Michigan tax facts, part 7: Will your city hall and local schools go bankrupt?

Editor’s Note: The 10 Things Every Voter Should Know About Michigan Taxes
To help voters make sense of ubiquitous political arguments in this fall’s elections in Michigan, Bridge’s 10-part special report tells it like it is on Michigan taxing and spending issues. Today we present parts seven and eight. Read each five-minute primer published so far:

Part 1: Are Michigan taxes too high, too low or just right?
Part 2: Who wants what in the long war over Michigan taxes?
Part 3: Who pays the taxes in Michigan?
Part 4: What do you taxes pay for in Michigan?
Part 5: Who gets tax breaks in Michigan?
Part 6: How much do taxes matter for business location?
Part 8: What would Richard Headlee think today?

In August, Michigan voters approved a plan to get rid of a longstanding tax on business equipment while also providing some security and predictability to local government funding.

But the hangover from the Great Recession remains. Long-term legacy costs for retiree health care and pensions loom. And the financial crisis is far from over in a variety of communities and schools in Michigan.

Proposal 1’s “passage is a huge thing for our members,” said Samantha Harkins of the Michigan Municipal League, which represents 530 cities, villages and urban townships in Michigan. “But I don't think it means that cities are doing great. It means they are doing less terrible than they could have been.”

Twelve Michigan cities are under scrutiny by the state Department of Treasury for financial instability, with five still under emergency management. Five K-12 school districts are on notice, including three with emergency managers.

Passage of Proposal 1 – which phases out the tax on business equipment – assures local government that they will receive compensating funds collected from the state's user tax. Had the measure failed, some feared the Legislature might vote to scrap the personal property tax without any replacement revenue.

“That would have been catastrophic,” Harkins said.

It would have been particularly tough in Downriver industrial communities near Detroit like River Rouge, where revenue from personal property tax comprised 57 percent of the city's revenue, according to 2010 analysis by the Michigan Municipal League. River Rouge is being run under a consent agreement with the state treasury to assure that spending matches revenue.

The same is true in Ecorse, where personal property tax revenue comprised 46 percent. Ecorse emerged from three-and-a-half years of emergency management in 2013 and is now under the control of a state-appointed transition advisory board.

The driving issue in these communities: Crushing legacy pension and retiree health care debt and a shrinking tax base. It is the same combination that led Detroit to file for bankruptcy in July 2013 with an estimated $18 billion in debt.

And passage of Proposal 1 does nothing to change that equation.

A 2013 analysis by Michigan State University found that unfunded legacy costs in Michigan municipalities excluding Detroit exceeded $10 billion in 2011. And the report noted the potential crisis was hardly confined to cities under emergency management. It found that legacy debt was equal to 25 percent of general revenue brought in each year in Grand Rapids, 30 percent in Ann Arbor and 38 percent in Lansing.

Ecorse, with a 2010 population of 9,512, had $61 million in unfunded liabilities, nearly four times its annual general fund revenue of $14.6 million. River Rouge, population 7,903, had unfunded liabilities of $89 million, nearly nine times general fund revenue of about $10 million.

Challenged by a $14 million hole in the general fund budget, Ecorse emergency manager Joyce Parker tapped into a $3 million emergency loan and $9 million in bonds. She also cut the number of full-time firefighters from 14 to six, privatized the city's ambulance service and moved to merge services and police and firefighters.

Some Michigan school districts face their own set of issues, tied to plunging enrollment and a decade of dwindling state funding for K-12 schools. A 2013 report by John Austin, president of the State Board of Education, noted that state funding to K-12 schools declined by 12 percent when adjusted for inflation between 2000 and 2012. Enrollment declined by about 10 percent over a decade, with much steeper drops in individual districts. State payments to schools are tied to enrollment.

The ride has been especially rocky in Muskegon Heights Public Schools in West Michigan, where enrollment fell by 22 percent between 2006 and 2009, leading to a loss of $3.6 million in revenues. But district spending during that same time dropped by less than $1 million, raising alarms about $16 million in mounting debt. Enrollment in the impoverished district fell by 50 percent from 1997 to 2010.

In 2012, Gov. Rick Snyder named Donald Weatherspoon, a veteran of state government, as emergency manager of the district. Weatherspoon fired the teachers and staff and hired for-profit Atlanta-based charter school operator Mosaica Education in an effort to turn things around.

A quarter of the teachers hired the first year left within a few months. Weatherspoon resigned himself after 16 months on the job and his brother, Gregory, replaced him. Earlier this year, Mosaica couldn't make payroll and asked the state for an advance payment so it could. In April, the district school board voted to end its contract with Mosaica after two years effective in June. In those two years, enrollment plunged another 40 percent.

In June, officials announced that the district would operate under a self-management plan that would tap the Muskegon Area Intermediate School District for financial management and an employment agency to hire and employ staff.

The Muskegon Heights experience raises some key pocketbook questions for taxpayers across Michigan:

• Will financially troubled local governments and schools successfully change how they do business? (See, for example, the communities of Marshall and Albion, which recently combined high schools) to stabilize finances.)
• Will more local governments and schools go bankrupt? Or, will taxes increase to cover community shortfalls? Or, will homeowners and businesses flee areas with high legacy costs and increasing tax burdens?

Those are the kinds of questions voters might ask political candidates asking for their vote in November.

“You’re going to pay at some point, you’re just not paying it yet,” Eric Scorsone, an MSU local government expert who has studied the legacy cost problem across Michigan, told Bridge Magazine last year.

“If you’re in some of these places, you’re looking at huge future costs. Middle class homeowners in some of these cities really need to ask themselves if they want to pay hundreds of dollars more in taxes for lower services.”