Mitch Bean: Starving Michigan cities and the coming storm

If we don’t change the way we fund municipalities, the crisis in Flint may be a preview of coming attractions.

It should surprise no one that many Michigan cities are in fiscal distress, and it should come as no surprise when more issues arise in years to come. Why? Because state funding for municipalities have deteriorated to the point many cities cannot adequately fund basic services.

Since 2002 Michigan has led the nation in cuts to municipalities. The Census of Governments published every five years by the U.S. Census Bureau reported that from 2002 to 2012, municipal revenue from state sources increased in forty-five states and the average increase was 48.1 percent.

In Michigan, municipal revenue from state sources declined 56.9 percent from 2002 to 2012.

Only four other states reduced municipal revenue from state sources during that period. California, Minnesota, Kansas, and Kentucky reduced state sources to municipalities by an average of 9.41 percent. Kansas was the next largest decline at 14.3 percent – compared with a 56.9 percent decline in Michigan.

Six states increased revenues to municipalities by 90 percent to over 200 percent; and another fourteen states increased municipal revenue between 40 percent and 90 percent.

We only have numbers through the current budget year for Michigan so we cannot do a multi-state comparison past 2012. But from 2002 to 2016, as enacted, Michigan’s statutory revenue sharing has declined 61 percent. As other states are increasing municipal revenues, Michigan continues to reduce funding for municipalities and a comparison of all 50 states from 2002 to 2016 would likely show an even greater relative decline for Michigan.

Policy actions during the administrations of Michigan’s three most recent governors have degraded state municipal finance through tax changes that reduced the tax base municipalities rely upon by tens-of-millions of dollars; and by direct cuts to statutory revenue sharing that have reduced municipal finances over $5.5 billion since 1998.

A review of property tax cuts enacted from 2002 to 2013 shows changes to the property tax base reduced local revenue about $88.3 million. In addition to property tax cuts, changes to the sales tax base have reduced constitutional revenue sharing payments to cities, villages and townships (CVT) by $27.3 million in FY 2014 and by $181.2 million cumulatively since Proposal A in 1994.

The largest impact on local resources have been reductions to statutory revenue sharing. Statutory revenue sharing to municipalities in fiscal year (FY) 2016 alone is estimated to be $585 million below the full funding of the statutory dedication. The cumulative amount of cuts to statutory revenue sharing for CVTs from FY 98 to FY 16 is estimated to be $5,538 million.

Cuts to statutory revenue sharing shifted state funding shortfalls from the state to local units. It became standard practice in FY 1991 and, with the exception of FY 98 when the base was revised to incorporate previous cuts into a lower base, and FY 2001 when statutory revenue was fully-funded, actual statutory revenue sharing payments have been below full-funding each year.

It hasn’t always been this way. State revenue sharing began in the 1930’s when the state began taxing enterprises that held licenses for alcoholic beverages and returned 85 percent of liquor license tax collections to the CVTs of origin. The revenue sharing base changed and in 1946 the constitution was amended to provide a constitutional revenue sharing payment based upon a percentage of sales tax collections and distributed on a per capita basis.

There have been various changes to the statutory revenue sharing base since the 1930’s including dedications of revenue from the intangibles tax (repealed), the income tax, the sales tax, and the single business tax (repealed). However, statutory revenue sharing was fully funded until the state temporarily reduced statutory revenue sharing during the recessions of 1980-83.

In 1998, the Glenn Steil Revenue Sharing Act, Act 140 of 1971, was amended to provide that statutory revenue sharing would be based upon a percentage of sales tax collections. The statutory revenue sharing base was specified to be 21.3 percent of the sales tax collections at a rate of 4 percent. For CVTs, the base was specified as an amount equal to 74.94 percent of 21.3 percent of the sales tax collections at a rate of 4 percent.

Under current law, state revenue sharing consists of two parts: constitutional payments and what’s commonly referred to as statutory revenue sharing payments. Constitutional revenue sharing payments are based upon a percentage of actual sales tax collections. When money is collected a specified portion automatically goes out in constitutional revenue sharing payments.

