Legacy Costs and Indebtedness of the City of Detroit
Report 373 ( December 2011 ) 29 pages
Both the Mayor of Detroit and the Governor of Michigan have expressed concerns over Detroit's precarious financial position. The Mayor has indicated that the city may run out of cash early next year, and there is a significant risk that an emergency manager will be appointed to oversee the city's finances. Balancing Detroit's budget is made more difficult by the significant indebtedness and legacy costs of the city. This report is an analysis of the city's current obligations to bond holders, retirees, and others. The city had in excess of $14.1 billion of such liabilities outstanding as of June 30, 2010.
While total legacy costs and debt approaches $20,000 for each resident of the city, over a third of the liability ($5.2 billion of the $14.1 billion) is bonded debt of the water and sewerage system that will be repaid from payments made by residents of suburban communities as well as Detroiters who use the water and sewerage system. In addition to this debt, Detroit has voter-approved unlimited tax general obligation debt (the city's debt service levy is 8.92 mills) and limited tax general obligation debt totaling more than $1 billion, on which it will pay an additional $467.7 million in interest. The city's general obligation debt rating is below investment grade.
The Michigan Constitution makes pensions earned by state and local government workers contractual obligations of the governmental employer. Detroit's pension funds have high funded ratios with the General Retirement System 87 percent funded, and the Police and Fire Retirement System 97 percent funded. However, these high funding ratios were achieved by issuing pension obligation certificates in 2005 and 2006, under the assumption that Detroit could earn enough investing the bond proceeds to both pay the debt service and help fund future pension payments. Detroit has $1.5 billion of principal debt outstanding on the certificates, plus unfunded actuarial accrued liabilities of $615.7 million for the two pension systems. The current year Detroit budget allocates $191.8 million for payments to the pension funds ($147.2 million from general city agencies and $44.5 million from enterprise agencies including Water and Sewerage).
In addition to pension obligations, the city has promised to pay a portion of the cost of health care and other benefits for retirees. These costs have traditionally been funded on a "pay-as-you-go" basis, and in the current fiscal year the city budgeted $157.3 million ($124.7 million for general city agencies) for fringe benefits for retirees (this compares to $181.8 million for fringe benefits for all active employees). Detroit has $5.0 billion of unfunded actuarial accrued liabilities for other post employment benefits, equal to approximately $7,000 per resident. Making the contribution required to pay off the unfunded liability over 30 years would have required more than $150 million in additional payments in FY2010.
What if Michigan Had Enacted a Percentage Tax on Gasoline in 1997?
Note 2011-02 ( November 2011 ) 3 pages
Last week, Governor Snyder proposed replacing the state's current 19 cent per gallon tax on gasoline with a tax based on a percentage of the price at the wholesale level. Michigan last increased its gasoline tax in 1997, when the rate was increased from 15 cents. Both inflation and a decrease in miles driven have reduced the purchasing power of the state's gas tax. While the proposal is for the percentage tax to be revenue neutral when enacted, the Governor has argued that the new tax is a more viable approach to funding roads and bridges, and that over the long run it will better maintain its purchasing power.
CRC has analyzed what gasoline tax revenues would have been over the past 14 years if the state had enacted a wholesale tax based on price back in 1997, rather than the current 19 cent tax. "CRC finds that if the state had enacted a price based tax equivalent to the 19 cent tax, it would have raised over $12 billion more in gasoline tax revenues over the past 14 years. Tax revenues in fiscal year 2011, would have been just under $3 billion compared to the roughly $830 million raised by the current tax.
The Proposed Detroit City Charter
Memo 1110 ( October 2011 ) 18 pages
Voters in Detroit will have the opportunity to approve or reject a proposed new city charter on November 8.
City charters establish the basic structure of the municipal government and define critical processes of elections, budgeting, accounting, and planning, within constraints established in state law. Charters may also mandate city departments and programs. The challenge inherent in charter development is achieving the proper balance between the relatively permanent charter mandates and the latitude needed by local officials to make government efficient, effective, and responsive under changing conditions.
Under the proposal, the city would be divided into seven districts or wards, which would be the basis for election of seven of the nine City Council members; the two other City Council members would be elected at-large. The seven non at-large districts would be the basis for the election of seven of the 11 members of the Board of Police Commissioners, and for appointments to a variety of boards and commissions. City Council members would elect the Council president and president pro tempore from among their members, and Council would gain the authority to approve additional Mayoral appointments.
Ethics provisions are more extensive and the specific grounds for forfeiture of elected and appointed offices are defined in the proposal, as is the process which City Council would use to remove an elected or appointed official. A debarment process for vendors and contractors that violate rules is also provided in the proposed charter.
