Strapped cities taking aim at Proposal A

property tax
Dan Gilmartin

Dan Gilmartin, executive director and CEO of the Michigan Municipal League, says the state must do something to help cities raise more revenue for basic services

LANSING — Dan Gilmartin has a warning for Michigan’s policymakers: The way the state funds its cities is squeezing them dry.

Yes, local governments need to do a better job at sharing services and cutting costs, said Gilmartin, executive director and CEO of the Michigan Municipal League, which advocates on behalf of cities and villages. But cities also are limited in how much money they can collect, even if residents were willing to tax themselves more — and that, he said, is something Lansing has to fix.

One fix Gilmartin and some other leaders are floating: An update to Proposal A, the voter-approved 1994 Michigan constitutional amendment that caps property tax increases.

That solution would be politically tough, but the fact that they’re talking about it at all is telling.

It’s part of a backdrop of other extreme money measures being bandied about in Lansing, including proposals to roll back or eliminate the state’s income tax — to the concern of Gov. Rick Snyder — and restructure public retirement plans that have become a financial crisis. The outcome will have ramifications for Michigan’s competitiveness nationally, not least of which is the long-term fiscal health of the state’s cities and their ability to attract talent.

Backers of updating Proposal A are aiming for changes they say won’t change the law’s original intent. Adopted partly to rein in ballooning property tax bills in the 1990s, the provision works by capping annual growth in property values, but some local leaders say it’s holding down revenue in a way that hadn’t been seen until the Great Recession of 2008 sent property values plummeting.

In exchange for limiting annual growth in homeowners’ property tax bills, voters agreed to raise the state’s sales tax by two percentage points — it has been 6 percent ever since — and dedicate the money to K-12 schools.

Researchers estimated that just 14 percent of local retiree health care plans in Michigan were funded in 2014, compared with about 78 percent of local pension systems, with more than $10 billion in estimated unfunded health care obligations alone. That’s a big bill that will come due eventually or municipalities risk not being able to provide the promised benefits; unlike pensions, health care for retirees is not constitutionally protected. That could prompt tough decisions on how to spend limited local resources to avoid scaling back public services.

In a recent paper, two former Michigan fiscal experts who now run a consulting firm argued that deep property tax declines during the housing crisis combined with a slowly recovering tax base — in part because of the Proposal A growth caps — have created a no-win situation for cities that have lower tax bases: Either pass high millage rates to fund services, or keep tax rates low and cut services.

Both high tax rates and service cutbacks “would encourage residents and businesses to move elsewhere,” wrote Mitch Bean, a former director of the nonpartisan House Fiscal Agency, and former state Treasurer Robert Kleine, who formed Great Lakes Economic Consulting LLC. “Thus, cities are caught in a vicious cycle that results in ongoing serious financial problems.”

The most serious problems, as in Flint and Detroit, can lead to state financial oversight or bankruptcy.

Republicans in the state House have made reforming public-employee benefits a legislative priority this term. Gov. Rick Snyder appointed a task force expected to deliver recommendations this spring on how to address the pressure from pensions and retiree health care on local budgets.

Municipal advocates, Democratic lawmakers and the state Treasury have begun to raise the idea that local revenue streams should be evaluated as part of a multi-part approach to reform that includes containing costs and benefits obligations, improving efficiency in delivering services and making sure municipalities’ revenue is sustainable.

The magnitude of underfunded employee legacy costs statewide has brought greater urgency to finding a solution. Plus, economists have signaled a coming slowdown in the recovery. Michigan could take an early hit if that happens, if record auto sales start to stagnate.

“All three categories need to be addressed over the next year” while the economy is still growing, state Treasurer Nick Khouri said. “The thing I’m emphasizing, more than any specific policy proposal or principle, is: Now is the time to have these debates, when we have the economy at our back and we’ve got a little flexibility — not waiting until the next crisis.”

Thinking differently

That doesn’t necessarily mean action on revenue, including anything related to Proposal A, would coincide with retirement reform. The co-chairmen of Snyder’s retirement benefits committee, who have backgrounds in auditing and health care finance, told Crain’s it’s too early to say whether revenue will be among the final recommendations.

However it’s done, the state and its communities need to start thinking differently about how to strike a balance between a favorable tax structure and adequately funded local services, said Tony Minghine, chief operating officer of the municipal league. People generally don’t move to a state because it has low taxes, he added. They move because they like a particular community’s quality of life.

“For the first time in a long time in Lansing, we’re talking about this stuff,” Minghine said. “It’s really encouraging.”

