Four-Hour Shutdown Ends, Budget Passed ----- 4:45 a.m.

Gov. Jennifer GRANHOLM today said action taken by state lawmakers on a solution to the state's budget crisis this morning ended a partial shutdown of state government that went into effect today. The governor is expected to sign the income tax increase, expansion of sales tax, reforms and a 30-day continuation budget to allow the legislature sufficient time to pass individual budgets for Fiscal Year 2008.

"This budget agreement is the right solution for Michigan," said Granholm. "We prevented massive cuts to public education, health care and public safety while also making extensive government reforms and passing new revenue. With the state back on solid financial footing, we can turn our focus to the critical task of jumpstarting our economy and creating new jobs."

The Governor acknowledged lawmakers who cast the votes necessary to secure Michigan's future.

"This was a historic vote to put Michigan's fiscal house in order, made possible by those lawmakers who exercised the courage of their convictions," Granholm said.

Deal Shuts Down Shutdown

It wasn't pretty, but the House and Senate put together in the wee hours of Monday morning the final pieces of a bi-chamber, bi-partisan deal to avoid a government shutdown while raising taxes $1.48 billion a year. At 4:20 a.m. Monday, Gov. Jennifer GRANHOLM's office issued a statement that the four-hour shutdown of state government ended with legislative approval of a comprehensive solution to the state's budget crisis that prevents massive cuts to public safety, health care and education.

Granholm's announcement was followed by the notice that the 35,000 state employees who received temporary layoff notices are being asked to report to work on their normal shifts Monday.

In fact, some of the early stages of a shutdown were already under way before lawmakers started moving the deal through. As the Legislature labored throughout the day Sunday, work crews began shutting down rest areas along the state's freeways. Campers at state-run campgrounds were told Sunday morning they'd have to clear out of their sites by 9 p.m. that day because of the impending state shutdown.

In the end, the agreement that prevented a state shutdown involved the dynamics that had been involved with the budget drama all year long -- trading off tax increases for cuts and reforms.

A prolonged struggle that lasted over an hour in the Senate delayed the enactment of the deal until 4 a.m. as Granholm lobbied Senators to cast a "yea" vote for immediate effect on HB 5198, the sales tax expansion bill. Without immediate effect, the measure wouldn't have taken effect until April 2008.

As the Senate struggled with immediate effect, tensions ran high on the Senate floor as members shouted at the Sergeants to stop members of the media from filming the board. Throughout the jockeying, Senators went up "green," then turned "red," only to go "green" again. It soon became clear that Senate Republicans wanted politically vulnerable Sen. Glenn ANDERSON (D-Westland) to cast a "yea" vote.

Ultimately, Anderson and politically vulnerable Sen. Roger KAHN (R-Saginaw) pushed the tally from 24 to 26. With a loud shout of relief from the floor, the voting board was closed and announced.

Following the Senate's adjournment, Senate Majority Leader Mike BISHOP (R-Rochester) said he was relieved.

"It's late at night. We worked hard for a long-time and it's going to be a while before we get the state turned around," said Bishop to reporters. "The key is that we have to continue to work together. This is the first step along the way."

Bishop said he was pleased with the reforms GOP lawmakers were able to secure as part of the deal.

"We feel we made some significant strides in those areas," he said. "We're disappointed that part of the revenue we raised tonight is a tax increase. We don't think that's the way to turn the state around. I personally am disappointed by that."

Tonight's deal also included SB 0772 and SB 0773, the 30-day continuation budget, which the Legislature delivered to Granholm in order to prevent the shutdown. The regular bills that make up the state's Fiscal Year (FY) 2008 budget will be passed as part of the overall deal in the days to follow.

Granholm could sign the continuation budget because she won the tax increases (estimated to bring in $1.48 billon in a full year of collections but $1.3 billion in FY 2008) she'd insisted on as a condition before she'd sign the budget extension bills.

At the end of the day in the House, preventing the shutdown came down to a battle of wills over SB 0418, the so-called MESSA reform bill (See section below). The MESSA issue had been heavily lobbied against all day by the Michigan Education Association and was feared earlier in the day to be what could unravel a three-legged deal (MESSA, Sales Tax on services and an Income Tax hike) to avoid a state shutdown.

