Now, let’s fix the rest of Michigan

A question from an old Kalamazoo friend stopped me dead in my tracks:

“I can understand why folks are excited about Detroit making progress on the post-bankruptcy ‘Grand Bargain’. But the powers that be seem only interested in Detroit. There are lots of other communities in Michigan that are badly off and need help, so how come we never hear about them?”

He’s absolutely right. I spent some time last week at the big policy conference on Mackinac Island. From most of the optimistic chatter on the front porch of the Grand Hotel – without a doubt the most optimistic I’ve heard in many seasons on the island – you’d think the only place in Michigan that’s trying to resolve its financial problems is Detroit.

Not so.

Places like Kalamazoo are suffering plenty. Not to mention Flint (maybe worse off than Detroit). Add to the mix Jackson, Saginaw, Benton Harbor, Allen Park and many places in the UP. In fact, many of the larger, older cities in Michigan are facing big time financial trouble.

And the sooner our leaders recognize that a solution to Detroit’s problems – important as that may be – isn’t the only crucial issue facing our state, the better off we all will be.

Off the Island, we face a local government financial crisis almost anywhere you look. And unless the governor and legislature start paying attention, the entire state is going to face Detroit-style problems that jeopardize our national image, not to mention our entire economy.

My friend in Kalamazoo knows perfectly well that his city faces a $190 million unfunded retiree health care obligation. Flint, already for some years in the hands of an emergency financial manager, is considering laying off what’s left of its public safety apparatus. Even relatively well-off communities are in trouble: Livonia’s retiree health care plan is only 38 percent funded and Birmingham has funded only 26 percent of its projected retiree health care costs. Jackson, where the entire city budget is $50 million, is facing $59 million in unfunded health care liabilities!

MSU professor Eric Scorsone estimates are that unfunded local government legacy costs statewide now total something like an astonishing $30 billion.

Most communities in the state have taken it in the chops from the Great Recession that decimated local property values and, thus, local property tax revenue. And, thanks to the Headlee Amendment to the Michigan Constitution that restricts annual gains in property value assessments, most communities can’t quickly gain back the revenue accruing from post-recession increases in revenue. Maybe someday, but someday is an awful long way off.

On top of that, the state has slashed nearly to extinction the revenue sharing program that used to sustain many local communities.

The plain fact is that Michigan’s entire system of financing local government is tottering on the brink of collapse, just the way it was from school finance in the early 1990’s.

And with all that’s going on just now – roads, minimum wage, the coming election, and Detroit itself – I doubt there is enough energy in Lansing just now to step up to meet the challenge.

But come next January, the newly elected leaders of this state are going to have to buckle down and start working hard on fixing our broken system of local government financing.

True enough, Michigan cannot succeed without a healthy Detroit. But it’s equally true that Michigan (including Detroit) cannot succeed without thriving communities in every corner of the state. The sooner sensible people focus on that and actually get something done, the closer Michigan will have come to a real turnaround.

Editor’s Note: Bridge Magazine earlier this year ran a comprehensive report on unfunded local government legacy costs. To read the series, go to here.

