John Austin directs the Michigan Economic Center and is a Nonresident Senior Fellow with the Brookings Institution. Former Flint Mayor Dayne Walling contributed to this article
A few weeks ago, the Trump administration unveiled a framework to support a much-needed rebuild of the nation’s infrastructure. As my Brookings Institution colleagues have observed, the proposal leans heavily on governments outside Washington to foot the bill.
The proposed Infrastructure Incentives Program would offer $100 billion for investment in a wide range of infrastructure types, but cap the federal contribution to projects at 20 percent, essentially rewarding states and localities that are able to raise new revenues or attract private capital.
In Michigan, Gov. Rick Snyder is also pointing to Washington for needed revenues, pressing President Trump to go further than his announced plan, and support an increase in federal gas taxes to pay for roads.
Michigan and our sister Rust Belt states are in a real quandary: As we are painfully aware during pothole season, we are home to some of the nation’s most aged and degraded infrastructure, but we also host a large number of communities with little to no ability to pay for rehabilitating it.
While the administration’s plan isn’t going anywhere anytime soon, it nonetheless exposes anew the fiscal and governance dilemmas that underlie infrastructure challenges in so many Michigan communities.
Too much localism
The problem starts with the sheer number of local governments in Midwest states. The Northwest Ordinance adopted by Congress in 1787 organized Michigan and the other territories of the Midwest. It codified the values of Jeffersonian democracy: The region would have free labor, not slave. It placed value on education and schools. And it organized a political governance structure close to the people. The region was platted in 6-by-6 mile townships, each housing a school (and ultimately a school district). As frontier cities and towns grew, they were incorporated into numerous additional municipalities.
One result is that we have more local governmental units than other states. The Upper Midwest is home to seven of the top 10 states in total governmental units, and all save New York are well above the nation’s average for governmental units per capita.
Michigan has more than five times the number of local governments as Virginia (2,875 versus 518) with only a slightly larger population.
The number of local units is not the problem in and of itself. As Jefferson envisioned, there are benefits to elected officials knowing the residents they represent by name. Service delivery isn’t necessarily more expensive either—the cost of picking up the trash each week is about the same per household, whether you live in a city of 1 million or a village of 10,000.
But this fragmented landscape of numerous political decision-making bodies doesn’t serve the geography of an economy and society that has changed dramatically over the past 200 years. Interdependent municipalities in metropolitan regions benefit from, and even demand, regional organization of transportation services, infrastructure, planning and zoning, economic development, and job training, among many functions. As we see today in the still fractious effort to put in place a regional transportation system in Southeast Michigan, multiple and sometimes warring jurisdictions deter progress.
These challenges are mirrored in our communities’ strained local fiscal capacity. As the Trump administration and Congress consider proposals that could ask state and local governments for the lion’s share of resources to rebuild America’s infrastructure, state and local tax policies in Michigan and other Midwest states have not adapted to a changed economy and population.
As Bridge Magazine’s own reporting and a recent summary of discussions with municipal leaders convened by the Michigan Municipal League reveal, "A combination of years of state disinvestment, tax policy flaws that have decoupled municipal revenues from income and property value growth, growing legacy costs, and perverse tax incentives around new development, among other factors, have contributed to a compounding crisis of decay in communities’ municipal revenue base.”
Many of our communities have lost residents, diminishing property values and tax bases. As a previous article in Bridge explored, these dynamics go hand-in-hand with the our high levels of racial segregation, as “white flight” drove losses of wealth, population, businesses and tax base in many communities.
At the same time, these communities still bear the costs of maintaining existing infrastructure designed for larger populations, delivering services to remaining residents, and paying generous health and retiree benefits to municipal workers and retirees promised during the region’s economic salad days.
A vicious cycle
Michigan’s local fiscal situation was already fragile when the Great Recession and auto collapse struck in 2008. Ten years later, property taxes—the largest source of revenue for locals—are largely below their pre-recession peak. This is true for 85 percent of Michigan’s communities despite low unemployment and a recovered auto industry.
According to a Michigan State Housing Development Authority review in 2017, there are nearly 200 Michigan cities, villages, and townships exhibiting economic distress. At any given time, about one in ten Michigan municipalities and school districts faces significant fiscal stress and mounting deficits.
It’s a vicious cycle for communities on the losing end of these changes. Population loss results in lower tax revenues. Less revenue means reduced services. Fewer services drive out more residents who, if nothing else, move a mile down the road to an adjacent community with better-funded schools, safety and public works.
Oftentimes, those who stay in the community remain on the hook to pay pensions and health care benefits for employees who moved away.
No help for Flint
We saw this movie recently in Flint.
The water crisis sprang from Flint’s fiscal distress, itself brought about by deindustrialization starting in the 1980s. The city lost jobs—from a peak of 75,000 GM employees to fewer than 7,000 today—and corresponding population—from 200,000 residents in 1970 to under 100,000 today. The extreme reduction in the city’s tax base was compounded by a $60 million decline in state sales tax revenue sharing, tied in part to lost population and in part to the Michigan Legislature’s whims (the statewide reduction to all Michigan municipalities was approximately $6 billion).
The Great Recession reduced Flint’s property values to approximately half of pre-recession levels, while increasing the demand for basic services such as police and fire protection as crime spiked and more properties were abandoned.
The state responded in 2011 by passing new legislation that strengthened the governor’s ability to appoint emergency financial managers in municipalities who were charged with reducing expenditures. Flint’s emergency managers switched the city’s water source to the polluted Flint River to cut costs. Today, as Flint works to recover, it’s attempting to provide basic services with only half of the general funds it had as recently as 2000.
And it is not just Flint, as reported in the Michigan Municipal Leagues study, Michigan’s Broken Municipal Finance System: “Every day Michigan residents and business owners’ quality of life is impacted by choices local governments are forced to make in providing public safety, street and sidewalk repair, public utilities, recreational and cultural amenities, and other essential investment that create flourishing local economies.”
Relief from fiscal distress and the resources to rebuild infrastructure in Flint and many other Midwestern communities are not going to be found in a “flip-the-switch” proposal that requires locals to find most of the money.
As colleague Adie Tomer points out, the Trump administration’s framework would mean “the rich get richer;” more prosperous communities that can raise local resources would receive the federal incentive funding. Michigan communities that today can’t keep the grass mowed, or the lights on—much less repair 75-year-old water mains—would be out of luck.
What has to happen? Even under the best circumstances, our communities would need the federal government to assume a higher share of the infrastructure finance burden. At the same time, our state and local governments will have to do what we can help ourselves.
We have urgent need to reform our municipal finance systems to better support older communities, including by consolidating or sharing wealth in the form of revenue sharing (or at least services) among multiple local governmental units. Without bolder moves in Washington and Lansing, a true rebuild and revival of our Michigan communities will remain a chimera.