A veteran of the House Fiscal Agency breaks down the transportation budget process

On this week’s edition of the Talking Michigan Transportation podcast, a conversation with Bill Hamilton, a senior transportation funding analyst at the Michigan House Fiscal Agency (HFA). 

As negotiations proceed on Michigan state government’s fiscal year 2023 budget, Hamilton explains the challenges and how things are unique with a needed infusion of federal dollars through the Infrastructure Investment and Jobs Act (IIJA), following relief from federal pandemic funds. 

Hamilton also talks about the IIJA’s impact in Michigan. This analysis breaks down the benefits to states.  

Acknowledging Michigan’s decades of underinvestment in transportation infrastructure, he talks about the history of the discussion and the reasons why it has been so difficult for Michigan policymakers to agree on a long-term and sustainable funding solution. 

 Other relevant links: 

A primer on the legislative act that lays out the funding formula for roads in Michigan at the state, county and city/village levels
https://www.house.mi.gov/hfa/archives/pdf/act51.pdf 

An HFA fiscal brief: MTF Distribution Formula to Local Road Agencies
https://www.house.mi.gov/hfa/PDF/Alpha/Fiscal_Brief_MTF_Distribution_Formula_to_LRA_Mar2022_Update.pdf 

Perspective from the Southeast Michigan Council of Governments https://semcog.org/desktopmodules/SEMCOG.Publications/GetFile.ashx?filename=PerspectiveOnMichiganRoadFunding.pdf 

Transcript

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Jeff Cranson: Hello, this is the Talking Michigan Transportation podcast. I’m your host, Jeff Cranson.

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Cranson: Today, I’m with a veteran of transportation finance and budgets, Bill Hamilton, who is a senior analyst at the House Fiscal Agency in Michigan. The fiscal agencies—there's one in the senate, one in the house—are non-partisan organizations that advise the legislature on all issues related to budgets, and finances, and revenue, and spending. And obviously, transportation is a big part of that, and we know that transportation has been underfunded for decades, and nobody knows more about this than Bill. So, Bill, thank you for taking time to be here.

Bill Hamilton: Thank you, Jeff. I'm happy to be here.

Cranson: So, talk first a little bit about the HFA, and what it does, and then about your background, and your years as a veteran staffer there.

Hamilton: Well, to begin with, you summed it up quite nicely at the beginning of the introduction. The House Fiscal Agency, that's spelled F-I-S-C-A-L, fiscal. You could sum up what we do in one sentence—we help the Michigan House of Representatives in their deliberations on the annual state budget. So, every year, the governor presents a budget, usually in February of each year. So, the budget presentation is a big event, a lot of press coverage. And then following that budget presentation, both the House and Senate, on separate tracks but simultaneously, have committee meetings on the budget. The appropriations committee and appropriations subcommittee, we take up the budget, we get testimony from the department, from the different interest groups. So a lot of the agency—both the House and the Senate has its own fiscal agency. We provide analysis documents, showing mostly the differences in the proposed budget as compared to the current year budget. So if you just google “House Fiscal Agency”, you'll go to our website, and you'll see a whole bunch of analysis documents on the budget proposal. And most of them, again, have the character; they’re documents of change. They describe the change in the proposed budget as compared to the current year budget. One other quick thing, we do legislative analysis. So in addition to budget bills, we look and analyze the bills that go to policy committees, bills that affect statute law. And we describe those bills, and we also identify if those bills have a fiscal impact. That's, again, what we do with the agency. About me, I grew up in Lansing. I went to Sexton High School. I went to James Madison College at Michigan State University. So, I've got a background in political science or political philosophy in some ways. Then after I got out of college, oddly enough, I took classes in accounting, and I ended up working for MDOT quite a while ago in the Office of Commission Audits. It's an audit staff. And I worked there a while. Then I discovered this job at the House Fiscal Agency, and I applied. So the last 25 years, I’ve been working in the legislative branch here at the House Fiscal Agency. The entire time, I’ve worked in transportation on the transportation budget, but I also worked on the agriculture budget.

Cranson: So, I’ve come to know you in your capacity working on the transportation budget, and you mentioned that you guys, the agencies, do analysis of the bills. And as a journalist, I can tell you that was very helpful to us. You basically score various legislation much the same way the CBO does at the federal level, and your analyses can be very helpful to understanding what the fiscal impact of any given proposal will be. So, this year, we've got a unique situation. We had the past couple years, because of the federal relief, because of the pandemic. What can you say high level about, and we're recording in mid-June, and we've made significant progress on the transportation budget. Could you kind of sum up where we're at, and what it consists of this year?

