New CRC Report Outlines Financial Challenges Ahead for Michigan Municipalities

The Citizens Research Council of Michigan has issued a new report about the implications of state budget issues on local governments. This report, titled Challenges Ahead in Balancing the State Budget, is very much in line with the SaveMICity messaging about the fact that the state’s system for municipalities is broken. In particular, the report shows that if we don’t fix our broken system the financial picture is going to get worse for our communities.

Here is an article by the CRC about the report. Reading the article and checking out the new report are definitely worth your time:

Challenges Ahead Balancing the State Budget – What it Might Mean for Local Governments

While the State of Michigan’s current fiscal health is stable, with the budget benefiting from an expanding economy and moderate projected tax revenue growth, future budgets will have to contend with fewer discretionary resources, because of decisions made by previous legislatures. Even under an improving economic picture, our new report shows that a number of decisions made by previous legislatures will make balancing the state budget much more difficult in the future.

What does this mean for local government budgets that receive the majority of their funding from the state?

Despite projections for continued economic growth, the General Fund is not expected to grow over the next three years relative to inflation because of a few major revenue diversions, including some that have yet to come online. These include:

  • The Michigan Business Tax, which offers businesses tax credits enacted during Michigan’s single state recession. Those credits reduce potential revenues by around $600 million annually, and will continue to drain discretionary resources for years to come.
  • The 2015 transportation investment package, which will eventually provide an additional $1.2 billion for road and bridge funding, with approximately half coming from fuel and vehicle-registration tax increases and the rest from income tax revenues that would otherwise flow into the General Fund. The General Fund contribution will start in FY2019 at $150 million and ramp up to $600 million in FY2021. Additionally, the transportation package included expansions to the Homestead Property Tax Credit for low-income households as an offset to the fuel and vehicle tax increases. These tax credits are expected to draw an additional $200 million from the General Fund annually beginning in FY2019. All told, the transportation package will reduce money flowing into the General Fund by $350 million in FY2019 and $800 million by FY2021.
  • Another noteworthy revenue diversion comes from the 2014 plan to expand exemptions on business personal property. The state agreed to reimburse local governments and school budgets for the revenue loss associated with exemptions for industrial and commercial personal property. A portion of the state Use Tax will be used as a dollar-for-dollar replacement, costing the General Fund $500 million annually by FY2023.

In addition to these and other smaller revenue issues, a smattering of upcoming spending increases will put more pressure on the budget as state costs for the Healthy Michigan Plan and the Michigan Indigent Defense Commission will begin to come due. All told, our new report estimates that more than $2 billion in potential General Fund revenue will be diverted or dedicated to these programs by FY2023, which accounts for 20 percent of the state’s General Fund budget.

But compounding factors could make the state’s budget even more difficult to balance in future years. Congress may look to cut federal spending, which could impact dozens of state-administered programs, reducing the federal money coming to Michigan by billions, forcing choices on whether that spending needs to be replaced.

And past experience shows that if the state’s economy cools, revenues from the Income Tax, which is responsible for two-thirds of all General Fund revenue, could decrease by up to 25 percent. Remember, Michigan is over eight years into the current economic expansion; the average length of previous ones was just under five years.

The bottom line is that beginning with the FY2019 budget and well into the next decade, General Fund programs are likely to face increasing competition for a smaller pool of resources. The legislature will have to decide what programs can afford to take cuts, and how to distribute them across the General Fund in order to maintain a balanced budget.

What this means for local government budgets is unclear. While the constitutional general revenue sharing payments made to cities, villages and townships (CVTs) are protected, statutory revenue sharing would likely be an area of the state budget subject to reductions. These payment are subject to appropriation.

In the current state budget, non-constitutional payments to eligible CVTs total over $255 million and payments to counties almost $220 million. Unrestricted general revenue sharing payments come in at $475 million from state resources. Statutory revenue sharing benefits all counties, but the disjointed method of divvying the funds among cities, villages, and townships has created a system that directs funds mostly to larger governments. The nuances of municipal finance leaves these sums contributing differently to individual governments’ overall budget makeup, but for some, it is THE main funding source to support local services.

During Michigan’s single-state recession, statutory revenue-sharing payments were a prime target for Lansing in its efforts to balance the budget. As General Fund resources became scarce with the decline in tax collections during the slowdown, budget writers regularly redirected these resources to other priorities. County payments were removed altogether from the budget in 2005 (replaced with the revenue from advanced county tax collections) and did not start coming back online until the late 2000s (when the county funds were exhausted). For CVTs, the total statutory allocation in 2001 was $684 million which represented near “full” funding under state law; today it is less than 40 percent that amount.

It is impossible to say where state officials will turn in the future to maintain budget balance. Past experience shows that balancing the state General Fund budget came at the expense of discretionary payments to local governments. Also, while state payments have increased in recent years, full restoration is far, far away and not likely to occur before the next round of state General Fund budget challenges emerge.

The new Citizens Research Council report, Challenges Ahead in Balancing the State Budget is  available free of charge at www.crcmich.org.