Rather than repealing or replacing Proposal A, which would require a statewide vote, associations representing cities and townships believe changes could be made by the Legislature, rather than by going back to voters. Rewriting the law in its entirety also would be a difficult task, given the voter education campaign that would be required and the current tax-cut sentiment pervading in Michigan and in Washington.

More than two decades after the law’s landmark passage by voters under former Republican Gov. John Engler, the limits it forced on local revenue have been tested in ways that no one could have predicted in 1994, when the economy was growing.

Proposal A had two main goals — to lower property tax bills and to set up a state funding structure for public schools, which until then had been funded primarily by local property taxes. Before Proposal A, a wealthier community could have a richer school district, a gap that has shrunk over the past two decades but has not been erased.

“It was the solution to the problem at that particular time,” said Judy Allen, government relations director for the Michigan Townships Association, which represents the state’s 1,240 townships. “I’m not saying it should be eliminated or thrown out. But I think it is always good to review to see if the mechanisms we have in place are working.”

Under Proposal A, annual growth of an individual property’s taxable value is limited to the lesser of the inflation rate or 5 percent. While it has slashed tax bills for Michigan residents, last decade’s recession exposed a flaw that municipal leaders say has hindered cities’ ability to recover: Property tax collections can tumble along with the housing market, but growth is capped — meaning tax revenue doesn’t grow as fast as a rebounding economy.

Two strategies are under consideration. The state’s Headlee Amendment, approved in 1978, requires communities to roll back their millage rates if their total property tax revenue growth exceeds inflation. Under Proposal A, when a property is sold, its taxable value reverts to the state-equalized value — equivalent to half of the property’s cash value and generally higher than its taxable value. If a community has a strong real estate market in a given year, that bump in revenue could have the adverse effect of triggering a Headlee rollback that lowers its millage rate. That could lead to a less-than-inflationary growth in a community’s revenue. The first idea would exclude so-called “pop-up” values from being used in Headlee rollback calculations.

The second would be to allow a community that is growing at less than the rate of inflation to “roll up” its millage rate under Headlee — in essence, allowing a community to offset stagnant growth or declines in property values with slightly higher millage rates. A community only would be allowed to “roll up” millage rates if it hadn’t already hit its taxing cap under state law, and it wouldn’t be able to net more in tax collections than inflation.

While local government leaders understood in the mid-1990s that an economic downturn could have devastating consequences for revenue, Minghine said, a healthy economy might have led them to underestimate the effect: “You never experienced those declines like that, so you never saw the math play out the way it did.”

“One of the things that became really, painfully apparent during the recession was how severely limiting that was,” he said. “When you have markets that are always trending upward, those limits are masked.”

No specific legislation has been introduced; rather, municipal groups have said the idea so far is a policy goal.

Gideon D’Assandro, spokesman for House Speaker Tom Leonard, said House Republicans would need to see a specific proposal before they could comment. They’re focused for now on restructuring benefits, D’Assandro said.

A matter of benefits?

An unsuccessful run last year by the Republican-led Legislature at the retiree benefits issue is expected to resurface this year. Snyder’s task force is made up of city and township leaders, labor groups, lawmakers and people with expertise in accounting, auditing and health care.

The revenue idea is one response to solving the problem, as municipal groups contend that simply restructuring benefits won’t help them pay for benefits promised years ago.

Still others say cities can’t afford the benefits that have been offered, and finding ways to adjust pension and health care benefits is the first priority.

“I believe there is a need to revisit Proposal A and how we fund local municipalities, but that doesn’t take away from the fact that we have a spending problem in local government,” said James Freed, Port Huron’s city manager, who estimated that 22 percent of the city’s general fund — or an $8.2 million annual contribution — will be going to address a $103 million pension liability in the next three years.

Freed said his city will face a $3 million deficit on a $22 million general fund budget within the next three years, which he said is solely the result of rising annual contributions to unfunded pension liabilities. He wants to see the Legislature first reform what kinds of benefits municipalities can offer, and then authorize cities to restructure payments through bonding or revolving loan funds that could reduce annual contribution amounts.

“Until we address the benefits and our spending, I don’t see how you go to the taxpayers and talk about revenue,” Freed said. “If we had every dollar of revenue sharing back, we would still be in the crisis situation.”

The state hasn’t fully funded revenue sharing to local governments since the 2001 fiscal year, according to an analysis by the House Fiscal Agency.

The April 2016 report by Great Lakes Economic Consulting included estimates that cuts to statutory revenue sharing, the type not provided for in the state constitution, for cities, townships, villages and counties topped $7.5 billion since 1998.

