'Shadow Tax Cut' deepens local budget crises

A $900 million cut in property tax revenues since 2007, the "Shadow Tax Cut," has devastated the budgets of local governments that heavily rely on these taxes to provide police and fire protection -- and a host of other services.

They’ve laid off hundreds of firefighters, police officers and other employees; cut pay and benefits; closed libraries and community centers. Some are keeping their city halls open only four days a week. Local government employment in Michigan is down by 53,600 jobs since its November 2006 peak of 438,500, according to the federal Bureau of Labor Statistics.

In one extreme case, DTE Energy repossessed two-thirds of Highland Park’s street light poles in August after the poverty-stricken city couldn’t afford to pay the $60,000 monthly light bill.

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“I think we’ve gone beyond cutting out the fat. We’re cutting into the bone now,” said Paul Tait, executive director of the Southeast Michigan Council of Governments, a regional planning agency. “I’ve never seen local governments under such pressure in providing core services.”

A survey by the University of Michigan’s Center for Local, State and Urban Policy found that half of Michigan’s largest local governments plan to reduce the number of services they provide next year.

Pontiac, for example, a once-prosperous auto-making town with a population of 59,500, no longer can afford its own police department. It turned over its 50-officer force to the Oakland County Sheriff’s Department in August.

And the state Treasury Department estimates 2011 property tax revenues will be at least $1.2 billion less than 2007 revenues, putting even more financial pressure on local governments.

Although declining property values appear to be bottoming out, local officials aren’t cheering just yet. That’s because the 1978 Headlee Amendment and Proposal A, approved by voters in 1994, will limit increases on the taxable value of property for years to come.

“We won’t get back to our 2007 taxable level until 2025,” said Robert Daddow, deputy county executive in Oakland County.

"No one ever contemplated a decline in property values when Headlee was passed," said Grosse Pointe City Manager Peter Dame. "Now we will be permanently stuck down at 1990s revenue levels trying to finance government services 20 years later."

Daddow and others say local units of government failed to tighten their belts quickly enough when property values started plunging during the worst economic downturn since the Great Recession.

“The reduction in property values was apparent five years ago,” said Patrick Anderson, president of the Anderson Economic Group in East Lansing. “Despite warnings from many of us, a lot of local governments were taken by surprise by the declines.”

But few knew things would get so bad. And now some of the state’s largest cities, particularly in economically hard-hit Southeast Michigan, are struggling to stay afloat financially.

Flint this week was assigned its second state emergency manager in 10 years. Detroit Mayor Dave Bing has said his city will run out of money by February unless employee unions agree to concessions.

 Hazel Park, a working-class suburb in Oakland County, offers a typical example of what cities across the state have had to do to stay afloat in recent years.

This city of 16,400 has shrunk its work force from 120 to about 90 over the past decade. It has cut the hours worked by clerical employees from 37.5 hours a week to 32 hours. Two years ago, full-time workers took a 5 percent pay cut.

“It’s especially tough on older communities that have high legacy costs and nowhere to grow,” said Hazel Park City Manager Edward Klobucher. “We have a significant number of retirees and old infrastructure that’s in need of repair.”

Total tax revenues, including property taxes and revenue sharing, in Hazel Park fell 9 percent between 2009 and 2010. The city also had 1.39 retirees receiving pensions for every municipal worker in 2010, a 10 percent increase in pensioners from 2009.

The budgetary strains have reached into the most prosperous corners of Michigan.

"On top of what was included in (the Bridge report), in 2011, Grosse Pointe experienced another 4.5 percent decline in property tax revenues -- and I am expecting a similar decline in 2012," said Grosse Pointe's Dame. "When a place like Grosse Pointe is facing such significant financial challenges making ends meet, you know there is a serious problem."

Voters join search for local dollars

Gov. Rick Snyder is pushing local governmental units to become more efficient by working with each other to consolidate services. Communities must show how they’re trying to share service in order to receive their full revenue sharing payments, which are down from previous years.

