Opinion | Michigan may soon be forced to pay cities under Headlee

John Mogk

John Mogk is a Wayne State University law professor and a founder of Taxpayers for Michigan Constitutional Government

The Michigan Court of Appeals is poised to decide the case known as Taxpayers for Michigan Constitutional Government v. State of Michigan, brought in September 2016, which claims that the state is shorting local governments billions of dollars annually in state revenue required to be paid under the Headlee Amendment to the Michigan Constitution.

The cumulative effect of this shortfall has created a financial crisis for many local governments.  In some cases, it may have accelerated the appointment of emergency managers.

The Headlee Amendment was part of a nationwide property tax revolt in the 1970s. In adopting the Amendment in 1978, the people of Michigan established a balanced fiscal framework for local governments. It capped property taxes that support local services, but required the state to maintain its payment of state revenue in the form of aid to local governments as the proportion in that year, originally set at 41.6 percent. 

The proportion was reset in 1989 to 48.97 percent when the Michigan Court of Appeals held that mental health payments made to counties were payments to satisfy a state obligation and were not eligible to be counted as payments in the form of aid to local governments.  

Taxpayers and local governments maintain there are other improper proportion calculations being made by the state. These include counting state payments to local governments resulting from a "tax shift" prohibited by the Amendment; additional payments made to local governments that are not in the form of aid, and payments to local agencies that are not local governments.  Including ineligible payments in the proportion calculation allows the state to keep revenues otherwise payable to local governments.

Violations of Headlee   

In 1993, the state legislature sparked a crisis in public school funding by repealing the power of local school districts to levy property taxes for public school operations. That eliminated roughly $6.4 billion in local school funding, leaving Michigan public schools insolvent. To solve the problem, the people of Michigan adopted Proposal A in 1994, amending the Constitution and lifting the state constitutional limit on the sales tax by 2 percent, imposing other taxes and requiring that the increased revenues be paid to local school districts.  

As a result, local taxpayers rather than paying school taxes to their local school districts pay school taxes to the state that are transferred to local districts to replace local taxes. The state then included these payments in the 48.97 percent local government proportion of state revenue, thereby reducing other state revenues previously paid to local governments that supported essential local services, especially for cities, villages, townships and counties.  These revenues are kept and used for state purposes.

This tax shift placed a tax burden on local governments prohibited by the Headlee Amendment, resulting in reduced local services or increased taxes on local residents.  

Also In 1994, the state created Public School Academies, commonly known as charter schools, to compete with traditional local school districts. Charter schools are nonprofit corporations with private boards meeting none of the criteria of local governments that require accountability to the voters, governmental powers and authority to act on behalf of residents within limited geographic boundaries. Nonetheless, payments made to charter schools are included by the state in the calculation of the proportion of state revenue paid to local governments.      

Throughout this period, the state has imposed obligations upon local governments that the Headlee Amendment requires be paid by the state. These payments are improperly included in the proportion as payments to local governments in the form of aid. They are not payments in the form of aid in any sense of the term, but constitutionally required payments to fulfill State imposed mandates.           

The shortfall in state payments to local governments resulting from these three improper calculations has been extreme in some years. As an example, by not counting Proposal A monies alone for the year 2013, the shortfall in payments to local governments was an estimated $2.5 billion.

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Thu, 05/17/2018 - 8:52am

Don't the communities bringing suit against the state realize that it is the same citizens paying all the bills whether it is local, state or federally derived? As a citizen, I am incensed that every level of government wants to build themselves a palace with a throne, foster projects which the majority do not support but gives the politician something to which they can attach their name, and in general, grub around for more money than they need to spend.

William Hammond
Thu, 05/17/2018 - 9:46am

If that was where it ended maybe I could agree with your comment. But that’s not the end. The forced placement of an Emergency Manager in Flint was because of a budget deficit that would have more than been erased by the loss of State Revenue sharing that these calculations caused. The result? More than 8,000 children exposed to the effects of lead, at least 12 people died from Legionella present in our water system. This coupled with a flawed EM Law which was passed after citizens had rejected it are reasons to pursue this remedy through the Courts.

Thu, 05/17/2018 - 8:13pm

Yet other cities went through the same revenue sharing decline without Flint's outcome, and no emergency manager. The Emergency manager's problem in Flint was mission creep where he thought it was his job to install a massive water infrastructure project in a dying city and then thought he should run the thing! If he stuck with balancing revenues and expenses as was originally conceived we'd never heard of it.

