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Guest commentary

Guest column: Michigan cities firing flares over funding

By Tom Ivacko/Center for Local, State and Urban Policy

Michigan local government leaders are waiving a red flag, warning that the state’s system of funding local government is broken and that we can expect fewer public services in the future if the system is not fixed.

In recent days, both Flint’s emergency manager, Edward Kurtz, and Lansing’s former mayor, David Hollister, have issued public warnings about the broken funding system and its dire community outcomes.

These latest warnings reinforce the key findings of the most recent Michigan Public Policy Survey on local fiscal health, which finds that 58 percent of Michigan’s local leaders (including 77 percent in the largest jurisdictions) think the system of funding is broken.

Tom Ivacko is an administrator and program manager at the Center for Local, State and Urban Policy at the University of Michigan.

These concerns come at a critical time. Over the last few years, many of Michigan’s local governments have been in retrenchment mode, cutting services and staff, shifting health-care costs increasingly to be paid by their employees, cutting pay rates and looking for ways to share services with neighboring jurisdictions. They have also been delaying infrastructure maintenance for some day in the future when more money is available.

This recent period of retrenchment has been driven most directly by falling revenues and rising costs for service provision. The funding decline, which started with ongoing cuts to state revenue sharing in the early 2000s, was significantly worsened by the housing sector collapse and the Great Recession around 2008.

The resulting fiscal crisis has played out unevenly across the state, helping (with other factors in some cases) to drive some of our largest cities to emergency financial status, even while some communities have chugged along fairly well (especially small jurisdictions that have no full-time employees and that provide few services). Many jurisdictions fall somewhere in-between, having managed their way through the fiscal squeeze by making tough choices and right-sizing to live within reduced means, thereby helping to preserve their fiscal health.

And so we have emerged from the Great Recession to a new normal of smaller local government – employment levels are down about 8.6 percent since their peak in the early 2000s. Our communities today have fewer services, fewer public employees – including now police and firefighters – and degraded infrastructure.

But despite their reduced size and an improving economy, less than half (43 percent) of Michigan’s leaders think they will be able to maintain today’s package of services into the future, based on the current funding model. In the largest communities, just 22 percent think they will be able to maintain today’s services. The outlook is even worse in terms of improving services, perhaps things like faster police and fire response times, or patching more potholes in the streets.

Among the leaders who think the funding model is broken, overwhelming majorities think each major part of the system is broken, including the gas tax, the sales tax, the Headlee Amendment and Proposal A, revenue sharing and more.

As they have through the recent period of retrenchment, many local leaders will continue to look for cost savings, efficiencies, and opportunities to boost intergovernmental approaches going forward. They’ll surely find some, but they’ve been working these fields for a while now, and the low hanging fruit has been plucked already. Without significant reform to the funding system, our local leaders see a new round of retrenchment in the future, with fiscal health preserved largely by increasingly difficult cuts.

Is that the future we would choose? Perhaps, perhaps not. But we ought to talk about it before it’s too late.

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.

10 comments from Bridge readers.Add mine!

  1. William C. Plumpe

    The question is—if we radically changed the current funding system what would it look like? And how would we maintain “local control of local funds” if funding was tied more closely to the State sales tax? It’s a difficult issue to balance. How much do we rely on property tax, how much on State sales tax and how much on revenue sharing or some other tax? Major changes to the current system could have unforseen results in the future much like Headlee and the cap on taxable value is haing now so I am very wary about making big changes because of what could happen down the line. Lowering taxes overall or going to a more progressive tax structure is a good idea but we still must make sure no matter what that all munucipalities are reasonably and adequately funded in a prudent and reliable manner. Enough said.

    1. Christopher Reader

      A primary problem is that cities gave up their ability to leverage local sales taxes in exchange for a set percentage of state sales tax. Rather than honestly approaching the challenges at hand, the state has whittled and whittled away at the percentage that cities receive, and cities have few other ways to make up that stolen revenue.

      We cannot have a strong state without strong cities, and we cannot have strong cities when the state is stealing revenue owed to the cities. We need to tax appropriately, and being investing in our infrastructure and other things that make an economy strong.

      1. Christopher Reader

        Sorry, begin investing, not being investing.

  2. Rich

    The real question might be “Do we really need or want all the city services provided?” The citizens of our city recently rejected a special millage to build a park. The City had plans for a grandiose park with all the bells and whistles. So after rejection of the special millage, the city council got together with the local school board and came up with a scheme to have parkland, perhaps with not as many bells and whistles, but all enacted without those messy citizens getting a chance to vote on the expenditure.