Hamilton: One of the things about the transportation budget that makes it different from most of the other budgets; historically, it has not used general fund revenue. So, one of the things appropriators typically do—the big discussion issues in the state budget, overall, is the use of general fund revenue. Because general fund is the fund source that appropriators have discretion over; how much you can use for higher education, how much do we need for corrections, how much do we need for the baseline activities of general government—that's general fund revenue. The transportation budget traditionally has used constitutionally restricted revenue from motor fuel taxes and vehicle registration taxes. Historically, that accounts for about two-thirds of the budget, and we've also used federal funds that are made available to the states, and to the state of Michigan. So, it's a restricted budget, and a lot of the funding is driven by Act 51, a statute. So, that makes it different than, for example, the agriculture budget that I work on. So, in this budget cycle for the 2023 budget, some of the biggest changes have to do with revenue changes. Revenue changes coming from Washington and the federal transportation program that was passed last year. It's called the Infrastructure and Jobs Act, and the acronym is IIJA. 

Cranson: Infrastructure Investment and Jobs Act. 

Hamilton: There we go. So for years, at least going back to the 1920s, there was a big amp up in the 1950s with the interstate program. But the federal government provides funds to states for transportation programs. And it's a partnership program. The federal government enlists states to achieve national objectives, or from the state perspective, these are federal funds that are helping us achieve our program goals. But the goals should be aligned. And as you say, the federal government provides about a third of our transportation budget. So, one thing that happened with IIJA—it's not a new program. There are new program elements, but it's basically this ongoing program of federal aid for state transportation programs. But the biggest change is the funding targets. The amounts that will be available to states, including Michigan, is significantly higher than in the past authorization. So that's one of the things we're seeing in the budget is a significant bump in federal aid. Again, appropriators don't really have to make an affirmative decision about that, but we do have to make the appropriation, and we have to acknowledge that in an appropriation bill.

Cranson: But that goes to the difficulty of this whole thing, right? That you want to use one-time money in a way that can make a dent, but not in a way that sets you up for something that's not sustainable. And that's the balance you have to strike, and that goes to your challenge explaining this to new legislators. I mean, in a term limited era, and you've lived through pre-term limits and post-term limits, you've got a new crop every six years. And they start from scratch, and it's not their fault that they don't have a deep background and haven't had a long time to learn these things. But it really puts a burden on you to help in that education process in order to have a common understanding.

Hamilton: You said it exactly right. The term limited legislators—I mean, they come from a broad background of across the state of Michigan, different backgrounds, and many of them come from local government, and they run for office. But the big challenge in the House, they have a maximum of a six-year term. They could get elected, then they have two more elections to the House for a maximum of six years. And many of them even complete six years because they'll run for an open seat in the Senate, for example. So there is something to be said for institutional memory, and that's partially what we do with the fiscal agencies is help provide some background in institutional memory. 

Cranson: Yeah, that's exactly what you do. But going back to this year, and where we're at, how do you think we're doing in your analysis of appropriating those federal dollars, those one-time dollars, knowing that that allows us to break what has become kind of a trend since fiscal year 12, I think, of using GF. I mean, back in that era, it was a matter of using general fund for the transportation budget or not being able to draw down all your federal dollars, right? 

Hamilton: Exactly, so that's one of the interesting things that began to happen about 2008 or so. We began using general fund in this budget in the way we never had in the past, in some cases, hundreds of millions of dollars. So, the current year budget does not have any general fund. When I say current year, that's the year we're in now, the 2022 budget year. There's no, well there’s originally no general fund, although we appropriated supplemental appropriation. And the governor and the House and the Senate had also considered using general fund for 2023. One of the biggest changes I’ve noted in the time we've been here is the increasing use of general fund. The challenge with general fund is that you're competing with all the other claims on general fund revenue. You can use general fund for education programs, for higher ed programs, for environmental protection programs. Because of the challenge of baseline transportation funding from the traditional sources of fuel taxes and registration chains, we've been using and have an increasing use of general fund in this budget. And, again, as you say, in some years, it was simply to provide matching funds for federal aid. We didn't want to lose federal aid, so we ended up using general fund. 

Cranson: Well, just to confuse things even more, and going to that question about what's sustainable long-term, part of the 2015 funding package that involved an incremental increase in fuel taxes and registration fees, it also dedicated 600 million dollars in income tax money that otherwise would flow to the general fund to transportation. So, we're kind of locked into that for a while now. Do you see when we get past pandemic relief and past the IIJA the federal money, a way that we can still get a transportation budget done without the infusion of GF money? 

