Around the Dome

by Del Chenault, Senior Vice President, Government Affairs
Scofes & Associates Consulting, Inc. (S&A)

July 2004

BUDGET AGREEMENT REMAINS ALLUSIVE

The Governor and Legislative GOP leaders remain at odds over major portions of the budget. The FY 2004-05 budget, to be enacted by October 1, was thought to be headed for final action by the end of the month. However, leaders have cancelled the House and Senate sessions until after the August primary election.

Further complicating matters are the upcoming national political conventions for the Democratic and Republican parties where, traditionally, many members of the legislature attend.

The logjam is centered around debate over the so-called ‘racino’ bills and a proposed increase in the tax on the three Detroit casinos. The racino bill would authorize slot machines at the state's horse racetracks as well as allowing up to two additional licenses in the Detroit area.

House Speaker Johnson has been a leading proponent of the racino legislation while Senate Majority Leader Ken Sikkema has been a vocal opponent and prefers to instead raise money by raising the Detroit casino tax.

Senator Sikkema has stated he envisions a combination of a Detroit casino tax coupled with additional budget cuts to balance the remaining $200 million shortfall in next year’s budget.

Ms. Granholm has called off formal budget negotiations with Republican lawmakers until the House and Senate can find a compromise on how much to raise the casino tax, which under the Senate’s version of the bill, would produce at least $50 million in new revenue for the budget. The House has called for doubling the tax while the Senate prefers a 33 percent increase.

At this rate, it appears the entire budget may remain unresolved into August, something that has not happened since the 1970s. Still, the administration and lawmakers have until September 30 to enact a budget for the next fiscal year.

In another budget development, the House approved extending the fee petroleum wholesaler and dealers pay on their underground storage tanks. The fee, set to expire in December, is expected to raise an additional $50 million in revenue. However, the Governor has stated she does not see the fee extension as a viable source of new revenue especially in light of a recent lawsuit filed challenging the state's ability to collect the fee at all.

The legislature is set to return August 4-6 and budget talks among leadership are to continue next week.

BILLS INTRODUCED CHANGING STATE’S ELECTRIC CHOICE LAW

A six bill package was introduced last week in the Senate that would make sweeping changes to PA 141—the state’s so-called electric choice law. The bills were praised by the Citizens for Long-term Energy, Affordability and Reliability Coalition.

The six bill package (SB 1331-1336) was introduced by six different Senate members including the Chair of the Senate Tech and Energy Committee Bruce Patterson. According to the CLEAR coalition, the bills are intended to protect Michigan residents "from the unintended consequences" of the PA 141.

However, members of the coalition opposing the bills, the Customer Choice Coalition, stated the bills will keep electric rates high in the state as well as threaten the reliability of the state's electric system.

Barry Cargill of the Customer Choice Coalition said the bills break a deal that DTE Energy itself participated in back in 2000 when PA 141 was adopted. Under the deal, DTE and Consumers Energy agreed to accept $2.2 billion immediately from ratepayers to cover stranded costs while at the same time agreeing to allow electric competition.

Under SB 1331, all electric customers who have gone to an alternative electric supplier could return to a utility under regulated rates by December 31, 2005, and if customers come back to the utility after that they would have to pay market rates. It also requires that all electric customer rates be moved to full "cost of service" rates over a 10-year period.

SB 1332 requires all electric suppliers to maintain power reserve margins of 15 percent to provide greater protection against blackouts or plant failures. It also sets minimum financial adequacy standards.

SB 1333 allows the Public Service Commission to set a mandatory service charge to finance Low Income and Energy Efficiency Fund.

SB 1334 sets a rate discount for schools (a number of schools have switched to alternative electric suppliers).

SB1335 and SB1336 both establish that utilities could finance environmental compliance costs at low interest rates, as well as allow the PSC to set a service charge to cover the costs of air pollution controls.

