Local governments’ fiscal distress worsened by state’s actions

CHOICES MATTER: For two decades, decisions at the State Capitol have consistently damaged the ability of local governments to raise the money necessary to make their communities attractive places to live, work and do business, argues Mitch Bean.

I am concerned about what seems to be a significant decline in the fiscal health of local governments in Michigan. That decline is due in part to the 1990s recession and plummeting property values – the effects of which are exacerbated by the consequences of Headlee limits on taxation and spending and Proposal A caps on taxable values.

However, the decline in local fiscal stability also was exacerbated by the dramatic reductions in state support for local governments in the last decade or so and major tax-policy changes.

For example, cumulative reductions in statutory revenue sharing (money from the state to local governments) exceeded $4.4 billion from 1998 through 2011. In addition, nearly all of the major tax-policy decisions the state has made in recent years have hurt local government funding.

Mitch Bean was the long-time director of the Michigan House Fiscal Agency which provides non-partisan information and analysis for members of the Michigan House of Representatives. He is one of the most knowledgeable financial and policy figures in Lansing and serves on the Bridge Board of Advisers.

When the state enacted the state sales tax, local governments were not allowed to levy one of their own, as local governments can in many other states. Local options were not allowed because the state concluded it could collect and distribute some of the revenue in a much more efficient and equitable manner.

Limits also exist on the personal income tax, with only 22 of Michigan cities with their own local version.

Until the early 1990s statutory revenue sharing was funded through earmarks from the personal income tax, sales tax, Single Business Tax and the Intangibles Tax.  The Intangibles Tax was repealed without replacement revenue, and during the 1990s recession, statutory revenue sharing experienced cuts, as you might expect.

But those cuts pale in comparison to what happened just a few years later.

When the recession of the early 1990s ended, most of those cuts were not fully restored.

In the late 1990s the prior cuts were rolled into a new baseline and a new statutory dedication based on sales tax collections was enacted.  The problem for local governments is that since 1998 this new system has been fully funded just once – in 2001.

At roughly the same time, at the start of the 21^st century, the Engler administration and Legislature agreed to use up about $3.2 billion in surpluses and one-time revenue fixes for state spending – while they were still busy cutting taxes.

Everyone who understood the budget knew they were setting up future administrations and future Legislatures for a problem. Term-limited lawmakers knew they wouldn’t be around to face the problem – and some of them wanted to “starve the beast” anyway.

Let’s fast-forward 10 years and look at how times have changed for your city, village and township leaders.

The fiscal 2012 legislative budget negotiations led to another cut to local government of about $140 million – via the elimination of statutory revenue sharing – and the creation of an Economic Vitality Incentive Program, or EVIP.

EVIP rolled all the previous cuts in state aid into a new baseline. The name “Economic Vitality Incentive Program” is certainly a bit of a misnomer, since it hasn’t brought much vitality to local communities.

And citizens should want some vitality in their local governments so they can protect local services. Services, such as public safety. A community and an economy cannot thrive if citizens are afraid to live there. Local police and fire services are essential.

Infrastructure is also essential. That includes roads and bridges, but it also includes the resources to remove derelict structures and the resources to repurpose old-use structures to new-use purposes.  It also means maintaining the historical and cultural identity of cities and neighborhoods by restoring historical residential and commercial sites.

The quality of life for Michigan residents is impacted daily by choices made by local governments. The ability of local government to make quality decisions has been significantly and negatively affected by state government decisions in recent years. State government should provide local governments with the necessary resources.

And if state government doesn’t want to provide the resources, they should eliminate restrictions they’ve placed on local governments and give them the tools to do the job themselves.

Term-limited politicians have made too many poor decisions. The problem is that while politicians may be term-limited, the consequences of their actions are not.