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Tue, 06/03/2014 - 8:29am
This is a great essay. The current system for supporting local governments is broken and basically unfair. Property values have declined in very many locations and the state's population is stagnant or declining. This portends further drops in property values. We know how to fix this problem. After the public schools in Kalkaska County in 1993 were shut for lack of money, the legislature, quite intelligently, ended the system of supporting the day-to-day operation of public schools through local property taxes. Instead, the state distributes funds on the basis of enrollment. To get those dollars, the state legislature: *raised the sales tax rate *added a tax on tobacco *applied an 8.6 mill sales tax on property Let's do something similar to solve the problem of financing local government. Let's end the practice of supporting the day to day operation of local government by local property tax. We could: *impose one property tax rate for the entire state and establish a minimum level of services that muncipalities must provide while encouraging local government to cooperate *substantially reduce the sale tax but apply it to almost all consumption *slightly increase the sales tax on property *consider a constitutional amendment that would allow a graduated income tax *establish a state authority that would limit the bonded indebtedness that municipalities could assume, e. g., prevent another Allen Park *insist that all retirement benefits for municipal and school employees be appropriately funded
Javan Kienzle
Tue, 06/03/2014 - 8:38am
John Donne said it all: No man is an island entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as any manner of thy friends or of thine own were; any man's death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls; it tolls for thee.
Mike Gillman
Tue, 06/03/2014 - 8:55am
Phil, Your reminder of the ticking time bomb of legacy costs to all Michigan communities is accurate and needed. But that reminder gives validity to critics of the pending "grand bargain" who point out that subsidizing Detroit's pension shortfall, will dictate similar subsidization in every community in Michigan currently underfunded (most of them). Neither the legislature nor taxpayers at large can swallow all of those pills without drastic service reductions. Is this the time for a big Michigan discussion of our new "third rail"? Can we have discuss serious options, unemotionally and without pressure from recipient groups, about paying down the legacy debt (Yes, even considering temporary tax increases and benefit cuts!) and avoiding the problem for future generations by getting all of our governments out of defined benefit pension programs immediately? Is The Bridge in a position to take leadership where legislators, administrators, and taxpayers all are afraid to tread? Mike Gillman Traverse City
Tue, 06/03/2014 - 8:56am
Retiree healthcare is a major problem nationally. Illinois and California will never be able to fulfill their promises. For this reason, I predict Congress will sooner, rather than later, adopt some form of single payer, national health plan that will remove this liability from state and local governments. In St. Joseph County, we spend an inordinate amount of money on community health. Some of our most expensive cases are people who've never lived or worked here, but simply are here when the need for help arises or move here in anticipation of the need for help. (People moving in with family, or Hoosiers moving here for Michigan's more generous programs.) Part of it, too, is our political structure. Sturgis (where I served two terms as Mayor and currently serve on the city commission) is surrounded by four townships. Our school district has an equal number of people who live outside the city limits as in it. Yet, city taxpayers foot the bill for our streets, fire, police, economic development, recreation programs, etc, that everyone in the service area enjoys or uses everyday, or that is provided to the churches, schools, medical facilities, shopping areas, and work places for everyone in the area. (That's a 10,000 foot view...much more detail needed). We need to create a mechanism to more fairly spread the cost of government across a service area. It's interesting, too, that the Plymouth-Canton School District manages three high schools, any of which could hold every high school student in our county where we have eight high schools, each with a separate school district. Oh, not to mention the Nottawa School District, a K-8 relic, which contains the most valuable land (irrigated farmland and Lake Templene) in the county, yet contributes no funding for high school capital needs to any of the schools its children 'graduate to" in the county.
Mike R
Tue, 06/03/2014 - 10:49am
Great article and excellent discussion in the Comments! I'm waiting for the "No" birds, Tea Partiers, and other anti-spending curmudgeons to weigh in; the more they carp, complain, criticize, and ultimately offer nothing positive, the more people grow tired of their thinly-veiled mooching and self-absorption, and the sooner we'll recognize the need to increase revenue (okay, I'll say it: RAISE TAXES) to rescue our local government, schools, roads, etc., etc.
Chuck Fellows
Tue, 06/03/2014 - 11:42am
Why do communities have underfunded and overwhelming legacy costs? Answer this question without blaming the unions or the alleged "greed" of municipal retirees, including teachers. Hint, what is the states role in "managing" these funds?
Thu, 06/05/2014 - 7:19pm