Also, this week, the Mackinac Center for Public Policy, held a forum to discuss and analyze the package. According the think tank, the state's electric market restructuring program needs some changes, however, it does not need the overhaul as provided in the package.

Utilities, particularly Detroit Edison, have argued that the reforms under PA 141, 2000, were going to cost electric customers more in the long run and have been predicting large rate increases when rate all freezes are lifted in 2006. But Theodore Bolema, author of Assessing Electric Choice in Michigan for the Mackinac Center, said the competition already introduced into the market would largely prevent those increases.

Mr. Bolema said the one provision of the package that does need to pass would eliminate the requirement that utilities take customers back at regulated rates once they have opted for a competitive generator.

Though representatives of alternative generators argued there is a need for customers to be protected from utility rate hikes to punish them for leaving in the first place, at least during a transition period, Mr. Bolema said the market would prevent such punishment. He argued that they would have to be attractive customers for the alternative suppliers to seek them out in the first place, so it would be in the utilities' best interest to try to attract them back.

The report also chastised the proposal to provide rate cuts to schools.

No hearings have yet been scheduled on the bills.

A more thorough analysis of the bills is available from BOMA Government Affairs Committee Chairs Bruce Babiarz and Dave Lipski or by contacting Scofes & Associates.

BOMA has identified the electric choice issue as one of its legislative priorities for the year. We will continue to participate in the CCC campaign and to ensure electric choice remains a viable economic alternative for BOMA members in the future.

LEGISLATURE APPROVES JOB CREATION BILLS

The Senate and House both passed three components of the Republican job growth package aimed at creating jobs in the state.

The legislature has been engaged in intense negotiations with the Governor on the five major initiatives in the Job Growth package. The legislature has approved three portions of the plan-- bills allowing for private labs to bid on state work, easing the single business tax on new employees hired and providing an SBT break for qualified start-up businesses.

Governor Granholm had vetoed an earlier bill allowing an SBT cut for new hires. The new bill, SB 1274, addresses some of the areas the Governor had cited as reasons for her earlier veto.

All the bills were passed unanimously, even though there still is not final agreement with the administration on SB 1274. Under the bill, companies that hire new workers for an increase in employees over the previous tax year would be entitled to a .5 percent tax credit on each of those workers.

If the company had gross receipts of under $10 million and capital costs of at least $150,000 in training and outfitting for the new worker, then the credit would be boosted to 1.5 percent. If the capital costs for a worker totaled $750,000, then the credit would be 2 percent. The cuts would begin with the 2005 tax year.

The Senate Fiscal Agency estimates the bill would reduce state revenues by $3.3 million for the 2004-05 fiscal year and $6.7 million for 2005-06.

The Senate also passed several bills that would exempt qualified, small, start-up high technology firms from the SBT for up to five years.

And the Senate also approved HB 5742-43 allowing private environmental laboratories, which conduct groundwater pollution and underground storage tank leaks, to bid on work for the state.

TREASURER RISING CONTINUES TO REVIEW BUSINESS TAXES

Earlier this year, Governor Granholm requested Treasurer Jay Rising to comprehensively review the state's tax structure, particularly the single business tax scheduled to be eliminated in 2009.

The Governor recently indicated that Mr. Rising continues to review the SBT and that the Administration could release proposals yet this year. She also conceded that reform of the SBT, rather than a complete overhaul, is possible.

The Governor has maintained a neutral position on the SBT but has stated she thought the tax needed to be replaced. However, some business leaders have informed the Administration they would prefer some adjustments and not an outright scrapping of the tax.

Whatever Mr. Rising recommends, the Governor said she would like to see it have support in the business community and be supportive of economic growth, something critics say is one of the main detriments of the SBT.

The Governor continues to show support for addressing the SBT issue between now and December. However, the 2009 repeal deadline gives the state some time if needed to continue work on the issue.