That means when the Administration emphasizes they are “increasing” constitutional revenue sharing payments in a budget message it’s disingenuous at best – because the constitution mandates the payment be made.

Municipalities rely primarily on property taxes and intergovernmental revenue to finance essential public services, and in recent years, due the combination of restrictions and direct and indirect cuts, property taxes and intergovernmental revenue sources have failed to keep up with the current level of services – much less rising costs.

Cuts in state revenue sharing have been a major contributor to the fiscal problems of Michigan’s cities but Michigan has also imposed numerous constitutional and statutory limitations on municipalities’ ability to collect property tax revenue which according to 2012 census data, account for 43.1% of cities general revenue.

Property taxes provided a steady, growing source of revenue for cities from 1996 to 2008. Taxable value increased by 67 percent and property tax collections rose by 69.3 percent, and the average city millage rate changed little; 16.07 mills in 1996 and 16.29 mills in 2008. Over the same period, state taxable value (TV) increased 89.5 percent, as suburban areas grew faster than cities.

What followed was the collapse of the housing and financial sectors in 2008 which resulted in the largest decline in Michigan property values since the 1930s. The taxable value of cities fell 18.1 percent from 2008 to 2012 and property tax collections fell 9.1 percent. Over the same period, state taxable value fell 13.1 percent.

Michigan’s largest cities were hit harder by the 2008-2009 recession than the state as a whole as the taxable value of the 15 largest cities fell 19.8 percent from 2008 to 2012. Most of the larger cities are located in Southeast Michigan, which was hit the hardest by the recession due to the heavy reliance on the auto sector.

During economic downturns, demands for state/local government services increases, but the resources available to local governments in particular decline, and limitations imposed on local governments effectively force service cuts when they’re needed the most.

According to a recent study by MSU Extension, Michigan imposes some of the most stringent limitations on local revenue of any state in the nation.

“A few states, such as Michigan and California, place strict limits on local own-source revenues while at the same time providing only meager intergovernmental aid and imposing costly labor and service obligations. We contend that these states have structured local fiscal policymaking in a way that effectively incubates local financial distress . . . state-imposed budgetary imbalances can engender recurring structural deficits and diminished local service capacity, particularly among the states’ older, industrial urban areas.”

Structural constraints, such as the interaction of the Headlee Amendment and Proposal A, have limited the collection of taxes on existing properties; while statutory revenue sharing payments, as well as other state grants to local governments, have been cut due to tight state budgets and a lack of understanding of the importance of revenue sharing to the fiscal stability of Michigan’s cities.

The impact of funding cuts on local services has been significant and will get worse if this trend continues. As discussed in a recent article in Bridge Magazine, Lansing is a typical example. As property values and state revenue sharing dropped, it had no choice but to slash payroll and cut costs where it could. From 2006 to 2013, the city cut its work force by 30 percent, from 1,220 to 852. It negotiated increases in employee health care premiums and pension contributions. It closed three fire stations and reduced minimum staffing requirements for firefighters. It closed two municipal golf courses.

Roads suffered as well. From 2004 to 2013, the percentage of federally funded roads in that city that were in poor condition soared from 4 percent to 40 percent. In November 2011, voters approved a 5-year, 4-mill tax increase to fund the police and fire departments – avoiding threatened cuts of 120 employees in the police and fire departments. They turned down the same request six months earlier.

Saginaw, on the high side of fiscal stress, has managed to avoid emergency management. But the city is barely recognizable from what it was decades ago.

According to the Municipal League, it lost more than $30 million in projected revenue sharing from 2003 to 2014. A 2013 report by Michigan State University on municipal legacy debt found that Saginaw’s unfunded retiree health care debt in 2011 was about $200 million. It had more than $100 million in unfunded pension debt and spent more than $8 million – a fourth of the general fund budget – on retiree health care in 2013, leaving much less to pay for basic services for residents.

