Local Michigan governments participating in a lawsuit that accuses the state of short-changing them for years will take their case to the Michigan Supreme Court.
The group scored a partial victory in the Michigan Court of Appeals last week, though the win fell short of its goal to see increased funding flowing from the state.
The lawsuit filed against the state on behalf of 14 local municipalities in September 2016 seeks to correct what they contend is a miscalculation in state aid that has left them short of funds for two decades.
At stake for the local governments is aid they say is crucial to balancing their budgets and funding needed for basic community services. The state of Michigan is required to pay nearly 49% of state shared revenue back to communities in order to pay for their designated local government services. The lawsuit alleges that Michigan has been returning significantly less including $2.5 billion last year alone, or 10 percent of the state’s total annual budget, according to the Michigan Municipal League.
The court ruled that doing so is essentially counting funding for mandates twice, and “would force units of local government to choose between cutting services or raising taxes to make up for the funds lost to pay for the necessary costs of new mandates.”
The court sided with the state on two other counts, most notably agreeing that payments to school districts count toward the state’s revenue-sharing obligations with local municipalities.
“We appreciate the court recognizing what we have said for years: the state has breached its duty to fully fund mandates, forcing our communities to choose between cutting the services our residents want and deserve, or raising taxes," Michigan Municipal League CEO Daniel Gilmartin said. "These choices have harmed our roads, denied emergency services and caused other valuable services to be denied to the residents who need them the most,”
The lawsuit filed by the Taxpayers for Michigan Constitutional Government against the state’s Department of Technology, Management and Budget is centered on what the group claims is the state’s failure to meet the requirements of the Headlee Amendment.
That amendment, passed in 1978, requires that the state pay a minimum of 48.97% of monies raised through state taxes to local governments. It further stipulates what funding can and cannot be included in the calculation of the minimum percentage payment.
The aim of the lawsuit is to correct the state's accounting practice, which in turn would increase funds that flow to local governments. Backers are hopeful, though they worry that even if districts prevail with the high court, change remains uncertain.
John Mogk, president of Taxpayers for Michigan Constitutional Government — the group that filed the lawsuit — and a professor at Wayne State University Law School, said that the group plans to appeal the two claims that were rejected at the state’s highest court.
“On one of the two claims — charter schools are not local government and therefore money spent then cannot be attributed to local government spending — that is a very large claim and the court split two to one,” Mogk said. “We are very optimistic that we will prevail on argument on that claim and feel that we have a very strong argument on the first claim also. We believe there will be an additional ruling in increased amount that the state will have to factor into the benefit of local governments.”
Without a win on the plaintiffs’ biggest contention, related to funding of public schools, “it is mostly a paper win,” said Eric Lupher, president of the Citizens Research Council of Michigan, an independent policy research organization. The courts are “able to slap the state on its hands and force it to change some behavior, but probably not result in new money for local governments.”
“The group clearly wanted a lot more that they got,” said Eric Scorsone an associate professor at Michigan State University, where he directs the Extension Center for Local Government Finance and Policy. “It’s a moral victory at the moment and I don’t think it will lead to a lot of new funding in the near term. I don’t see an appeal changing the outcome.”
Scorsone said he also expected that the state would move to appeal the decision on mandates. “I think this is only the beginning of the legislative process that is clearly going to be appealed to the Supreme Court,” he said.
Kurt Weiss, a spokesman for the department of Technology, Management and Budget office said he doesn’t expect the July 30 ruling to have a direct impact on next year’s fiscal 2020 budget. The next fiscal year begins Oct. 1 and the budget remains the subject of negotiations between GOP legislative leaders and Democratic Gov. Gretchen Whitmer.
“We will continue to review the ruling, working with the Attorney General’s office, but it’s too soon at this point to know what our next steps will be or what the costs are,” said Kurt Weiss. “No determination has been made as to whether the state will appeal the decision.”
The Taxpayers for Michigan Constitutional Government filed the suit in September 2016, contending the state has improperly counted spending on traditional public schools, charter schools and funding for local governments to comply with state mandates toward its minimum local government spending requirement under the Headlee Amendment, which has resulted in a shortfall of payments to local governments that is well in excess of $1 Billion.
The Headlee Amendment says monies raised through tax shifts, monies paid to local governments to perform obligations of the state and monies paid to agencies that are not political subdivisions of the state cannot be included in the calculation of the minimum percentage payment.
The appeals court unanimously agreed with group on the argument that the state should not count spending it provides local governments to comply with new state mandates toward its Headlee requirement.
The ruling on mandates doesn’t change much, according to James Hohman, director of fiscal policy at the Mackinac Center for Public Policy, a think tank focused on Michigan issues.
“It means that additional payments for mandated services cannot also be included in a calculation that prevents the state from sending less than 49% of its revenue to local governments,” Hohman said. “The state isn’t clear on what is and is not a mandate, or what funding goes to that.”
The group lost on the argument that the state incorrectly counted funding it gave K-12 public schools under 1994’s Proposal A toward its local government spending minimum under Headlee, calling it a “tax shift” that has created a burden on local taxpayers through higher property taxes or cuts to services.
The measure created a statewide property tax to fund schools, capped the rate at which revenue from the tax can increase, and prevents local school districts from asking voters for additional operations support through a property tax levy. It also increased the state sales tax by 2%, with revenue to go to the state's school aid funds. The judges unanimously disagreed with the plaintiffs, however, on their Proposal A claims, writing that the constitution doesn’t support the group’s argument.
Michigan spends $1 billion a year on charter schools, which the lawsuit argues are non-profit corporations, not political subdivisions of the state, and should therefore not be included in the calculation of the minimum mandatory payment.
Two judges ruled in the majority opinion that charter schools are local governments — in this case, school districts — “for the purposes of receiving state aid. Given that, we see no reason to overrule the state’s decision to count those funds as payments to local government under the Headlee Amendment.”
The aim of the lawsuit is to correct the state's accounting practice which in turn would increase funds that flow to local governments.
Whether shortages would be refunded to local governments and how much would be up to the discretion of the court. To the extent that there is any interest from the court in doing that, Mogk said there is a limitation of either one or two years of state aid reimbursements that limits the damages for which the state is on the hook.