Snyder proposed no increase to statutory revenue sharing next year. Instead, he proposed allowing local governments to share in $122 million in surplus funding, which is the result of the state overestimating how much money was needed to prevent funding losses for municipalities after the elimination of Michigan’s personal property tax on some business equipment.

“I have no problem looking at how we deal with long-term liability issues facing local communities. But it has to be done in context of a broken municipal financing system,” House Democratic Leader Sam Singh said.

Revenue sharing cuts and the recession led mayors and city managers to downsize staff to balance budgets and minimize cuts to services. That decision today means fewer active employees are paying into municipalities’ retirement systems, Singh said.

Other solutions

Other policy ideas that have circulated include updating the formula to distribute statutory revenue sharing payments to account for such criteria as population, per-capita income and the cost of services.

In addition, lawmakers could consider authorizing more local taxes, including local sales taxes; smoothing out annual declines in property values by using a multiyear average; and increasing municipalities’ tax caps, according to the Citizens Research Council of Michigan.

“There’s no reason to cling to anything we’ve done in the past, and anything and everything should be on the table,” said Eric Lupher, the research council’s president.

The longer a solution is put off because it’s politically difficult, Gilmartin said, “we will do so at our own peril.”

“There are other issues that play more in political campaigns,” he said. “But this is slowly strangling our state.”

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Comments

Jay
Mon, 02/27/2017 - 10:20am

Gilmartin said that local governments have to do a better job of cutting costs and sharing services. This is the first place to start. In many areas of the state, there has been bad blood going back many years with neighboring local governments and they refuse to work with each other. Local governments can certainly reach agreements to share some services where it's a win - win situation and they cut costs in the process. Every local government should be creative and find ways to share services and cut costs before any new ways of generating revenue are even considered.

duane
Mon, 02/27/2017 - 11:41am

Jay,

In sharing or out sourcing of services the government [local, state] have no idea what good services look like let alone how well they or their neighbors are doing. If you don't know what to measure or how to measure it, how you will provide better services or be able to buy better services.

The other part of their problem is that these governments don't realize that they have more leverage in getting better services by letting others compete for the work, and until they realize that they will not try. All you need is two or three providers that want the work and they will innovate to make a better offer and if that doesn't seem enough then they change the next contract. This is proven by major cost issue driving a need for more of other people's money, retirement and medical benefits to former employees, the government agencies were captives of their own egos [they want to make staff happy while ignoring the cost, which they pushed out until after they were long gone].

As for creativity [creativity is a culture that is driven by need] in local or even state government, their cultures are built on the past, they write rules to control the future by looking at the past, they spend money based on what they spent it on in the past, they build and maintain roads the way they were done yesterday. The biggest conflict between governments and the citizens is that the governments live in the past [fighting each battle like they did the last one] while the citizens are working in an ever changing world that they are trying to be ready to survive in the future. Each of us can describe at least one recent technological change in each part of our lives [especially where we work], ask a City engineer what new technology are they using in road construction and listen to the silence.

Matt
Mon, 02/27/2017 - 10:55am

Your article does a good job of talking about Proposal A. What it fails to address is that the monies set aside in Proposal A have already been taken by the legislature to help pay for community colleges and universities. As your article states the voters approved Proposal A as part of property tax relief for K-12, but the legislature has for the past 8 years or more not followed through and has been giving K-12 funds to support colleges and universities. Maybe that could be added to your story?

marco
Mon, 02/27/2017 - 12:01pm

It seems to me that the Headlee amendment and Proposal A are operating exactly as intended. The decline in property tax values may not have been foreseen at the time, but certainly could have been considered as possible. At one time, salaries of government employees in Michigan were higher than those of workers in comparable private industry jobs. If this is still the case, it will be difficult to generate sympathy for addressing those unfunded liabilities that affect government employees. The true purpose of government is to provide for the common good of the citizens, e.g., roads and other infrastructure, rather than for the needs of government employees.

Eric
Mon, 02/27/2017 - 2:55pm

It is funny that Snyder continually says locals should share services when the whole premise of state government is redistribution of funds from the locals that drive the state's economy to those that don't.

Barry Visel
Mon, 02/27/2017 - 3:15pm

We recently purchased a condo for our two special needs children to live. It happens to be in Kalamazoo. We just received a survey (a long drawn out affair) asking many questions pertinent to running a city, and many more that have little relationship to municipal government (child care, churches, healthcare, education, electric and gas utilities, and more). Out of 5 pages of questions, not one dealt with unfunded liabilities. Not one question was open- ended. Given the response envelope, they hired a firm from New Jersey to tabulate the results. If this is how municipals are spending their time and my tax dollars, I am not impressed, let alone support additional revenue schemes.