Hamilton: I can't really say. Again, that's for appropriators. So at various points, both the governor and the Senate and the House have all included general fund in a proposed 2023 budget. So, we'll see if they can come to an agreement on a number, on the distribution. That's the one thing that's still totally up in the air between the folks negotiating. And I will make one quick correction on something you said. So the IIJA money, this infrastructure money; that's not one time. So, this is the ongoing federal program. The IIJA simply increased funding targets, increased the amount that's apportioned to the states. I think that's the term they use, apportionments. So these are federal apportionment programs, and it's pretty much promised at these levels for five years in this program.

Cranson: Yeah, that's a really good point. Yeah, there's a difference, obviously, between what's reauthorization and what's new. And then it does have a five-year window, which is a good thing in terms of longer-term planning. So, yeah, that's a very good point.

Hamilton: The thing that was one time is this covid relief money that came to the states. So there were three big packages of federal covid relief, three packages that included transportation funding. And it's kind of funny, I began working on a paper about this, but it ended up being a moving target because every time I almost completed the paper, something changed in the program. So I’m still working on the paper; that's in the to be completed pile. 

Cranson: Yeah, when it's done it's going to be somewhere around the length of war and peace, I think.

Hamilton: Yeah, exactly. So, the covid relief is one time. But the IIJA is not; that's part of an ongoing program. 

Cranson: Stick around, there's more to come right after this short message.

[Cars driving past] 

Female Narrator: Oh, look at those beautiful wildflowers along the road. Aren't they pretty? 

Male Narrator: Check out that classic car; you don't see many of those anymore. 

Female Narrator: Wow, look at that cable median barrier. 

Male Narrator: What, you mean that wire guardrail in the middle of the road? 

Female Narrator: Exactly, aren't they gorgeous? 

Male Narrator: Um…not exactly. 

Female Narrator: They were put there to prevent crossover head on crashes, which are some of the most deadly type of freeway crashes. And they're really effective, reducing those types of incidents by 90 percent. That's a lot of lives that have been saved. 

Male Narrator: Huh. I guess I never really looked at them like that. I prefer the wildflowers, but I'm seeing those median cable barriers in a whole new light. 

[Cars driving past]

Cranson: Can you tell me, basically, what are the high points for the transportation fiscal year 23 budget?

Hamilton: Well, I guess the high points of both the executive and the House and the Senate—and again you can find this on the House Fiscal Agency website if you look. The big changes are simply recognizing additional revenue that's going to be available to the state of Michigan. So, we anticipate receiving an additional 384.7 million dollars from federal sources in 2023 as compared to the 2022 baseline. And actually, we've already received additional federal money in the current fiscal year. We're going to receive additional federal money in 2022, and that's really the big story in this budget; recognize these additional federal funds in both the current year and in 2022. So I’m going to tell you, I’m going to hijack the discussion a little bit and highlight a couple things that I think your listeners should know in looking at the budget. One thing, I mentioned going to the House Fiscal Agency website, and a lot of our documents are documents of change, the current year and the proposed budget in 2023. But I’ve got a couple of long-term analysis documents. One of them is a PowerPoint budget briefing, and that shows a 25-year history in the budget. And so that's a good thing to start with if you want to understand the budget, and if you want to understand the transportation funding crisis. If you look at one of the slides in that PowerPoint, I show revenue from fuel taxes and registration taxes. Those are credited to the Michigan Transportation Fund, the MTF. So if you look at that slide, if you look beginning about 2001 through 2013-2014, MTF revenue is totally flat. So, for a roughly 15-year period, baseline level of revenue is totally flat. So, even though I know we're experiencing inflation now, but for that period, inflation was fairly low. But there is still inflation, a baseline inflation in material crisis, in labor prices, in health care. I mean, contractors, MDOT has to pay employees, health care costs go up. So for 15 years, inflation is eating away at the buying power of that MTF revenue.

Cranson: And just to break that down real quickly—the Michigan Transportation Fund, the MTF, is what goes to, by formula, it goes to local road agencies, split basically 22% for cities and villages, 39% for the counties, and then 39% of it goes to MDOT to their STF, which is the State Trunkline Fund.

Hamilton: Exactly. So here's the thing, all of the recipients of MTF revenue—the Michigan Department of Transportation for the State Trunkline Program, County Road Commissions for county road programs, cities and villages for street programs—for 15 years their funding was effectively totally flat. You throw it on a trend line, it's a flat trend line for basically 15 years. That's the number one reason why we're talking about a funding crisis.

Cranson: Yeah, well. Okay, I’m not gonna put you on the spot here too much because it is the nonpartisan House Fiscal Agency. 

Hamilton: Exactly.

