New Research Report: State Creating Barriers For Local Government Financial Stability

A new, independent research report by the Massachusetts-based Lincoln Institute for Land Policy has found that Michigan’s system for funding its communities is among the most restrictive in the nation, making it difficult for its cities to provide essential services to residents.

It’s the second report released in the past week showing how the state’s system for supporting its cities, townships, villages and counties is broken and must be fixed. The other report, Building Equitable Communities: More Funding Needed for Local Governments, was released last week by the Michigan League of Public Policy and can be viewed here.

The in-depth Lincoln Institute report, Towards Fiscally Healthy Michigan Local Governments, was released Tuesday during a news conference and shows that past cuts in state revenue sharing payments to communities and severe limitations on their ability to raise local revenues are hindering the ability of Michigan’s communities to meet the needs of residents operating in a modern economy. These significant restrictions are limiting our state’s growth.

Here’s the conclusion from the report: “Our research shows that Michigan’s local governments were headed for fiscal distress long before COVID-19, and the pandemic has unfortunately only sped up the inevitable. Over the past few decades, the state government has implemented so many barriers for localities to achieve fiscal stability that Michigan’s counties, cities, townships, and villages could not adequately prepare for or recover from a crisis. It is time for state leaders to take concerted efforts to improve the fiscal health of local governments in Michigan, for the sake of local taxpayers and businesses—all residents of Michigan, on whom the state cannot turn its back.”

The report adds that state officials must remember that local governments provide the services and infrastructure that residents and businesses rely on; implementing policies that make it easier for local governments to do their job ultimately benefits the state of Michigan as a whole and the people and businesses that comprise it. Improving state aid would likely be the quickest recommendation to implement, would put more dollars to work for the residents of Michigan, and would likely have the most visible impact. Relieving some of the property tax limitations or authorizing an additional local revenue source would, over time, also improve the capacity and stability of local government budgets. Efforts to address inefficiencies at the local level will likely take a lot of time, but such efforts have the potential to improve how residents view and appreciate their local government over the longer term. We look forward to building a more fiscally healthy Michigan with you.

The Lincoln Institute is a nonprofit operating foundation that spent months researching Michigan’s “unique” statutory and constitutional restrictions surrounding local finance. The formal findings were presented by Jenna DeAngelo, Associate Director of Local and Regional Fiscal Health, Lincoln Institute in a news conference Tuesday with state and local perspective provided by State Representative Mark Huizenga, R-Walker; Westland Mayor Bill Wild, president of the Michigan Municipal League Board of Trustees; and Anthony Minghine, Deputy Executive Director and COO for the Michigan Municipal League. The Michigan Municipal League was not directly involved in the report, but was asked to moderate Tuesday’s news conference due to the non-profit, non-partisan organization’s role in representing Michigan’s community and its in-depth knowledge of municipal finance The report was funded by Flint-base Charles Stewart Mott Foundation.

Rep. Huizenga said he has plans to hold a future hearing on the report before the House subcommittee on general government that he chairs.

Two statewide news outlets, Gongwer News Service and MIRS News, posted in-depth articles on the Lincoln report that subscribers of those services can view here and here. A summary of those articles is posted below.

Here are the key findings of the report:

1. Historically, the state of Michigan has incubated financial stress among its localities. Statutory revenue sharing in Michigan has been significantly underfunded for the past two decades: since the early 2000s, repeated cuts in funding combined with changes to criteria for receiving statutory revenue have resulted in an overall loss of needed funding for local governments.
2. At the same time, Michigan has some of the tightest property tax limits in the United States, and this unusual design has contributed to large declines in property tax revenue both during and since the Great Recession, with long-lasting impacts on localities’ ability to pay for essential public services.
3. As in many states, local governments in Michigan rely heavily on property taxes to fund their operations; however, Michigan’s limitations on property taxes severely curb local governments’ ability to raise revenues necessary for critical local services such as road upkeep, fire services, and education.
4. Because localities are further prohibited from collecting a variety of other taxes and fees that could bolster revenues from the property tax, the resulting lack of revenue diversity also hinders local governments’ ability to adapt to changing economic conditions, including the COVID-19 pandemic.
5. The state suffers from government fragmentation, which results in inefficiencies: with every county, city, village, and township responsible for providing certain services, duplications among overlying governments may arise. Cost-saving measures implemented by many municipalities are only able to go so far and opportunities for collaboration may be overlooked.
6. With dwindling state aid, strict limitations on property taxes, few local options for revenue sources, and inefficient local governance, it is unsurprising that many of Michigan’s local governments are fiscally distressed.
7. With fewer total state dollars available to localities, important programs—like capital programs, infrastructure maintenance, economic development, affordable housing, and more—take a hit, often falling short of meeting residents’ needs. Michigan’s businesses also suffer from these inadequate investments: residents leave areas because they want to live and work in communities that provide the resources and investments that make residents’ lives better—and thus, too many of Michigan’s localities fail their residents by design.