Rich
Mon, 02/27/2017 - 3:17pm

NO, NO, and NO!! Where does it say that my tax money should go to building professional sports stadiums for millionaire players to play in? Why do government employees have gold plated pensions while I have none, and yet when a unit of government has not funded them enough, the citizens of that area are assessed to pay in what should have previously been provided (Wayne County, 2015)? Why is it that whenever I walk into a government office, or see a crew at work outside, I see people sitting and talking, or worse yet sleeping in their trucks? Why does every government project have to be another Taj Mahal?

The revenue has to be withheld until the taxpayers are satisfied that a reduced level of spending has been achieved.

Zeke
Tue, 02/28/2017 - 1:44am

Lansing has tremendous trouble controlling their costs ie. reducing manpower to match true needs as well as employee wages and benefits.
Unlike a family household who face the same problems in controlling expenses who cannot tax their neighbors Lansing continuously sees additional taxation as their solution to paying their bills but never having to reduce their expenses. When will they learn tax payers are not a bottomless pit.

John S.
Mon, 02/27/2017 - 11:33pm

There's an old book in my library: The Hidden Costs of Public Safety. This is the largest chunk of local government budgets. Public safety is the third rail of local government (i.e., touch it and you are dead). Let's pull up data from 2013-2014 and look at the relationship between the crime rate/1000 persons and number of police officers/1000 persons, looking at cities 10,000 and higher. Is anyone surprised that there's almost no correlation? R-square= .006 . In some localities, right-size public safety and do something to control the rising costs of retiree health care benefits and suddenly finances don't look so bad. If the public demands more police and fire and wants to pay for it--fine! Still, they should know more about what they're paying for. Is there more than a handful of mayors, city councils, and local managers who want to take a serious look at public safety staffing levels? I doubt it.

Angie
Tue, 02/28/2017 - 11:02am

As increases in the cost of health care benefits for municiple workers and retirees are driving many cities and towns to the abyss of fiscal collapse, perhaps some investigation into the reasons for the increases is needed. Why is health care in America so expensive? What can be done to control heath care costs? I'd like some of my tax money be spent finding answer to those questions.

Kevin Grand
Tue, 02/28/2017 - 8:44pm

All of these policy wonks are overlooking the fact that Michigan Families have had the tar kicked out of their own budgets during this recession along with local governments.

The only difference here is that these local government knew that there was a reckoning coming pertaining to Headlee & Prop A for years now, yet chose to stick their collective heads in the sand!

Michigan Families have had to adapt their own budgets to accommodate this "new normal". local units of government should do the same.

As I see it, local cities made their beds when they made these OPEB agreements that they knew that they couldn't keep, let them handle the consequences of their poor decision making. Why someone who is as intelligent as Ms. VanHulle neglected to mention this in more detail in her article above is beyond me.

And regarding "tweaking" either Prop A or Headlee to address this?

Lansing is already getting an ear full from irate constituents regarding why the Gilbert Bills can sail through the Michigan Senate just last week (SB-111 thru SB-115), yet bills like HB-4001 gets tanked during the very same week.

So good luck with getting either one of those "solutions" addressed.

Marion
Wed, 03/01/2017 - 11:38am

Tax me more to pay for unfunded pensions, not good service? No thank you. People have shown how Lansing can cut its budget and no one will listen. Additional money sent to Lansing will be spent on things from which most people will not benefit. There are plenty of places to cut in the budget. Try that first.

Matt
Wed, 03/01/2017 - 10:24am

Not to appear sympathetic perpetual whining from government units. Our property tax system makes no sense, it is in fact a wealth tax that depends on a constantly moving subjective target - real estate value. As well, it discourages upkeep and new residents from moving in because new purchasers are hit with high tax bills verses long time property owners who likely voted to increase millage rates. Beyond these, it is very expenses to administrate with big accessing and equalization department staffs. And finally it provides an unstable funding source. Would we be better off having a real estate tax reflecting the services required , potential occupancy, or size or Building type and SQARE FOOTAGE?

Susan Murdie
Wed, 03/01/2017 - 10:43am

It is so frustrating that our Cities need more money to provide basic services.

The City of Jackson (which I live in) has wasted our tax monies on so many political projects.
Millions have been wasted on demolitions of perfectly good homes, millions wasted on unnecessary parks, this list could go on for days.
I would really love for Mr. Gilmartin and others to go to each City in Michigan and compile a list of all the money City Leaders have wasted to keep their political or governmental positions/benefits.
I personally do not want to give another dime to my City leaders to be wasted on yet another project to change one-way streets, put in another park, tax giveaways to developers, benefit/retirement packages, hiring of firms to support their agenda, demolishing perfectly good homes, funding an heavy handed inspection department (aka income department for the City), raises for themselves, etc. This list of governmental waste and abuse absolutely makes me sick!