    Cities should be adequately funded to perform the basic services – fire, police, water, sewer, local roads. Anything other than basic services should require a vote of the people, held during an election that ensures adequate turnout of the population.

  3. Jim Zielske

    It seems like the talk around town lately has been rasiing taxes , revenue, but families have not received a ” raise” in many, many years. Where will this additional revenue come from? It seems the ” Cheap Mentality” has finally come home to roost.

    1. David Waymire

      Jim, according to the Senate Fiscal Agency state spending from state tax dollars (including revenue sharing) in the last decade has increased by 6.9 percent (revenue sharing is down nearly 30 percent), while personal income is up 21.8 percent. Someone’s getting a raise. (That report also shows inflation was up 20.7 percent over the decade.)

  4. Charles Richards

    This article was disappointingly uninformative. Where were the numbers on property tax revenues, revenue sharing (both constitutionally mandated and discretionary)? It is true that the Headlee Amdnement has the unintended consequence of preventing property tax revenue from recovering as property values increase, but don’t voters still have the option of voting for a Headlee override? What does Mr. Ivacko suggest? Restoration of the cuts in discretionary revenue sharing? How much does he think would be adequate?

    1. Tom Ivacko

      Mr. Richards, as an op-ed space is very limited so I was not able to provide as much information as you were looking for in this column. We did provide a link in the column to a much more detailed report on these issues. I would encourage you to review that report for more information In addition to that report, our Michigan Public Policy Survey website provides pre-run data tables from our surveys of local government leaders, and we have hundreds of those tables available at:

      As for my personal suggestions, I am not trying to argue either in favor of or against more revenue. I understand Michigan has lots of passionate citizens who think they’re already over-taxed. We also have lots of passionate citizens who think tax cuts have gone too far and that service cuts now are harming quality of life. My suggestion is that we should pay attention to, and have a serious conversation about, what our local leaders are telling us, which is that unless something changes, we’ll have a new round of local government retrenchment coming again in the near future, even if the economy continues to improve. They are telling us that the funding system for our local government no longer works, and I think that’s a fundamentally important question to dig into.

  5. dale westrick

    We have a different problem in our Township they collect the money put in in 13 different banks at practically no interest. Now that the fdic rules changed at the end of 2012 and the fdic insurance on non-interest bearing accounts expired we now have to invest over another 1 million dollars in other investments. Our fund balance in Aug of 2009 was 170% of our general fund as noted by standards and poors rating. In a survey generated by Eastern Michigan college of business for me from 1998-2010 the percentage of increases some over 2000%. Our office operation cost went from $120,000.00 in 1998 to over $366,000.00 in 2010. The proposed budget for office operation for 2012 is almost $400,000.00. If you question any of this information go to my website and check out my home page for details. I forgot to mention we are not investing in the community improvements.

  6. Chris Miller

    The call to encourage study and debate of the issue of local government funding is timely and critically important. In our city, we have seen a 50% reduction in revenue sharing, and for this coming fiscal year, a further reduction of property tax revenues will bring the total to a 29% reduction over the past seven years. The Personal Property Tax changes that were approved in the lame duck session will result in an additional revenue loss of in excess of $100,000 in the 2014 fiscal year. In total the city has reduced its spending by 25% over levels of just six years ago, and has reduced staff by 22%. City staff have had their salaries frozen and benefits reduced. All during this time the city has maintained virtually the same number of residents and is providing virtually the same services.

    To conclude that it was possible to reduce the size of this local government may be true in part, but it is also true that the sorts of capital infrastructure investments that are necessary to maintain fiscal responsibility over the long term have suffered, and short term maintenance has also been compromised. The outlook for the future is dire. While we all hope the general economy continues its recovery, the reality is that because of Headlee and Prop A, cities in particular will not recover with the rest of the economy. Even conservative predictions tell us that we will not recover the income lost from property tax losses before 2028, and in the meantime many other expenses will be rising.

    For 2013-14, our city faces a shortfall of roughly $350,000, equivalent to the cost to operate our city library or recreation department. New revenue opportunities are limited and challenging, and include a Headlee override, a library millage, or an income tax; the former and latter both require a vote of the public. At the same time we face these challenging options, we are working hard to make our community a special place where existing businesses want to stay and grow, and where new businesses are built.

    All Michigan cities are facing these same challenges and untenable choices. Tell the Governor and your legislators.

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