As for the larger issues of tax reform, Ms. Granholm said Michigan remains a regressively taxed state that only added to the problem with the recent passage of her proposed cigarette tax increase.

The legislature and the Governor continue to talk of additional tax increases such as an increase in liquor taxes, estate taxes and the tax paid by the three Detroit casinos.

EXPERTS ANNOUNCE LOWER STATE TAX BURDEN

A study by the Senate Fiscal Agency recently announced Michigan's overall tax burden on residents is at one of its lowest levels since 1978. The main cause for the findings appears to be continued declination of overall state revenues while state personal income continues to increase.

Based on fiscal estimates on how much revenue the state will raise during the 2004-05 fiscal year, the state's tax burden will amount to roughly 7.4 percent of personal income.

At that level, the tax burden will be less than 7.5 percent estimated in 1978 when the Headlee Tax Limitation Amendment was adopted by the state's voters.

The SFA said calculating the tax burden is done by taking the state's total personal income and dividing it by the total revenues that could be raised under the Headlee amendment (the actual revenues raised have been less).

Because of the slowdown in the economy, beginning four years ago, total state revenues have either decreased or slowed because of increases in unemployment and reduced retail sales. Even so, total personal income has increased during this period.

For the 2004-05 fiscal year, the May revenue estimating conference anticipated total revenues that could be raised under the Headlee Amendment of $24.4 billion. Meanwhile, it anticipated total personal revenue of $330.4 billion. That produces the overall tax burden of 7.4 percent.

The lowest tax burden the state saw was during another economic slowdown, during the 1991-92 fiscal year, when the average tax burden was 6.6 percent.

The highest average tax burden was during the economic boom of 1997-98, when it averaged 8.5 percent.

GOVERNOR ANNOUNCES NEW JOB CREATION

Governor Granholm recently announced creation of over 3500 jobs due to the expansion and consolidation of seven companies under assistance from the Michigan Economic Development Corporation.

The largest job creation will come from Haworth Incorporated, which plans on merging its out-of-state manufacturing and distribution services to its operations in Holland, Allegan, and Big Rapids. The project also calls for reconstructing the company's headquarters in west Michigan, directly creating 1,000 jobs.

Other M.E.D.C.-assisted projects include combining General Motors Powertrain Division services into a revamped Pontiac Campus, which will keep 1,600 jobs, and building a Family Dollar Store on Detroit's blighted west side, which will generate 11 jobs.

STATES’ TERM LIMITS LAWS ANALYZED

At the recent meeting of the National Conference of State Legislatures meeting in Seattle, a panel of experts met to discuss the impact and results of term limits laws that swept the country in the early to mid nineties. The panelists agreed that the clearest impact has been a loss of legislative influence to the executive branch.

The panel also pointed out that turnover is higher after term limits in states with full time professional legislatures such as Michigan than in states with part-time, citizen legislatures

They also stated that term limits have not served to improve the numbers of women in legislatures or in leadership positions, but have proven to be more responsive in reflecting growing ethnic populations.

Further, they pointed out that the influence of lobbyists has not changed markedly overall, and that the influence of staff has not changed as much as has the influence of partisan staff.

Also, new members tend to have more local government experience than before.

Much of the information was drawn from a 2002 survey by the Joint Project on Term Limits, supported by the NCSL and other legislative groups, which sought data from legislators and those who work with and around legislatures.

The study also indicated that among all 11 states with term limits, the biggest difference is in the turnover rate, which has also become much higher compared to non-term-limited states. In 1992-2000, the turnover rate in Michigan increased to 28 percent, from 20 percent in 1982-1990, and in Ohio, it increased to 23 percent, from 16 percent in that same comparison span.

But he said leadership is perceived as diminished, with most House speakers serving only two years and coming to the office with far less legislative experience.

In California, the first and largest state with term limits, Bruce Cain, a political science professor at the University of California at Berkeley, said the most impressive impact was in the ability of minorities to gain legislative representation more quickly as incumbents are term limited out of office.