The House passed the conference report on SB 0418 at roughly midnight (although the House clock stopped at 11:55 p.m. and was held there for at least five minutes). Once MESSA had cleared the House, it came down to Senate action on the two largest pieces of the deal, HB 5194 (income tax hike) and HB 5198 (sales tax on services). Together they are estimated to bring in $1.48 billon and were enacted with a 19-19 tie that was broken by Lt. Gov. John CHERRY.

Following the votes on the income tax, some Republicans expressed their discontent.

"It's unconscionable for Democrats to use the threat of a government shutdown to force residents to pay more, when so many people are already struggling to pay their bills. Yet, that is exactly what they did," said House Minority Leader Craig DeROCHE (R-Novi).

Meanwhile, House Speaker Andy DILLON (D-Redford Twp.) said it was the House Republicans who had been playing politics.

"The House Republicans . . . I think they wanted a shutdown," the Speaker said. "They wouldn't put the votes for revenues to prevent a shutdown and they wouldn't even put up all the votes they had for the reforms that the Senate Republicans wanted."

The House Republicans put up just two votes for a tax increase (the income tax hike) but did end up putting up all but three of their votes for the MESSA reforms. There remains about $200 million yet to be accounted for in fully balancing the budget, an amount that may be taken care of through a one-time pump in revenue because of an accounting quirk with the new Michigan Business Tax.

The following are details of how each of the three major legs of the deal came about:

Income Tax Hike - Leg Number One

After the days and days the House has spent attempting to pass an income tax hike, the final vote came fairly quickly with Gov. Jennifer GRANHOLM working the House floor for votes.

Ultimately, the House vote on HB 5194, which came at 10:46 p.m. Sunday, came down to a 57 to 52 vote. Two Republicans joined in with the House Democratic caucus to raise the income tax rate from 3.9 percent to 4.35 percent. Those members were Reps. Ed GAFFNEY (R-Grosse Pointe) and Chris WARD (R-Brighton).

Three House Democrats voted no on the income tax hike. They were Reps. Marty GRIFFIN (D-Jackson), Rep. Mike SIMPSON (D-Jackson) and Rep. Lisa WOJNO (D-Warren).

Under the conference report for the measure, the rate will be rolled back to 3.95 percent on Oct. 1, 2011 and then back to the current rate of 3.9 percent on Oct. 1, 2015. When the conference report came up in the Senate at about 1 a.m., the Senate struck a 19-19 tie on the measure with Lt. Gov. John CHERRY casting the tie-breaking report, as expected (See "Bishop Will Allow Tax Vote, Cherry A Yes Vote," 09/13/07).

In bringing the final Senate tally to 19-19, there were four members of the GOP that voted in the affirmative. They were Sens. Patty BIRKHOLZ (R-Saugatuck), Tom GEORGE (R-Kalamazoo), Ron JELINEK (R-Three Oaks) and Gerald VAN WOERKOM (R-Muskegon).

Democrats voting against the measure included Sens. Glenn ANDERSON (D-Westland) and Dennis OLSHOVE (D-Warren).

Sales Tax Expansion Moves - Leg Number Two

Legislation that broadly expands the sales tax to such services as janitorial work, mailing, copying and dating operations was passed by the Legislature. The plan is to put the expansions in place by Dec. 1, which raises $613.8 million in Fiscal Year (FY) 2008, but for an entire fiscal year the revenue number rockets to $751 million.

When the measure was taken up in the House, zero Republicans voted for it. The 56 votes required for passage of HB 5198 were supplied by Democrats only -- with politically vulnerable Rep. Marc CORRIVEAU (D-Northville) and Rep. Kate EBLI (D-Monroe) voting no.

But by the end of the day, the House Democrats gave anti-tax activist Leon DROLET a full menu of possible recalls to shoot at as every one of the House Democrats either voted for HB 5194, the income tax hike, or HB 5198, the service tax, or both.

On the Senate side, the Republicans made Lt. Gov John CHERRY cast the tie-breaking 20th vote, and it didn't take long for the Michigan Republican Party (MRP) to draw attention to the fact.