That includes police and fire, normally the last services a municipality cuts. The city has slashed its police force to 55, a quarter of its staffing level in 1975 – and a cut twice as steep as the drop in population during that time. Its fire department is staffed at 50 – half what it was in 1995. In addition, its streets have steadily deteriorated, with 57 percent of its federal aid roads in poor condition in 2013.

The same year, city officials decided to stop cutting weeds in the hundreds of vacant parcels scattered around town – a measure to save $200,000 a year. The resulting weed-choked lots left many residents complaining the city no longer cared about its neighborhoods. The Saginaw Land Bank in 2014 agreed to pay the city $45,000 to cut some of the lots while the city mulls a long-term solution.

One can argue about an exact level of tax base a city needs to provide adequate services, but any city with a tax base much below about $20,000 per capita will struggle financially and be forced to levy higher-than-average property tax rates or income taxes – there are about 90 cities that do not meet this criteria.

For example, Troy, with a tax base of $52,783 per capita, levies only 11.5 mills and Kalamazoo, with a tax base of $19,622, levies a millage rate of 25.5 mills. This disparity illustrates why revenue sharing is so important.

A municipality with a lower per capita tax base must levy high millage rates to provide a reasonable level of services. High tax rates encourage residents and businesses to move elsewhere; but if tax rates were kept low, the lack of services would encourage residents and businesses to move elsewhere as well.

This illustrates why we need a strong revenue sharing program, like Michigan used to have. A strong revenue sharing program allows communities with low tax bases to maintain a reasonable level of services without needing to levy uncompetitive tax rates. Without revenue sharing cities trying to recover are caught in a vicious cycle that results in ongoing serious financial problems as demonstrated by the fact that, over the years, Michigan has had more communities under state control than any other state.

Although housing values are recovering from the sharp decline, it will take most cities years to recover their lost tax base due to the constitutional cap on the annual increase in taxable value. For example, taxable value in Farmington Hills fell 30.2 percent from 2008 to 2012. Assuming an annual increase of 3 percent, it will take 13 years, or until 2026, for taxable value to return to the 2008 level.

One could use a number of euphemisms to describe Flint: The canary in the coal-mine; the tip of the iceberg; or a preview of coming attractions. But unless and until Michigan has a stable and sufficient system of municipal finance, I fear that the Flint crisis is only the beginning.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