In Colorado, a mid-sized state with a part-time legislature, term limits has not produced the diversification and ‘citizen-type’ legislator proponents had hoped. The Colorado law has also lessened expertise and leadership while increasing lobbyist influence. 

BOMA’S KEY STATE LEGISLATIVE ISSUES—
JULY UPDATE

The BOMA Governmental Affairs Committee reviewed and discussed major issues facing its membership in the state legislature. The GAC chose the following issues to be lobbied and monitored by BOMA lobbyists Steve Scofes and Del Chenault.

SERVICE TAXES—BOMA strongly opposes the extension of the state’s sales tax on services such as dry cleaning, plant services and attorney fees. These types of taxes are generally regressive and are ultimately passed on to consumers leading to higher lease rates and less demand for office space. While BOMA supports State Treasurer Rising’s examination of the state’s tax structure, we oppose any new taxes or fees as a means to balance the state budget. As reported above, State Treasurer Rising continues his examination of the state’s business tax structure including the SBT. A proposal revamping the SBT could come by end of the year according to the Governor. Further, we continue to be watchful of any efforts by the legislature or Governor to establish a service tax in this tough budget year during their negotiations.

SBT—BOMA supports efforts to further reduce the SBT in Michigan or maintain the tax at its current level. The SBT has long been a major hurdle to new business growth in Michigan and we applaud the legislature’s efforts to phase-out the tax by 2010. Further, we support efforts to further adjust the SBT by exempting various business costs such as health care and expansion investment. The state House and Senate each passed a package of bills cutting the SBT for certain start-up and high tech companies. The bills now head back to the Senate for concurrence upon their return in August.

MOLD—BOMA promotes high standards to protect the health and safety of building occupants. Further, the science of mold toxicity and any related ailments remains unsettled and unproven. BOMA opposes state initiatives to regulate mold and moisture or to establish mold exposure standards that can be overly-broad. Such attempts could lead to consumer confusion or lead to unreasonable liability by sellers or lessors. BOMA supports state attempts to expand research on this issue through cooperative efforts with building owners/developers and tenants as well as working with our state legislative leaders to ensure industry representatives are involved in any legislative initiatives regarding this issue. The current Mold package in the House is not scheduled for a committee hearing at this time. The BOMA GAC has held meetings on crafting a mold package that can be supported by the industry. The state legislature has not been willing to contemplate other non-budget related until the fall.

UTILITY DEREGULATION—BOMA opposes any legislative attempts to change PA 141 of 2000—the electrical deregulation act. BOMA believes the competition in the electrical marketplace due to PA 141 has led to lower commercial electric rates for our members. BOMA supports efforts by the Customer Choice Coalition to maintain the competitive aspects of PA 141 and believes any changes to the state’s electrical regulation should be accomplished by the Michigan Public Service Commission. As reported above, the State Senate has introduced six bills seen as greatly benefiting DTE. The package is not set for a committee hearing at this time. Further, the coalition supporting the current structure is now meeting regularly and BOMA intends to be a participant in these efforts to secure electrical choice.

LAND USE—BOMA encourages the use of the Brownfield law for redevelopment of urban areas and adaptive re-use of obsolete buildings. BOMA opposes any initiatives restricting new development and believes market demand should dictate building and construction. No new updates at this time.

MEDC FUNDING CUTS—BOMA Michigan recognizes supports the important economic development and job creation work performed by the Michigan Economic Development Corporation. BOMA is opposed to efforts to reduce or eliminate funding for the MEDC or to any of the economic incentive programs and funds used by the Department to lure jobs and growth. BOMA supports the Governor’s 2004 Executive Budget providing an 8% funding increase for the MEDC. The MEDC budget has passed the Senate and House and now rests in a House-Senate conference committee. The bill will not see action until the Governor and legislative leaders come to agreement on a budget deal in August. See story above for more details.