Brian Loftus
Wed, 03/01/2017 - 4:48pm

Enough chatter about new sources of revenue - do we need another reason for people to leave Michigan? My Township's statutory revenue sharing is down - like every other municipality - but when the state sends over $600 million to Detroit Schools and some $200 million to Flint (both demanded more) there isn't a whole lot left.
I have attended several 'Hostage Taking' municipal finance sessions, usually covering the same (now tedious) topics of the article. I refer to them as hostage taking because, invariably, public safety personnel (the Hostages) are paraded as those being sacrificed unless more revenue is raised. Apparently other municipal employees do not have the same appeal.
What Michigan needs is jobs to attract the residents who left in the last decade (Michigan being the only state to lose population between 2000 and 2010). Concurrently, the residue of the Headlee Amendment, much of which was replaced by Prop A of 1994, should be eliminated. The rollbacks on local millages, including voter approved millages, are stifling revenue generation. Additionally, Headlee precludes the capture of the increase in taxable value of existing properties at point of sale, particularly problematic to older, built-out communities.
I am the Supervisor of Grosse Ile Township. We are working hard to attract residents to replace those 9% of our population who went elsewhere since the 2000 census. Existing homes are selling at market prices, but we cannot collect the property tax based on the current market value, we are constricted by the taxable values resulting from the property value collapse from the 2008 recession . Fix Headlee first, then we can talk about other revenue sources.

Robert J. Kleine
Fri, 03/03/2017 - 1:13pm

If we fix Headlee we may not have to talk about revenue sources other than more revenue sharing. In 1998 statutory revenue sharing was $770 million now it is $250 million. The state has cut business taxes by billions, they can afford to provide more money to local. Given our restrictions on local revenues and our form of govt. organization the system cannot work without a robust revenue sharing program. No state treats local government worse than Michigan.

Brian Loftus
Fri, 03/10/2017 - 2:18pm

Two points - with the Headlee restrictions removed revenue sharing will be less of an issue. Most communities will enjoy increases in property tax revenues, those that cannot or will not attract residents will have to rely on sharing. As to the revenue to be shared - since the state has GIVEN nearly a billion dollars to Flint, Detroit and Detroit Schools, there might not be much to share. All of those transfers are meant to mitigate the incompetence or corruption of local elected officials. The rest of us do get a little irate as we do our best to run our municipalities prudently with the dollars available.

Marlino
Sun, 03/05/2017 - 7:02am

In all of this conversation there are no comments about neighboring communities consolidating their services. This is where savings needs to start, and it could be significant and measureable. The problem is the people who might make these decisions are the problem. Take public safety. Is the police chief or fire chief going to recommend his department consolidate with the community next door? Whoa. And put himself out of a job? Birmingham police had the perfect chance to consolidate with other communities a few years ago when the chief retired. They blew it because of excuses and leadership too selfish and afraid to take the bold steps to start making this necessary process occur. A master plan in consolidations of communities would bring measureable and wonderous results, but it will need to be developed by 'outsiders', because the current leadership simply won't give up the fat cat programs they have, taxpayers be damned.

Mary Fox
Sun, 04/09/2017 - 1:21pm

You might as well scrap proposal A since Republicans don't spend the money in the way we voted anyway. Everything is siphoned off for business subsidies. I am really tired of having business's fair share of taxes shifted to me and then being asked to contribute even more. Tax the businesses.

Mary Fox
Sun, 04/09/2017 - 1:28pm

Get rid of the 9.6 BILLION in corporate welfare tax subsidies we shell out yearly, and use them to fix roads, fund schools, fund fire and police and spend them on the general welfare. The free market will operate; when people are employed building roads and bridges, protecting and educating the public, taking care of cites and towns infrastructure, business will have lots of customers and people will be adequately employed. Use tax dollars to serve public needs not to subsidize private businesses.

Matt Korolden
Sun, 04/09/2017 - 3:05pm

Meanwhile, Nestle wants to pump hundreds of millions of gallons of water for about $200 bucks a year.

We've paid $12M in legal fees related to the Governor's legal defense related to Flint.

We gave away $1B in tax breaks to corporations with nothing to show for it.

The MIGOP has been an unmitigated disaster for MI.

Jerome Bigge
Sun, 04/09/2017 - 5:34pm

I've been thinking about moving out of Michigan for years. Raise the property tax and "good bye, Michigan".