DALLAS – Michigan's struggling cities won't be able to reverse their declining fiscal health if they continue to depend on the state's faulty revenue sharing system.
That's the conclusion the Michigan Municipal League reached in a recent report. Low property values and shrinking state aid are hitting some local Michigan governments especially hard and the state's emergency manager program alone is far from a panacea.
The league takes the state to task for the current system and warns that unless Michigan changes the way municipalities are funded, any city with a tax base much below $20,000 per capita risks suffering a similar fate as Detroit or Flint. Detroit emerged from bankruptcy in 2014 and Flint, while under emergency management, sought savings in water delivery that ultimately resulted in its water contamination crisis.
"The state has failed our cities," former state treasurer Robert Kleine said last week during a press conference to announce the report's findings. "We have a dysfunctional system of local government organization and financing. The entire system needs to be overhauled. We cannot have a strong state without strong communities."
The league says Michigan's municipalities need broader access to revenue sources in addition to the property tax and the limited revenue sharing from the state. Sales taxes, fuel taxes, vehicle registration fees, alcohol taxes, tobacco taxes, public utility sales taxes, real estate transfer taxes, and other sources should be considered in the absence of a turnaround in state aid sharing, it argues.
Of Michigan's 277 cities, 90 have a lower-than-$20,000 per capita tax base. The cities face a dilemma, according to the league: either levy higher-than-usual property tax rates to provide a reasonable level of services or keep rates low and forego services. Both options damage competitiveness and drive residents and businesses elsewhere.
The state's emergency management program leaves the conundrum of a dwindling funding base unanswered, the report said, because state intervention doesn't address the problem of an adequate tax base. Eleven cities, one township, one county and five school districts are under some form of state intervention.
The average taxable value per capita for cities under state supervision is $12,060 compared to the state average of $32,000. The average millage rate is 29.3 mills levied compared with 18.3 mills levied for all cities.
Royal Oak Township levies 15.11 mills compared to the average for all townships of 4.71 mills. Only one of the cities under state intervention, Pontiac, levies less than 22 mills. Detroit, Flint, Highland Park, Hamtramck, and Pontiac also levy an income tax.
The emergency manager program, in which the state governor appoints a manager with extensive powers over a troubled municipality or school district that meets certain criteria, was launched in 1990. It's the state's go-to method for dealing with local government financial troubles.
The report comes as the EM law has come under heightened scrutiny following major failures in Flint and Detroit Public Schools.
Flint is dealing with a water contamination crisis that began after the city broke off from the Detroit Water and Sewerage System in 2014 to save money when its contract to receive Detroit-supplied water ended. The city began pulling water from the Flint River and intended to use it until later this year when it will get its water from a new Lake Huron pipeline being built by the partially bond-financed Karegnondi Water Authority.
The river water wasn't property treated and corroded pipes throughout the system, creating damage and contamination that remained even after the city switched back to Detroit water.
Detroit Public Schools, which has been under emergency management since 2009, is struggling to remain solvent and lawmakers are working on a massive restructuring. The district's fourth emergency manager, Darnell Earley, who departed at the end of February, was emergency manager of Flint when the city made the ill-fated decision to switch from Detroit water.
The league is not alone in its support for sweeping funding change.
"If we don't change the way we fund municipalities, the crisis in Flint may be a preview of coming attractions," Mitch Bean, former director of the nonpartisan House Fiscal Agency and former chief economist for the Michigan House of Representatives, wrote in a commentary for the Center for Michigan. "State funding for municipalities have deteriorated to the point many cities cannot adequately fund basic service."
Aside from property taxes, Michigan cities are largely dependent on a state revenue sharing system that has consistently declined since 1998. Since 2002 the state has led the nation in cuts to municipalities. According to the US Census Bureau, from 2002 to 2012, municipal revenue from state sources increased in 45 states and the average increase was 48.1%. In Michigan, municipal revenue from state sources declined 56.9% from 2002 to 2012, according to the report.
Cities have responded with cutbacks in public services and increase in millage rates.
"Every Michigan city is struggling we all feel this pinch," said Rebecca Fleury, city manager of Battle Creek. "I shouldn't have to ask my elected officials to choose between a fire station and a police station, which is exactly what we are facing right now."
The largest impact on local resources has been reductions to statutory revenue sharing. From 2002 to 2016, as enacted, Michigan's statutory revenue sharing has declined 61%. According to Fleury, Battle Creek has been left to operate with $23 million less in state revenue sharing since 2002.
As a result, many municipalities continue to have fiscal problems—even in a growing state economy.
"We've seen a 50% drop in revenue coming into locals and it is not because the money isn't there," said Michigan State University assistant professor Joshua Sapotichne at last week's press conference. "The state budget has increased by 30%. So to say that there is no revenue to share is not true – there is a lot of revenue to share."
He cited business tax cuts Michigan has enacted over the last five years.
"If the state can afford to cut business taxes by $3 billion over the last five years they can afford to fully fund revenue sharing," Kleine said.
The collapse in housing in 2008 also contributed to the largest decline in Michigan property values since the 1930s and sent the taxable value of these struggling cities spiraling downward 18.1% from 2008 to 2012; property tax collections fell 9.1%. During the same period the state taxable value fell 13.1%.
The decline in taxable value for cities was partly offset by increase in millage rates from 16.28 mills to 18.07 mills.
"Cities' ability to respond to sharp declines in revenues is limited by the constraints and limited revenue flexibility caused by constitutional and statutory limitations, which are among most severe in nation," Kleine said.
A 1978 local tax limitation known as the Headlee Amendment and 1994's Proposal A have limited the collection of taxes on existing properties. "Prop A and Headlee were both adopted on an already fairly aggressive property tax rate limit as well," said Sapotichne.
The 1978 tax limitation took away local authority to levy taxes outside of property taxes and limited their ability to raise revenue.
One of the intents of the Headlee Amendment was to prevent the state from imposing unreimbursed mandates on local governments, but critics say it's failed. Local units of government have been forced to pick up the tab for numerous services that are deemed "optional" by the state, but which truly are not optional for taxpayers, such as emergency 9-1-1 certification requirements.
And the courts have been slow to act on Headlee enforcement. Local governments end up covering the costs of various mandates while litigation slowly moves through the court system. Michigan courts seem unwilling to tell the Legislature to appropriate necessary funds, citing the separation of powers. A better method needs to be developed to address this issue, the report says.
Proposal A limits the taxable value of a property. It can only increase by the rate of inflation or 5%, whichever is less. Under the Proposal A cap there are two ways taxable value can exceed the inflation cap: new or improved property or the sale of existing property. A property's value can decrease, however, which places taxing entities in a precarious position as the amount of money they can assess goes down.
"We are not asking for tax increases but we are asking for policy that gives cities a much higher priority, one that doesn't defund cities while axing taxes," said Sapotichne. "One idea we see is the ability to put assessments for specific economic development areas, but we don't have opportunities to do that in Michigan."
