

rt H

i

b.) {)1 ff H-
(0 ii;

{p

p

(010)

 

"Macro-Budgeting Adapta
in Industrialized Democracies." P"
Review 46/2 (March/April 1986): 12

 

"Incremental Budgeting in a Decremental
Age." Policy Seienceg 16/1 (June 1983): 1-25.

 

"Budgetary Adaptations to Resource Scarcity."
In Charles H. Levine and Irene Rubin, eds. Fiscal Stress
and Public Policy, pp. 113-134. Beverly Hills: Sage,
1980.

 

 

 

arkans y, Ira. "Agency Requests, Gubernatorial Support,
and Budget Success in State Legislatures." American
D

m

Alitical Science Review 62/4 (December 1968): 1220-1231.

 

 

~ 0

 

(0

hepsle, Kenneth A. "The Failure of Congressional
Budgeting." Society 20/4 (May-June 1983): 4-10.

Simon, Herbert. "A Behavioral Model of Rational Choice."
In Models of Man. New York: John Wiley, 1957.

 

Tucker, Harvey J. "Incremental Budgeting: Myth or Model?"
Western Political Quarterly 35/3 (September 1982):
327-338.

 

VerBurg, Kenneth and Charles Press. "He Was a Man of the

Pros, Not the Pole." Michigan: The Magazine of the

 

Detroit News, December 5, 1982, p. 36.

 

Walker, W. E. and J. M. Chaiken. "The Effects of Fiscal
Contraction on Innovation in the Public Sector." Policy
Sciences 15/2 (December 1982): 141-165.

Wanat, John. "Bases of Budgetary Incrementalism."
American Political Science Review 68/3 (September 1974):
1221-1228.

 

277

Wildavsky, Aaron. "From Chaos Comes Opportunity: The
Movement Toward Spending Limits in American and Canadian
Budgeting." Canadian Public Administration 26/2 (Summer
1983): 163—181.

"The Budget as a New Social Contract."
Journal of Contemporary Studies 5 (Spring 1982): 3-19.

 

SpeakingATruth to Power. Boston: Little,
Brown, 1979.

 

"A Budget for All Seasons: Why the
Traditional Budget Lasts." Public Administpapieaneview
38/ (November-December 1978): 501-509.

 

 

 

Budgeting: A Comparative Theory gfmgudzefiary
a_cesses. Boston: Little, Brown, 1975.

 

 

:31.
”U

The Politics of the Budgetary Process.
Boston: Little, Brown, 1965.

 

Wooldridge, Blue. "Exemplary Practices in Local Financial
Management: An International Perspective." Public
Administration Review 44/2 (March/April 1984): 153-161.

Yondorf, Barbara and BJ Summers. Eegislative Budge:
Procedures in the 50 States. Legislative Finance Paper
No. 21. Denver: National Conference of State Legislatures,
January 1983.