But residents of many communities are voting to keep services intact, especially police and fire, by approving tax increases.

A survey of 73 millage issues in the Nov. 8 local elections by the MIRS news service in Lansing found that 60 of them, or 82 percent, passed.

Approvals included a 4-mill increase in Lansing to avoid layoffs in the police and fire departments, a sinking fund millage that will raise $4.3 million to repair school buildings in Grand Rapids and an additional 2.1 mills to fund road repair in Warren.

“While legislators continue to talk about the need for more efficiencies, they are failing to realize that local communities are doing everything possible to combine services and that the state cuts are just leading to local tax increases,” said Dan Gilmartin, executive director of the Michigan Municipal League.

To add insult to the injury of the property tax revenue declines, the state has cut revenue sharing payments to cities, villages and counties by $4.2 billion since 2001, including $499 million last year, according to MML.

Some say the dire straits that local governments find themselves in demand an overhaul of Michigan’s tax system.

“What we have right now is a really complicated system. If we were to pick a time to fix it, this would be a great time,” said Eric Lupher, director of local affairs at the nonpartisan Citizens Research Council of Michigan.

One fix he advocates is exempting increased revenues resulting from the sale of property from the Headlee cap, which limits local government revenue growth to the rate of inflation.

There often is a wide difference in taxable value, created by Proposal A, and state equalized value on homes that have not changed hands in years.

When such homes are sold, the taxable value is adjusted up to the state equalized value, resulting in additional revenues for local governments and schools. That extra revenue is included in the Headlee cap.

"Coupled with the abrogation of the state’s commitment to revenue sharing and the lack of a revenue source for fixing roads, it is clear to me that the state of Michigan needs to start over with the whole system of local government finance," said Grosse Pointe's Dame. "Other states have far more options to general revenue locally. A new partnership between the state and its local governments should be forged."

Hazel Park's Klobucher struck a similar note: “I’m hoping somebody in Lansing will realize the whole system is broken and that we’re in a desperate situation."

That’s probably wishful thinking.

The Republican-controlled Legislature isn’t interested in any changes to the Headlee Amendment or Proposal A that result in tax increases, a spokesman for House Speaker Jase Bolger said in an email.

“The speaker's position on this issue, as with many others, is that we should not be doing anything that makes Michigan less attractive to job providers or tougher on taxpayers,” spokesman Ari Adler said.

“At all levels of government, if services can no longer be afforded, then leaders need to reconsider whether those services should be provided or at what level,” Adler said.

Tax appeals stack up at tribunal

Another ticking financial time bomb for local units of government is the huge number of pending property tax appeals at the Michigan Tax Tribunal.

The tribunal, which hears property assessment appeals from local businesses and homeowners, has about 42,000 pending cases. Of those, about 28,000 are small claims appeals, mostly from homeowners.

Automakers and many other major corporations have cases pending before the tribunal. Officials say local units of government could be forced to refund millions of dollars in previous years’ taxes, should they lose those cases.

“Most communities have not set aside any money to fund these losses,” Daddow said. “They’re going to get stuck pretty badly.”

Many local units of governments have already spent past years’ tax payments and would have to raise taxes to pay refunds to taxpayers that win their appeals, Daddow explained.

If there is any good financial news for local governments, it is that the decline in property values appears to be easing.

A new report by SEMCOG found taxable property values in Southeast Michigan this year fell 6.5 percent, which was less than its predicted 9.6 percent decline.

And the drop in taxable property values should slow to 0.4 percent by 2014, SEMCOG reported.

Although 48 percent of local governments in the latest U-M survey said they were experiencing fiscal problems, that was down from 61 percent last year.

“Optimistically, it may mean the fiscal crisis that has been hitting local governments peaked in 2010,” the U-M study said. “Another interpretation is that local governments are better able to meet their financial needs because of cuts in employees and services.”