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Comments

Steve Sawyer
Thu, 05/26/2016 - 9:55am
In reading Bridge articles on this issue, I've been thinking about the gerrymandering that has been done in this state. This is usually cast in terms of partisan advantage, but I'm wondering if the gerrymandering has also resulted in a disparity in rural vs urban representation? Is there an anti-urban sentiment at work here, with those representatives with strong rural support attempting to "starve the beast" by ensuring that cities wither and die? It may not be that blatant, more of a "why give money to those people - they'll just piss it away on beer" attitude.
Robert
Thu, 05/26/2016 - 10:33am
Piss it away? Like Detroit? Kwame? The school mess? Cities which waste their funds on frivolous developments like the Jackson core and meanwhile use government funds to tear down homes that might be rehabbed and kept on the tax roles deserve little until they clean up their act. Detroit's demolishing of abandoned homes is an exception.
Thu, 05/26/2016 - 10:16am
So are we comparing apples to apples in this analysis? What other states have nearly 1,800 cities, villages and townships like Michigan? Oh, along with 83 counties ALL collecting various tax revenues and fees. We need vibrant cities and improved infrastructure. I'm just not certain yelling fire based on the facts cited in this article is the appropriate way to make a case for more money. How about a comprehensive look at our local governmental and infrastructure systems? Eliminate/consolidate to the U.S. average of governmental units for states, then talk about where we stand and how we can invest more. That discussion would/could go a long way on both sides of the aisle at the Capitol. Until then, this type of more money argument just pits one side against another and change will be incremental at best.
Barry Visel
Thu, 05/26/2016 - 10:41am
Careful what you wish for. Townships are probably the best example of living within their means, and understanding how to define "basic" services in a limited and manageable way.
Robert
Thu, 05/26/2016 - 10:18am
Ok. I'm convinced. Now what do we do? There seems to be absolutely no recognition of any of these issues from our legislators.
Barry Visel
Thu, 05/26/2016 - 10:25am
Increases in state support vs. decreases in state support doesn't really explain much if the average per capita support is about the same. Any data on that? (Could be that Michigan was much higher than other states in the first place). Having municipal golf courses and taking care of weeds on private property aren't examples that help your argument...why do some cities have golf courses? And, if you are lumping water and sewer services in the category of eccentrically basic services, then you have to separate the revenue side from general fund taxes or revenue sharing since these services are supposed to be funded through separate budgets with customer billing rates set to cover the cost. Cities provide many more services than I want or need, which is why I live in the country, and which is why I'm not particulary interested in supporting them through state redistribution schemes. Most of the stores I frequent happen to be in communities that are managing their budgets quite well. You are on to something when it comes to tax exemptions. Michigan's tax expenditure budget is out of control at more than $30 Billion dollars/year. What more revenue?...eliminate tax incentives, deductions and credits...we have way too many.
Barry Visel
Thu, 05/26/2016 - 10:45am
That was supposed to be "essential" basic services in paragraph 2. Just like government, my iPad thinks it knows what I want better than I do :-).
John S.
Thu, 05/26/2016 - 10:58am
The state legislature giveth. The state legislature taketh away. Blessed be the name of the state legislature. There's need for the sales tax to include services, but it won't happen in my lifetime. All local governments (if they haven't already) need to look carefully at levels of staffing in public safety (police and fire), what's needed, what the city can afford, and also look carefully at retiree pension and health benefits. Local governments have two public safety departments, one active, and one retired. Perhaps there's need to rethink what a public safety career amounts to. What do "retired" police officers and fire fighters do when they leave the force? Most quickly find another job while also drawing their pension. When they reach age 63 they can draw SS (double dipper) or even another government pension (triple dipper). They are all "earned" benefits, but ...
EB
Thu, 05/26/2016 - 4:54pm
Since sales tax is our most regressive tax, an increase (by taxing services) will disproportionately impact low income people. We could increase revenue by doing what most states do and implement a progressive income tax. We could also get our criminal justice costs in line with other states. Currently we spend more on prisons than higher education, one of only a few states that does this.
Barry Visel
Thu, 05/26/2016 - 5:48pm
I will never understand how a progressive income tax is fair...penalizing people who work hard (or just get lucky) just because they have higher incomes. A flat tax that starts at zero on, say, all income up to double the poverty rate, and then the same whatever rate on all income thereafter would be much more fair. I would also eliminate all tax credits, deductions and incentives so everyone pays what they owe and the government stops picking winners over losers. A level playing field in the land of equal opportunity, not unequal redistribution. Of course there would still be redistribution from those that pay taxes to those that don't earn over the minimum threshold.
David waymire
Fri, 05/27/2016 - 8:51am