Well Chuck, I was looking at what taxes had previous funded local governments and what happened to them. Headlee is well below the constitutional limit. One person suggest an increase in sales tax which is regressive and we would be balancing the state budget on the backs of the poor. A better alternative would be a graduated state income tax (change the constitution).
Tue, 06/03/2014 - 12:10pm
Well Mike, here's an idea from a spending skeptic. Basing taxes on some subjective, moving target idea of property value is nuts. It is not only expensive requiring assessing, equalization, appraisals, notices, appellant processes and tribunals - and all the government employees filling these functions, it is subject to massive cheating, and particularly the way we are doing it in Michigan acts as a discouragement to people moving into higher cost/service cities and penalizes property remodeling and upkeep. To the point of this article, it gives a fluctuating revenue stream to cities whose costs are relatively fixed regardless of the strength of the real estate market . One question, why should a person living in a community for years (likely voting to raise millages all along) pay a substantially lower amount of property tax than a new arrival? Maybe this explains why cities tend to be old and poor? Our property tax system should be changed to be based on square footage where all 1500 sq foot homes in a given tax jurisdiction or district pay the same tax. Granted many details need to be fleshed out beyond the scope here, but to your charge that no one skeptical of government has any alternatives to our current problem other than just raising taxes on the same old system as you propose.
Mike R
Tue, 06/03/2014 - 5:18pm
Thank you, Matt. That's a very positive start to the revenue conversation.
Tue, 06/03/2014 - 4:10pm
What we have in Michigan is more of a spending problem than a revenue problem. We need people in public office with the political will and wisdom to address the issue of 3rd party government contracts being outsourced to other States, as well as other countries, a supervisor to employee ratio in State government being nearly three times the Federal recommended guidelines for optimal government operations, and the disconnect between the public and those who hold public office. Barring the failure of these foundational issues being addressed, we will continue failing to fix our State.
Tue, 06/03/2014 - 11:13pm
What about taxing mobile home parks? They use the roads, schools, police and fire and do not pay property taxes. Why not tax services especially golf fees, sports tickets that are luxury items. We could reduce the tax rate if we close the loop holes.
Wed, 06/04/2014 - 10:15am
You are right! Many states apply sales tax much more broadly than us, including food and services. We could probably lower the overall rate and still make room to allow the taxes from all fuel purchases to go to our roads instead of being funneled to other uses as is the case now. The current sales tax system makes no sense and should be reformed instead of the fuel tax increase being pushed through now, (giving us the highest gas taxes in the nation).
Wed, 06/04/2014 - 1:17pm
Kasich did the same thing in Ohio, balanced the state budget on the backs of local government.
Barry Visel
Wed, 06/04/2014 - 2:51pm
As I have pointed out several times before, there is an estimated $30 + Billion dollars/year of potential revenue the State gives away in the form of tax expenditures (credits, exemptions and deductions) that all of us benefit from in some way. Eliminate tax expenditures and there will be more than enough revenue to solve our problems AND lower tax rates (and I would suggest eliminating business taxes as an economic development tool). Tax expenditures are documented in an appendix of the State budget. The following link should take you there, or simply search online for michigan's Budget to find it.
Charles Richards
Wed, 06/04/2014 - 8:09pm
Mr. Power notes that the Headlee Amendment restricts the rate of increase in revenue from property taxes. In fact, it is worse than he supposes. Proposal A limited the growth in taxable value to the lesser of the rate of inflation or five percent. And the Headlee Amendment requires a rollback of the tax rate to yield the same revenue from existing property as before the increase in taxable value. Thus, a community that doesn't experience growth will never receive an increase in property tax revenue. Communities would not be in their current difficulty if Headlee was symmetrical. That is, it had permitted a roll up in rates when property values fell. That would have maintained revenues at their previous level. So, perhaps a state tax increase sufficient to compensate communities for the lack of a roll up option in Headlee would be a reasonable solution.
Wed, 06/04/2014 - 11:35pm
Charles, My understanding that in this current tax environment there are municiplaities that are managing their finances and over the past few years have correct their unfunded liabilities. Why is it that we need to makes ways to get more of other people's money when there are municiplalites that are succeeding, even ones that have declining jobs and property values?
Sun, 06/08/2014 - 8:10am
We need to pass a law which makes it illegal for municipalities to promise retirees post retirement benefits beyond pensions and cap the level of pensions. Otherwise municipalities will continue to make promises they cannot fulfill. Current retirees and those soon to retire will need to be weaned off retirement health care benefits over perhaps a decade but it is simply not fair to burden citizens who cannot afford their own healthcare with the retiree healthcare costs of every public employee.