"With Lt. Gov. John Cherry casting the tie-breaking vote under the cloak of night, Gov. Jennifer Granholm and Democrats cajoled, bullied and maneuvered their way to the largest Michigan tax increase in a quarter century, a move that only creates losers in the form of taxpayers who must pay for this largess, and smacks a black eye on a state economy that leads the nation in unemployment and hostility to new business investment," MRP spokesman Bill NOWLING announced in a statement released literally minutes after the vote. Cherry is seen as a possible gubernatorial candidate in 2010.

MESSA - Leg Number Three

In exchange for allowing votes on two tax increases, Senate Republicans insisted that the GOP's long-desired reform of public employee health insurance be part of the mix. Senate Republican leaders say requiring health insurance administrators to surrender to school administrators health claims data for employee pools of 100 employees or more will allow districts to better shop for premium rates at a savings of at least 12 percent.

The key target for this reform is the Michigan Education Special Services Association (MESSA), a spin off the politically powerful Michigan Education Association (MEA) and the third-party insurance administrator for half of the state's schools, which flatly denies school districts in the state, as a whole, will save one dime from the alleged reform.

Last night, the Republican-led Senate passed, with great difficulty a conference report on SB 0418. (See related story)

Sunday, at literally a few minutes to midnight (by a clock that seemed to have stopped) the House passed SB 0418, on a 56-53 vote. After much ado only three House Republicans ended up voting no. They were Reps. Jack BRANDENBURG (R-Harrison Twp.), Mike NOFS (R-Battle Creek) and Tory ROCCA (R-Sterling Heights).

The Governor seemed to play a role in getting some House Democrats to switch their votes from no to yes, and Dillon finally talked Rep. David LAW (R-Commerce Twp.) into casting the 56th and deciding vote (See related story).

Other Reforms

The House last night did pass several Senate "reforms." The biggest change is requiring future public school teachers to pay more for their future retirement benefits. Under SB 0546 and SB 548 (See "Senate Passes Teacher Retirement," 6/26/07) teacher pension aren't erased in favor of a 401 (k) defined contribution plan as the GOP tried before. Making the change now would actually cost the state money in the near term. The Legislature did raise the amount a teacher who starts after July 1, 2008, would have to pay into the system through a graded premium schedule. It also tightens how future teachers could buy years of service. SB 0546 passed the House 65-44 on Sunday and 23-15 in the Senate. SB 0547 passed the House 56-53 and the Senate 21-17. - The Senate Republicans scored one of their top policy items of the 2007-08 session in SB 0001, legislation sponsored by Sen. Tom GEORGE (R-Kalamazoo), which encourages Medicaid recipients to quit smoking and stay in shape by offering them lower co-pays, etc. (See "SB 1 Looks For Medicaid Incentives," 1/10/07). The bill passed the House 107-2 with only Rep. John PASTOR (R-Livonia) and Rep. John GARFIELD (R-Rochester) voting no.

Neither the Senate Fiscal Agency nor the House Fiscal Agency was able to pin a dollar figure to the amount of money these reforms would save.

- The Senate also insisted on a series of government efficiency studies that are included in SB 0395, SB 0396, SB 0397 and SB 0398. The bills create one commission charged with taking a year to sniff out government waste, red tape, etc. Another commission is charged with making sure the state is living up to all local government mandates (See "Bills Create Government Efficiency Committee," 6/26/07).

SB 0395 passed, 108-1. SB 0396 passed, 104-5. SB 0397 and SB 0398 both passed on 108-1 tallies. Rep. Bill CAUL (R-Mt. Pleasant) was the consistent no vote on all four bills.

- Another school-related reform that seems to have natural bi-partisan support, SB 0549, which would make school districts within common intermediate school districts operate under a common calendar (See "Mandatory P.E. Jumps To Senate," 6/21/07). The House passed the bill, 64-45.

- For years, Sen. Jason ALLEN (R-Traverse City) has been angling to stop Department of Corrections (DOC) inmates from manufacturing items already made by a private sector Michigan factory (See "GOP Looks Into DOC's Furniture," 8/21/03). The idea is to end the DOC competing with the private sector, in particular West Michigan's furniture-making industry. SB 0632 puts those limitations in place. The House passed the bill, 101-8.

- SB 0622 puts a private contractor in charge of prisoner mental health services. The Department of Community Health (DCH) currently provides treatment to the seriously ill in prisons through contractual services and psychotropic medications. Combined, the DCH bills the Department of Corrections $40 million a year for these services.