The state's with the highest per capita incomes and most college grads tend to have graduated income taxes to support state services. Minnesota is the state with the highest per cap income and lowest unemployment rate (and highest percentage of college grads in population) is Minnesota, which has a graduated income tax. The wealthy like and use services, too, including higher Ed (more rich kids in college than poor) courts (businesses and the wealthy can affor lawyers), state parks (poor families without cars don't get to Mackinac Island), and they like their schools good and well funded (see Birmingham, Bloomfield, et al). A graduated income tax is the best way to fund government. Today, the poor pay and middle class pay a higher share if their income in Michigan state and local taxes than the rich. Why? Renters pay school property taxes imputed through rent at 24 mills, not the 6 homeowners pay. And the poor spend a larger share of their income on sales taxable items than the wealthy, who spend more on services (landscaping, country club, yoga, massage, etc.). It's our current tax system that is patently unfair.
John Saari
Thu, 05/26/2016 - 11:36am
We need to democratically define essential basic services and what we want to pay for them. Pay- as -you -go should be the goal. Do not borrow. Start small, think community. Use pay-it-forward volunteers. Encourage pride. The Government should work from the bottom up. Democratically provide the minimal basics to all. Encourage success.
Eric A. Schertzing
Fri, 05/27/2016 - 10:34am
Let us start simply and basically with our roads and bridges. There is no clearer indication of the lack of leadership and funding. Our parents invested in infrastructure after World War II and created the foundation for our prosperity. This has been sliding backward for two decades. The recent funding bill by he Republican leadership did NOTHING to improve our miserable roads. Good luck with your future in a city or township in Michigan. We were a rich state when I was growing up, now we most resemble Mississippi.
Rich
Thu, 05/26/2016 - 3:18pm
Some cities seem to be doing very well with vibrant building booms and above average property values filling their coffers. When they do spend money it is on the very best of everything such as sports fields groomed to a level equivalent to Tiger Stadium, and township offices with multi story atriums and the best of everything. Do those entities deserve any state revenue sharing? I think not. How about defining, or better yet, let the people define what is a basic essential service, and eliminate revenue sharing for anything above basic essential services.
Thu, 05/26/2016 - 6:46pm
Many of these comments reflect the basic conservatism that has kept Michigan at low rankings against so many other states. The emphasis on "basic services" signals that no aspirations for government beyond the ordinary services needed to run a household is permitted. There is also a clear signal that "I don't want to pay for something that someone else needs, but I don't". Some time ago I began examining the conflicts between regional initiatives and this hyperlocal viewpoint. I just had to update this post https://localinannarbor.com/2013/11/03/regionalism-reconsidered/ again to include this current article. So many of our "progressive" politicians have a clear vision that regional initiatives are what is needed to (ugly phrase) "grow Michigan". But they so often see it the job of municipalities, i.e. the cities, to pay for these. Meanwhile the more affluent citizens in townships simply sit and insist on paying only for their own basic services.
suesue3
Thu, 05/26/2016 - 9:43pm
Oh wait...this article and points are ridiculous! Every article in this publication produces is about big big big government and everything is underfunded. It is going to be underfunded because it has been over funded and no one is watching the hen house. Look at the pensions--out of control--this is the problem because cities and counties have been giving away the ship. Cities need to live within their means. Lots of them do it all over Michigan. Maybe we were over funding them in the first place. For example, Ann Arbor has its own park department with its own recreation group, The public schools have their own recreation group and the county has its own recreation group--not to mention the State park system. How many recreation groups do we need if everyone is sitting home on their computers? Government is out of control.
rbran
Fri, 05/27/2016 - 9:42am
After 26 years of budgeting for a small Michigan city, I agree with Mitch Bean 100%. The State has balanced their budget thru revenue sharing cuts to local governments and also have delayed payments. Road funding (Act 51) and State Highway agreements have been virtually the same for more than 20 years. The legislators have ignored any changes to the formulas. City's that are "built out", older, well established communities can gain very little taxable value from new growth. Once you lose taxable value, cities are limited by Headlee how much they can grow without lowering their millages below what their City Charters may allow. Cities cannot regain their maximum millage rate unless they have an override Headlee vote - virtually impossible. Loss or revenue since 2008 will never be recognized. What suffers? Infrastructure, maintenance and with reduction in pensions, higher employee health care contributions - employee morale. Turnover is becoming a bigger problem. There are no health care benefits after retirement unless this benefit was given by PA 312 for police and fire employees - a budget buster if your community gives this benefit. Change needs to come to municipal finance or this problem will never go away. Local governments in general do a fine job of allocating their funds. Elimination of road commissions and county government with some of the savings go towards local roads and providing police, fire and emergency services would go a long way to solve the problem. Then legislators could work on a better long term solution to road funding and how local governments can pay for essential services.