Cranson: You can say that's the number one reason is because of those costs being flat, but whatever you're comfortable saying, why is it so hard in Michigan to get a sustainable funding plan? And Michigan’s not alone, there are other states that struggle with this, but there are other states, both red and blue, that have done a decent job of funding transportation long-term. Why is it so difficult in Michigan? 

Hamilton: There are a couple issues. We mentioned term limits, I mean, term limits are a factor. I don't want to weigh in too much on the term limits as a policy decision, but that is a factor. Nobody likes to raise taxes, and so if you vote to increase fuel taxes or registration taxes, that is a tax increase; nobody wants to do that. Well just one quick thing about the funding services; almost all the attention is focused on fuel taxes. And legislators, “Are you gonna raise the gas tax?” I mean, if they go on a political talk show, they'll be asked about the gas tax. But again, look at my budget briefing document. Vehicle registration taxes are actually a bigger contributor to Michigan transportation or revenue, revenue that hits this MTF, the Michigan Transportation Fund. So those are the taxes you pay when you get a new vehicle registration plate, when you, on your birthday, renew those plates at the Secretary of State. Then it's actually a bigger source of transportation revenue than fuel tax. 

Cranson: And that's just because of fuel economy, really. I mean, and that's a good thing. We're driving more fuel-efficient vehicles, but that's not a good thing if the fuel-efficient vehicles do as much damage to the roads as their predecessors. 

Hamilton: Well, exactly. So that is one of the challenges with transportation funding; about half of the funding comes from fuel taxes. And that's the consumption tax—it's not based on the price, it's a fixed tax per gallon. And consumption has been flat or falling since about 2002. And Jeff, as you mentioned, vehicles are more fuel-efficient, younger people are less apt to drive, so vehicle miles traveled is falling. So again, that's one of the challenges. We can increase the tax rate, but the consumption base is going to continue to fall.

Cranson: Yeah, that's well put. Well, anything else you want to say real quickly as we wrap it up about where we're going? And I mean, if this year was difficult with a fair amount of money to try to appropriate, what's the climate going to be for fiscal year 24?

Hamilton: Oh gosh, Jeff, you're asking me for predictions. We like to say predictions are hard, especially about the future. So I’m not going to predict, but I want to leave the listeners with a couple quick thoughts about the budget. One, we think of the budget as money. If you actually look at a budget bill, go to the website, we've got links to the budget bills. It's kind of confusing—it looks like money, and it's related to money, but it's really spending authority. The legislative branch is granting the executive branch authority to spend the money. The executive branch effectively has money—well, the Michigan Department of Treasury has money. The appropriation process is granting spending authority, legislative branch to the executive branch. That's number one. The second thing is I want folks to know the fuel taxes and vehicle registration taxes are constitutionally dedicated to transportation. And there's one thing that drives me nuts is when I hear folks say that these funds are diverted. They've never been diverted. We have a strong internal control system in Michigan, lots of checks and balances. All of that constitutionally dedicated money is expended for transportation purposes. It's not diverted. 

Cranson: Why is that term used, and why, I guess, that's one of those myths that's out there. Why is that?

Hamilton: Part of it is because, in Michigan, we do have a sales tax on the sales of motor fuel, in addition to the motor fuel tax. And the sales tax is also constitutionally dedicated, primarily to school aid. So the same transaction is affected by two different taxes. It's not unique there, but I think 13 other states have sales taxes on top of motor fuel taxes. Some of the interest groups promote that as diversion, but it's not really. So, there's a sales tax that's constitutionally dedicated to schools, your revenue sharing. That's where it goes. Fuel taxes are constitutionally dedicated to transportation, and that's where they go. They're not diverted. The last thought, over half of the Michigan transportation budget is actually either distributed or made available to local units of government. So, we talk about it as like the Department of Transportation budget. They present the budget in subcommittee. But half of the funds are either simply distributed monthly to local units of government—road commissions, cities and villages, public transit agencies—or made available for grant programs. Half of this budget is distributed or made available to local units of government. On that I rest.

Cranson: [laughing] Okay, thank you, Bill. This has been helpful. I love talking about these things with you, and I love your experience and your insight, and how you exercise great discipline in keeping your personal philosophy and personal views out of these things so that you can offer a dispassionate but informed view and advice to legislators. So, I really appreciate the work you do. 

Hamilton: Always good talking to you. Thank you, Jeff.

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Cranson: Thank you again for listening to this week's edition of the Talking Michigan Transportation podcast. I would like to thank Randy Debler and Corey Petee for engineering this week's podcast. To subscribe, to show notes, and more, go to Apple podcast and search for Talking Michigan Transportation.

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