Tuesday, January 12, 2010

"We’ve gone from being a relatively wealthy state to a non-wealthy state."

“We’ve gone from being a relatively wealthy state to a non-wealthy state,” said Senate Fiscal Agency Executive Director Gary Olson. “This is the issue now and into the future. The state needs to face the reality of that economic decline.”

This new reality requires adjustments from nearly every sector. The response to this reality does not need to define a LONG term future for Michigan. What Gary Olson points to is the immediate horizon which dictates activity and expectations over the next two to five years. How we collectively respond (the state and business) will help dictate the long term wealth of Michigan.

The article goes on: "Given the stark news, which has been the norm for Michigan for 10 years, a comprehensive restructuring of the state’s budget process is needed to avoid policymakers making “changes on the margin” year after year, advised George Fulton, director of the University of Michigan’s Research Seminar in Quantitative Economics."

A major takeaway -- STRUCTURAL change is the key focus given the facts surrounding sustained revenue trends. The Senate and House fiscal agencies both show that the impact of radical changes to the auto industry is permanent. This is not a cycle we will see pass. From the Federal Reserve Bank of New York:

Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.

While the 4% pay cut taken by the Administrators of the Birmingham School District may be confused as a cyclical response to a structural change, the structural (long term) affect will be how this cut slows future cost growth. It is why agreements that assume annual revenue increases of 3% to 4% are unsustainable when revenues fall, or are projected to grow by only 1%. It is why contracting and consolation of support services will be the norm, not the exception. Adjusting structures to the reflect the downside will allow us to adapt again as the “upside” appears. It is why everyone needs to be at the table to rethink how we execute our missions given the new reality articulated by Gary Olson and George Fulton.


general articles - news - spending time said...

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Geoff said...

Mr. Lawrence,

When the board has given us projected budgets and forecasts for the past 7 yrs., we've been shown 0% increases in the state's foundation grant. The board has pounded it into the employees' heads that BPS cannot count on the state to provide us w/ any new money for the upcoming year of 2004, 2005, 2006...

And the board has promised the community that these budget cuts are "structural" and will fix the bleeding. But the bleeding hasn't stopped, and the cuts are slicing into the classroom on all levels with the newest budget.