From the research, the Lincoln Institute came up with the following recommendations:

• • A special state fund to distribute state aid to local governments, modeled after other states that dedicated a specific amount of sales or income taxes to local communities. The report notes that statutory revenue sharing was 58 percent of total revenue sharing in 1998, but has dropped over 30 percent, now just 23-25 percent of total revenue sharing.
  • New state policy to allow local governments to raise mill rates when the tax base grows slowly, by reauthorizing tax rate rollups under the Headlee Amendment. Michigan is one of the few states that limit local property tax rates, assessment growth and property tax levies, eroding the stability of the property tax as a revenue source for cities.
  • Local revenue options for communities. In the past several years, many states—though not Michigan—have passed legislation enabling municipalities to collect local sales or regional property taxes. These additional revenue sources would diversify revenue streams for cities, allowing them to better plan for the future.

MIRS article summary/excerpt:

Municipal Finance In Michigan Is ‘Fundamentally Broken’

The state’s structure for municipal finance is “fundamentally broken and needs to be fixed,” Westland Mayor Bill WILD said today in a press conference unveiling a new report calling for increased revenue sharing and “revenue diversification” for local governments.

“In Westland, our tax bills are similar to what they were pre-recession . . . We are delivering 2020 services on 2007 tax bills,” Wild said.
…
Jenna DeANGELO, of the Lincoln Institute, said the report identified four issues in local government financing: state revenue sharing, property tax limits, other revenue sources, and local government fragmentation.

“While many other states have cut aid to local governments, during and after the Great Recession, Michigan’s cuts were considerably larger than those in most other states. Revenue sharing is an important revenue source for local governments in Michigan, especially when you take into account the fact that localities are extremely limited in how they can raise revenues from the property tax and other local taxes,” DeAngelo said.

The result is that the municipalities that are struggling the most to raise revenue through property taxes are even worse off because revenue sharing is not fully funded, she said. Local governments in Michigan are very reliant on property taxes to fund their operations.

“Michigan has some of the tightest property tax limits in the United States. And this unusual design has contributed to large declines in property tax revenue both during and after the Great Recession. While most states have only one or maybe two forms of property tax limits, Michigan has three,” DeAngelo said. “A few studies have tried to measure and rank the restrictiveness of state tax and expenditure limits, and those three studies ultimately ranked Michigan either second or sixth in restrictiveness.”

Other states allow municipalities to use other taxes and fees to raise revenues in ways Michigan does not.

Gongwer article summary/excerpt:

Report: State Creating Barriers For Local Gov’t Fiscal Stability

State government needs to take concerted efforts to improve fiscal health for local governments, including changing property tax limits and providing local revenue options, a report released Tuesday by the Lincoln Institute said.
…

“Because localities are further prohibited from collecting a variety of other taxes and fees that could bolster revenues, the resulting lack of revenue diversity also hinders local governments’ ability to adapt to changing economic conditions, including the COVID-19 crisis,” the report says. “Finally, the state suffers from government fragmentation, which results in inefficiencies: with every county, city, village, township, and special district responsible for providing certain services, duplications among overlying governments may arise. Cost-saving measures implemented by many municipalities can only go so far and opportunities for collaboration may be overlooked.”

Areas with extreme poverty and where concentrations of minorities reside often experience worse fiscal stress, the report said. It pointed to Benton Harbor where residents pay $3.80 per 100 cubic feet of water and the neighboring community of St. Joseph where residents pay $1.80.

Businesses also suffer from inadequate investments from local governments, as they cannot get amenities and services that make their lives better.

The report recommended the state create a special fund to distribute money to local governments.

…

Michigan is also unique in its restrictive property tax limits as states typically use one of three types of limits and Michigan uses all three, the report says. The state should allow its local governments to raise millage rates without an override vote when the tax rate rises slowly, the report recommends.

Additionally, the state should allow more revenue options for local governments, focusing on allowing counties to determine when a new tax or fee would work best in their own jurisdictions. On the fragmentation of the state’s local governments, the report recommends networked enterprise where local governments connect public, private and nonprofit resources in pursuit of a shared goal, like reducing poverty.

…

Westland Mayor Bill Wild, at a press conference detailing the report with the Michigan Municipal League, said for decades he has heard officials on both sides of the aisle say local governments should manage the funds they do have better. He said while he does not disagree, you can only do that for so long.

“There is no question our state has repeatedly balanced its budget on the backs of local communities,” he said. “The systematic disinvestment in our communities goes back decades. … It needs to stop or our communities will no longer be able to provide the quality services our residents and our businesses have grown to expect.”

Matt Bach is the assistant director of strategic communications for the Michigan Municipal League. He can be reached at mbach@mml.org.