Heidi Lucken
Fri, 05/27/2016 - 10:19am
Um that rainy day fund in excess of 600 million $ those ideologue idiots up in Lansing who are withholding that rainy day fund is my money either spend it on infrastructure or give it back! The state municipal economic woes, currently, are my definition of sedition!
Bob
Fri, 05/27/2016 - 2:09pm
I imagine all of this has led to growth in long-term municipal bond indebtedness.
duane
Fri, 05/27/2016 - 8:35pm
I wonder why all we hear about is more money and more spending and never about the value we should get for all that money. Mr. Bean seems to simply want more of other people's money to be given to government with no accountability, he seems to want more of what got us to this situation. Mr. Bean throws out numbers, but never says anything about what we get for that money. He berates the taxpayers of not giving enough to government and uses the reduced number of police, but he never talks about how that is changing the safety and security of our neighborhoods, he never mention what are the best metrics to use to measure the impact of the police, how to ensure that all police organizations' practices are at the same best level. He sounds like all politicians that went before him that want more money talk about the loss of police. In my community there have been some high profile violent events, none were because the police didn't do something they should have or that they lacked the manpower to prevent bad people from doing bad things. Our police have had some difficult situations to deal with and managed them extremely well, does that mean they need a blank check? I want to ensure that what seems to be an effective local police department is properly funded, but I want them to develop some means of ensuring that they are focused on ensuring they have the 'best practices', that they are providing good value with their programs/practices, and they regularly report on their verification results. Mr. Bean never mentions how spending more would change the security of our community. All he seems to be interested in using numbers to shame the taxpayers into to giving more of their hard earned money to the government with no interest in that money improving the communities we live in. He seems to only see money as the reason for the events that have happened in Flint, he sees none of those who put Flint into its dire financial condition responsible, he offers no means to ensure that new moneys would not lead to the same type of situations elsewhere in Michigan. Mr. Bean seems to simply want more of other people's money to be given to government with no accountability, he seems to want more of what got us to this situation.
Tue, 05/31/2016 - 10:29am
Conyers just proposed a TAX for water infrastructure which involves everyone's wallet
Wed, 06/01/2016 - 10:37am
State house and senate could produce a local funding system, revenue models residents would gladly pay for .1) Decriminalization permits for Marijuana $50 per year for medical and recreational users 2) Student debt reduction service via work service and repayment through employers:Students pay $5000 to get in the program 3) Farmers, Manufacturers and Entrepreneurs Training Alliance($10,000 membership ) then they gain access to state intern and mentoring participants where by each participant donates 50 hours of their time time to learn business model,work ethic and showcase their talent this encourages entrepreneur thinking ,job training and on the job training .
Jim O'Connor
Thu, 06/02/2016 - 4:58pm
The voters put in place term limits and the legislature consists of people that are generally short-term focused/motivated and lack institutional knowledge. First step, repeal term limits. Growth means development of green land and not the costly re-development of aged communities. Throw away the old and get new. New is cheaper and nicer. Until this model can be changed older communities will be straddled with legacy costs, systems, challenges, etc... and the unnecessary sprawling development of farm land, etc... will continue. The apparent view by the State is that the sub-governmental units (Counties, Cities, Villages, & Townships) are separate and not part of the whole. It is all one in the same and State seems to be more concerned with the State operations and leave the children to fend for themselves. As indicated in the article, this is not good and other State's are following a much better model.
Greg
Tue, 06/14/2016 - 11:46am
Michigan needs a state public bank, that is what North Dakota is doing and by your own account were able to increase spending by over 200%.1. If the public bank did business as the State of Michigan this would save the state and local governments from paying fees to commercial banks. 2. A state bank keeps all the money local in the state.3.A state bank would cut the cost of infrastructure projects in half, since half the cost of projects is paid in interest(Flint!)4.A state bank is able to borrow money from Fed at the same rate banks pay (0.25%)5.A state bank can lend out up to 10x the amount on deposit.6.A state bank keeps public money >250k safe from commercial banks derivative risk -bail-ins.7.Please see Ellen Brown's book - The Public banking solution
Greg
Tue, 06/14/2016 - 5:09pm
A bank has the power to create money. If the state of Michigan did business as a public bank it would be able to create all the money it needed in the form of loans to cities and local municipalities, this has been done in North Dakota for 97 years and is being done in India, China and Japan.
Da
Thu, 07/28/2016 - 10:36pm
The lazy unions are to blame 100%