Opinion | Now is the time to address Michigan fiscal policy

It is now become clear that the COVID-19 pandemic is likely to result in a severe economic downturn. This downturn may be short term or longer term and we have no clear view of the length yet.  In the face of this crisis, local governments, counties, cities, village and townships, are front-line providers of the public safety and health resources that we need in this time.  These public services, already strained from inadequate long-term funding, will be at further risk just when they’re needed the most.

Going into this crisis, Michigan local governments had, through strong local leadership, rebuilt their reserves and become more resilient.  Counties, cities and townships all had increased general fund balances by an average of 7 percent in the past five years.  Few, if any, local governments had a general fund deficit.  They did this despite operating in a broken local public finance system.  This was done in the face of a local finance system, constructed by the state government over many decades, that restricts property taxes, prohibits the introduction of many local option taxes and continues to ensure local government pick up much of the costs passed on by state government. 

Of course, a number of local governments are facing a more difficult time than others.   This includes cities, townships, villages and cities from across the state.   Notably, in the Detroit area, communities such as Melvindale, Hazel Park, River Rogue, Harper Woods fall into this category. There are others from northern Michigan and the Upper Peninsula.  This does not mean that communities will fall into fiscal distress but they are at more risk.  Also, those communities that have a city income tax are at risk as local income falls.  Finally, we are seeing a fall in sewer and water revenues from communities across the state.  

All of the hard work and leadership many local governments have put in to save money for a rainy day may be quickly undone by the COVID-19 downturn.  The biggest risk, of course, will come from potential state revenue sharing cuts.  There will be a great temptation to cut state revenue sharing to local government to balance the state budget.  Understandably, each part of our state will have to be part of the necessary shared sacrifice.  

Given the great variety of fiscal risks facing local governments, now is the time to address state policy toward local fiscal distress.  If, as we expect it will, local government fiscal distress increases  over the next year, there is an important question as to how the state will handle this.  Within state government, there are currently tools for addressing audit regulations, budget rules and borrowing qualifications and constraints.  However, these tools are limited.  The state has not addressed the problem of the broken emergency financial manger system that is still in place via Public Act 436 to address the most serious local financial problems.

A new policy needs to be enacted as soon as possible.  The new state policy should meet the following strategy:

• Phase One should be a review process, as is typical now, to determine the full extent of the problem. 
• In Phase Two, local officials should create a recovery plan that is tracked and monitored by the state with priority access to state grants and resources. 
• A third phase, assuming the second fails, would move to a new public body, populated by state and local officials that would provide oversight to local finances.
• A final step would involve municipal bankruptcy, if absolutely necessary. 

At no time in this plan would local officials lose compete control of the local government.   And importantly, state government would be a partner rather than an antagonist in local government fiscal distress.

Ultimately, a federal stimulus plan for state and local governments is what is required and necessary.  State and local governments cannot raise taxes at a time of recession and need to spend money on critical public health and safety services.  Only the federal government has the financial resources to invest the necessary financial resources to ensure front-line providers have what they need.  We cannot count on this coming through, however, and we should not wait to address policies that could cause more harm than good if local fiscal distress becomes a reality.