Road to Economic Recovery for Michigan Local Governments is Blocked

“By the Numbers” is a series of short articles evaluating the finances of Michigan local governments, primarily through the use of U.S. Census reports on Local Government Revenues and Expenditures by Type of Government, and State and Local Government Revenues and Expenditures. These articles look at how Michigan compares over time to the rest of the nation.

Several articles have benchmarked changes in revenues for local governments comparing the years 2002, 2007, and 2012. Changes in revenue collections, as well as transfers from the State and Federal governments, have been evaluated for each type of local government in Michigan – municipalities, counties, townships, and school districts. Another installment looked at two distinct types of own source revenues: taxes and fees.

Later articles benchmark Michigan’s state and local expenditures on various categories of services on a per capita basis as compared to other states, using information from 1992, 1997, 2002, 2007, and 2012. Expense categories analyzed include payroll, administrative costs, public safety, K-12 education funding, natural resources and parks and recreation, and infrastructure.

Finally, overall results are evaluated below with a critical look at Michigan’s current system of funding local governments and the services they provide.

Two years ago, SEMCOG’s Local Government Revenue Task Force released its report, Running on Empty. The report looked at local government property tax revenues from the time Proposal A passed through the time of the Great Recession. The report also put a spotlight on the state budget and how it responded to local government financial needs. Starting in 2002, the state effectively placed a freeze on total revenue distributions going to local governments even though revenues collected by the state increased by $5 billion from 2002 to 2014.

As a follow-up to Running on Empty, I have written a series of blogs called “By the Numbers” (see above). They focused on the question, “How are Michigan local governments doing financially as compared to the rest of the nation?” The results of the study give a very clear indication that Michigan local governments were hit harder by the Great Recession than most in the nation and, as a result, the services they deliver were greatly impacted.

Every level of local government in Michigan was significantly impacted by Michigan’s “one state recession,” as well as the Great Recession:

• Counties‘ tax and fee revenues grew at less than one third of the national average from 2002 to 2012; only two states saw smaller increases.
• Townships‘ overall revenues increased at half the rate of townships across the country during the same time. Again, only one state saw smaller increases.
• Only five states saw revenues for schools increase at a slower pace than Michigan.
• Michigan cities were battered by the economy like nowhere else in the country. Cities across the country saw their revenues increase by 50 percent between 2002 and 2012. Michigan’s cities lost 8.5 percent of their funds over that time span.

Local governments in Michigan have been dealing with revenue limitations for decades. Wage growth for employees of Michigan local governments was half the national rate over the past two decades. The greatest challenge was in Michigan cities where payrolls were reduced by a third from 2002 to 2012.

Over the past 20 years, the cost of administering Michigan’s local governments has gone from the national average to one of the lowest in the nation. Michigan’s expenditures for police and fire protection have gone from above average nationally to much below the national average. Placing in the bottom quintile in the nation in spending on parks, spending 40 percent below the national average, is not a positive attribute for a state that is so proud of its natural assets.

Issues of inadequate infrastructure have dominated Michigan headlines for the past several years. Road, stormwater, and drinking water infrastructure have become critical issues. Nationally, Michigan has ranked poorly over the past 20 years in these areas. In 2012, Michigan was last in the nation in infrastructure investment, investing at only half of the average of other states. While the legislature has adopted a plan to spend more on our most visible infrastructure – roads – Michigan will still spend much below average on roads even after the new funding is fully implemented.

Education may be the most problematic service to quantify. For years, Michigan ranked in the top 10 in funding our local schools. Between 2007 and 2012, Michigan dropped from 8th in the nation to 25th. Unfortunately, student test results are falling behind other states as well.

“By the Numbers” has not painted a very rosy picture for Michigan local governments. If you talk to local elected officials from across the state, which I do on a regular basis, you will find most have experiences consistent with the report, or worse. Others have not seen significant hardships.

The greatest challenge as we move forward may be to reach a shared understanding that what happens collectively in our state, even the failure of one community, impacts us all. This series compares Michigan to the rest of the country, but it does not dwell on how different parts of the state and different local governments experienced different impacts.

Many local government officials talk about the fact that it will take years – if not decades – to get back to where they were in 2007 from a financial standpoint. Even this view understates the real issue. Michigan’s local government funding structure will never get them back to where they were relative to the rest of the nation. By the time they get back financially to where they were, the rest of the nation will have moved on and at a growth rate that is much faster than Michigan.

The Headlee Amendment has impacted every local government in the state. Headlee was an experiment in fiscal restraint. Many thought it would create significant financial hardship for local governments. The expected disaster never seemed to materialize, but the problem is that Headlee’s impact is very slow and methodical. As other parts of the country raced ahead, Michigan proceeded at a slow and measured pace. Some areas of the state, where significant construction took place, did well. Other areas remained operational but were not moving ahead. Finally, some areas could not keep up; they lost ground to everyone. The cumulative impact of Headlee was erosive and persistent.

Headlee’s effects accelerated a hundred-fold during the Great Recession. The historic loss in property value has reset the Headlee baseline at a much lower level and created a new normal for local government operations. While the economy and tax revenues associated with it have accelerated across the country, Michigan local governments will be prohibited from benefiting from that recovery. Taxes related to recovering property values will once again be throttled by Headlee, which denies economic recovery to local government operations in our state. Unfortunately, the Great Recession has weakened so many local governments that any significant issue related to expenditures or revenues could cause the financial collapse of many.

Running on Empty focuses on changes that can be made to allow Michigan’s local governments to compete with the rest of the nation once again, while still protecting its citizens and property owners. Once Proposal A passed and included the cap on taxable values, the concept of Headlee millage rollbacks lost its purpose. Instead, the millage rollback has become the biggest barrier to financing needed services in our core communities. The state must also recognize that if so many restrictions are placed on the ability of Michigan local governments to raise revenue, then they must step up their efforts to financially support the locals. Unfortunately, the state seems headed in the opposite direction.

The Great Recession exposed the significant weaknesses in Michigan’s local government financing system. The question is will we correct the situation, or will we instead continue to close our eyes to the fact that struggling local governments will significantly impact Michigan’s economic future?