John S Porter
Fri, 05/18/2018 - 3:48am

I suspect that Flint was hammered in another way as well. I haven't personally researched this, but I recall reading that Flint water fund was loaning money to other departments, which is also prohibited by the Headly Amendment. Put another way, you aren't permitted to levy taxes in the form of a utility rate. That rate must relate to the services provided. I understand that the Emergency Managers continued this practice when by rights Flint should have been put into bankruptcy much earlier, before the water system was ravaged. I knew some Flint water staff in the 80s and I believe that it used to be a very good system.

Thu, 05/17/2018 - 9:57am

The previous commenter is incensed that local government "wants to build themselves a palace with a throne." I don't consider local services such as fire protection, police protection, clean water, and basic civil services to be "palaces and thrones." I consider local and state government to be an extension of me - a citizen and voter. Our employees - the leaders of state and local government - have an obligation to transparently raise the necessary funds to pay for these basic services that a civilized community and society need. I don't believe they "grub" for money and I don't believe the majority want to live in communities that look like ill-maintained, unsafe, warzones.

How Ironic
Fri, 05/18/2018 - 8:41am

Yes Abark I see your point about the Palace &Thrones comment. For the most part the vast majority of elected officials do good, but there are a few that do not concur! But one also has to take into consideration the 'lust of power' that those few undertake. Where there is an untouched account with a large financial balance, it is considered low hanging fruit for an elected official to justify using that an account as a community ATM Machine!

Sun, 05/20/2018 - 2:14am

Yes, I am incensed over palaces and thrones. Baseball fields whose grass rivals Comerica Park, yet the kids can only play there if they are part of an organized league and are locked out at other times, all to be named after a local politician. Town halls with soaring atriums, and full glass fronts, and brass fixtures galore that mirror the McMansions in the high rent district. Council rooms with enough cherry trim to finish out one of the said McMansions, sitting in the most expensive thrones that money could buy while people with 6 figure private sector jobs sit in the cheapest office chairs in order to save their company a buck or two. Schools that are finished out like palaces yet did not open because they forget that they would need teachers to open them. Brick sidewalks galore yet no money to maintain them. All superficial stuff that we should not be forced to pay for.

At the same time I have seen communities house their fire departments in basic buildings but at the same time use the savings to buy their departments the needed equipment or training. More modest parks that kids can actually use for a pick-up ball game or family outing. The list goes on and on. I want only people in government that are going to squeeze every penny they receive to get the most benefit for the taxpayers.

Sovereign Mary
Mon, 05/28/2018 - 10:33am

Abark - Your response was excellent. If all the communities had been given their rightful share of funding from the State of Michigan, then a great many of them would not have had to call for more increased millages from their constituents over the years, or experiencing the downsizing of necessary police and fire protections.

Paul Jordan
Thu, 05/17/2018 - 7:32pm

We citizens receive most of our public services through local government. We rely on local government for safe water, sewer services, protections of public health, waste collection, and police and fire protection. Nobody expects local government to build palaces for anyone--but we absolutely rely on them.

It is correct that my city, Flint, was placed under an emergency manager because the state had drastically cut revenue sharing. Despite this, allies of the Mackinac Center and the Devos family took great pains to characterize our fiscal distress as due to incompetence and foolish electors.

My two grandsons, who live around the corner from me, seem okay but the fact is that the effects of lead are such that our family will never know. We still pay the highest water rates in the country.

In addition, despite the fact that we have occasionally lead the nation in arson, and have a high rate of violent crime, our police and fire services were drastically cut under the emergency managers. These are facts.

Thu, 05/17/2018 - 10:24am

I take exception to the statement that “Charter schools are nonprofit corporations.” Most charter schools are FOR profit corporations that take tax dollars and turn them over to shareholders, like the DeVos family, as profits. That is why that family pushes charters so hard.

Thu, 05/17/2018 - 8:19pm

What's your proof that these charters are in fact profitable? There are many "for profit" companies that are never intended to make any money, they are easier to set up and run. Besides do you really think the DeVos family cares about making a profit on these? I'd guarantee not.

Sun, 05/20/2018 - 9:48am

Well Matt - Can you give proof that they are NOT profitable? I doubt it.

Because that is part of the problem with charter schools that are for-profit - unless they are a publicly owned company - they do not have to disclose their finances to anyone. I cannot give you "proof" because it would be illegal for me to disclose private taxpayer data but I can tell you from personal experience of auditing many non-profit and for-profit charter schools that the heads of these schools - the CEO's and the CFOs, etc. are paid obscene amounts of money. Let me define obscene - in one case, the salary and benefit package for the CEO was over $1 million. In other words, the profit is diverted into the paychecks of the executives. And absolutely NOT reaching the teachers and people delivering the services. They were all paid lower than the average public school teacher with worse benefits (debunking the theory that if you eliminate or reduce benefits for public educators and transfer the risk to them for their retirement through defined contribution plans their wages could go up to make up the difference).