SB 0622, in an H6 substitute form, passed in the House on an 82-27 vote. The Senate concurred with the changes on a 22-16 vote.

- One of Rep. Lorence WENKE's (R-Richland) reforms, HB 4800, deals with stopping state government retirees from collecting retirement benefits while also working for the state as a contractor or employee. The Senate passed the bill unanimously and the House passed the so-called "double-dipping" bill, 97-12.

Sales Tax Expansion Moves

A measure to expand the state's sales tax to such services as janitorial work, mailing, copying and dating operations, moved out of the joint House-Senate panel at 11 a.m. Sunday, the House on Sunday night and the Senate on Monday morning. The plan is to put the expansions in place in time to raise $613.8 million in Fiscal Year (FY) 2008, but for an entire fiscal year the revenue number rockets to $751 million.

The conference committee on the sales tax expansion bill, HB 5198, clunked through 5-1 at about 11 a.m. Sunday morning after some question existed over whether the tax could be subject to a public referendum.

Apparently, Senate Republican leadership wanted to add language to the bill that would have allowed the public to vote down legislation through referendum despite it carrying appropriations language, which typically bans the bill from a voter challenge.

To clear up the confusion, Lt. Gov. John CHERRY, Senate Majority Leader Mike BISHOP (R-Rochester) and House Speaker Andy DILLON (D-Redford Twp.) were called to the fourth floor Capitol conference room.

In the end, the committee approved the report, 5-1 with Rep. Steve BIEDA (D-Warren), Rep. Paul CONDINO (D-Southfield), Sen. Valde GARCIA (R-Howell), Sen. Wayne KUIPERS (R-Holland) and Sen. Mike PRUSI (D-Ishpeming) voting yes. Rep. Dave PALSROK (R-Manistee) voted no.

Immediately following the vote, the House leadership declared a "Call of the House," which locked members into the chamber. Both sides dove into caucus to be briefed on the sales tax expansion and remained there past noon.

The bill was ultimately passed with 56 Democratic votes in the House and Lt. Gov. John CHERRY providing the 20th tiebreaker vote in the Senate. Sen. Glenn ANDERSON (D-Westland) was the one Senate Democrat allowed to vote no on HB 5198.

Information on the extensive list of services being covered under the bill (plus the amount of revenue expected to be raised) as of FY 2008 includes:

- Business Service Centers ($9.5 million)
- Carpet/Upholstery ($5.2 million)
- Couriers and Messengers ($3.1 million)
- Document Prep Services ($4.8 million)
- Investigation Guard/Armored Car ($27.0 million)
- Janitorial ($43.8 million)
- Investment Advice ($16.8 million)
- Landscaping ($40.5 million)
- Mini-warehouse and self-storage ($3.9 million)
- Transit and Ground Passenger, limo and cab ($10.5 million)
- Office Administration ($79.2 million)
- Other Personal Services ($48.2 million)
- Other Travel and Reservation ($6.7 million)
- Personal care, no haircuts ($14.1 million)
- Scenic Transportation ($14.2 million)
- Security System Services ($14.2 million)
- Service Contracts ($23.5 million)
- Skiing ($2.2 million)
- Interior Design ($27.8 million)
- Tour operators ($2.6 million)
- Consulting ($188.2 million)
- Packaging and labeling services ($20.8 million)
- Warehousing and storage ($21.0 million)

Tricia Kinley with the Michigan Chamber of Commerce said the sales tax expansion to services in HB 5198 was part of lawmakers' misguided approach in solving the budget with tax increases on families and businesses.
 

Ms. Kinley said the one "beacon of good light" was having the Legislature sign off on HB 5104, which deals with the FAS 109 deferred liabilities issue.  As for recent changes to that bill and what effect they would have on businesses, Mr. Hadden said he hasn't looked over the passed version of the bill, so he's not sure how the changes will affect his members.
 

Mr. Rodriquez said, the claim of some that government spending is already at "bare bones" isn't accurate.   Although some reforms, such as MESSA reform under SB 418 were passed along with the tax increase, Mr. Rodriquez said he wouldn't call the compromise reached "fair."  "We got some reforms in exchange for the service tax, but we need to go farther," he said, adding that two cost savings measures that the Chamber is heavily focused on are consolidating school districts and local units of government and Medicaid reform.