And the DeVos's have many reasons for pushing for private charter schools - such as a method to incorporate religion into what should remain secular.

John Q. Public
Thu, 05/17/2018 - 10:08pm

While many charter schools contract with for-profit education management organizations, they are not, themselves, for-profit corporations.

Thu, 05/17/2018 - 8:28pm

So... if you win, who are you suggesting to take this money from? We hear over and over there are no extra funds. And if you're thinking going after the rich, remember with new tax law's limited deductability of state taxes, Florida, Tenn and Texas are mighty temping. This will be interesting.

Sun, 05/20/2018 - 7:36pm

This is very well done; my compliments to Professor Mogk. But I disagree with some of his assertions and would like clarification about others. He says, "These include counting state payments to local governments resulting from a "tax shift" prohibited by the Amendment" Does he mean to assert that the Headlee Amendment renders Proposal A null and void? That Proposal A amounts to an illegal tax shift? Really? Proposal A was passed well after the Headlee Amendment and so would be presumed to prevail. He says, "This tax shift placed a tax burden on local governments prohibited by the Headlee Amendment, resulting in reduced local services or increased taxes on local residents." But he also said, "As a result, local taxpayers rather than paying school taxes to their local school districts pay school taxes to the state that are transferred to local districts to replace local taxes. " So the local taxpayers come out even; they weren't obligated to raise taxes or cut services as a result of this tax shift. They suffered no injury.

He also asserts that this alleged "shortfall has created a financial crisis for many local governments. In some cases, it may have accelerated the appointment of emergency managers." But when did these financial crises occur? After the collapse of real estate taxable values during the financial crisis that began in 2008. Did local governments experience financial stress after passage of Proposal A? Isn't that odd? I can't recall any such financial stress in that time period.

Of course, if Professor Mogk prevails in his lawsuit, the courts would order the state legislature to raise taxes by some $2.5 billion dollars. As I recall, the courts recently did just that in some other state. That's so much easier than making his case for more revenue to the voters. Let's just dispense with the voters; after all, they clearly lack the insight and judgment of Professor Mogk.

And he claims that payments to charter schools do not count as payments to local governments even though such payments reduce the costs of local school districts. Further, he says, "Throughout this period, the state has imposed obligations upon local governments that the Headlee Amendment requires be paid by the state." But he fails to specify what those obligations were.

As I noted at the beginning, this is a very clever article, but only as a piece of marketing, of moving public opinion. It is absolutely true that the Headlee Amendment and Proposal A have contributed to the considerable financial distress suffered by many local governments. But I do not recall any journalist, columnist, or public figure pointing out their flaws at the time of their passage.

Mary M
Fri, 05/25/2018 - 2:40pm

Thank you Professor John Mogk, of Wayne State University, and Taxpayers for Michigan Constitutional Government for bringing forth this rightful lawsuit against the State of Michigan for shamefully violating the Michigan State's 1978 Headlee Amendment in shortchanging communities throughout the state in the millions of dollars.
I hope the Michigan Court of Appeals will make the right and proper decision by ruling in favor of this necessary lawsuit to stop the State of Michigan from continuing this abuse.

Sat, 05/26/2018 - 7:26am

As a elected local government representative I must commend Professor Mogk and the TMCG organization for the hard work in challenging the State. I also read with interest the comments by those who don't fully grasp the intention of "Headlee". One comment drew my attention whereby they assert no one has been impacted by imposition by the State. When everyone can fully see the big picture then they can make such misguided assumptions. When unfunded mandates are passed by the state which usurp local revenues or services this places direct detriment to you and me regardless of where you live. Many state agencies and legislators themselves ignore the Michigan Constitution requirements, it is clearly evident from where I set. This is also clearly evident by the costly lawsuits that have ensued against the state whereby large sums were paid by taxpayers only to find the state was wrong. The TMCG lawsuit is just another example of righting what state government has done to local governments. Is Prop A a tax shift, yes, even if taxpayers passed it. The legislative and executive branches used Prop A as bait and switch in clever ways. It's true, if the state thinks something is good and passes laws to implement it, Headlee requires they appropriate funds to pay those extra costs. Even if they must raise taxes to fund it. But don't mandate a local government to provide it and set back waiting for OPM to pay for it. You want examples of where local governments are shorted; just look at the General Property Tax Act, it has manifested into wholesale plucking of local coffers. Hopefully the TMCG lawsuit prevails and the state is forced to comply, I am optimistic. "We all have a right to criticize government, but we have an obligation to know what we are talking about" Lent Upson.