A new branch of city government called "Independent Departments and Offices" would include the Auditor General, Law Department, a new Inspector General, and the Ombudsperson. All of these agencies would be responsible for aspects of oversight, as would the City Council, the Risk Management Council, and others.
The Costs, Benefits, and Alternatives for Consolidating the Onekama Governments
Report 372 ( October 2011 ) 65 pages
CRC's study was commissioned through the Shared Public Services Initiative, a collaborative project involving local, state and non-profit organizations administered through the Michigan Municipal League Foundation. CRC was asked to explain the merger options and to analyze the costs and benefits of consolidating the Village of Onekama and the Township of Onekama in Manistee County. Even while CRC was studying the issues and preparing its analysis, the community was working with Eric Lupher, the Citizens Research Council of Michigan's Director of Local Affairs, to learn about the possibilities and implications of consolidating the two governments.
Residents of Onekama recently circulated petitions to disincorporate the village. On August 24, the township clerk certified that the circulators had collected more than the 57 signatures needed to get a question on the ballot. The General Law Village Act provides an option for creation of a disincorporation commission to prepare a report recommending a course of action for what should be done with the village's assets and liabilities if dissolution is approved. The commission's report is intended to provide voters with the knowledge needed to make informed decisions on how disincorporation will affect them. The question could be put to the voters of Onekama as early as February, 2012.
Local Government Performance Dashboards and Citizensí Guides
Memo 1108 ( September 2011 ) 12 pages
Local governments have less than a month to create citizens' guides to financial information and performance dashboards to qualify for state funding through the new Economic Vitality Incentive Program (EVIP). CRC's new paper, Local Government Performance Dashboards and Citizens' Guides, offers guidelines and recommendations to help local governments make the guides and dashboards meaningful tools that will keep residents better engaged in the operations and financial condition of their local governments.
The State of Michigan's Fiscal Year 2012 budget replaces statutory state revenue sharing with a new Economic Vitality Incentive Program that creates incentives for local government reforms. In order to qualify for funding that formerly was automatically distributed based on a statutory formula, local governments will have to comply with requirements related to employee compensation reforms, intergovernmental collaboration for the delivery of services, and new accountability tools - citizens' guides to financial information and performance dashboards.
The citizens' guide is intended to be a short, quick way of conveying the financial health of the government to the residents and consumers of governmental services. The performance dashboard should provide a few metrics that chart government performance. Those metrics could include: fiscal stability, economic strength, public safety, quality of life, and any other measures that are relevant to the strategic goals and objectives of the local government.
CRC's new paper explains the context within which the new accountability tools were introduced; discusses the state's guidelines for development of these tools; critiques the templates the state has created to provide some guidance to local officials; and recommends the content of performance dashboards. It provides links to resources local governments can use to draw on best practices and organizations that have developed reports on performance measurement to citizens.
Distribution of State Aid to Michigan Schools
Report 371 ( August 2011 ) 87 pages
Proposal A of 1994 and the related school finance reforms met many of their initial goals, most notably greater equalization of per-pupil funding across Michigan districts. While the wide variance in revenues per pupil was a public policy problem that plagued the state for many years prior to Proposal A, the prescription to this problem has created new issues. Distribution of State Aid to Michigan Schools identifies a number of important issues that policymakers should consider when contemplating changes to Michigan's school funding model.
The major topics covered in the new CRC report include:
- Issues surrounding the movement of school funding decisions from local districts to the state.
- A look at how district revenues have changed since Proposal A, including viewing districts by pre-Proposal A funding level; impact of required retirement contributions; income of district residents; district property tax wealth; urban, suburban and rural districts; and the percentage of African American students in a district.
- Evidence on the effect of increases in school spending on student performance.
- Effects of enrollment changes and school choice on district finances.
- Funding for "at-risk" pupils.
"It has been 17 years since Proposal A," said Thiel. "School finance is too important to leave on autopilot. Michigan needs to regularly examine how the system is working and assess if it is still meeting the needs of Michigan's students."
The State of Michigan's New Fiscal Plan
State Budget Note 2011-02 ( July 2011 ) 13 pages
With Governor Snyder's signing of the FY2012 state budget on June 21, the final piece of the state's new fiscal plan is now officially in place. The plan was crafted against a backdrop of an improving state economy and growing state revenues, in part making it easier to complete in a timely fashion. It consists of: 1) a revamped state tax structure, 2) a spending plan that balances ongoing spending and resources mainly through significant appropriation reductions; 3) a down payment on future long-term obligations; and 4) a deposit in the state's rainy day fund. Major pieces of the plan will come on-line in the fall, including the budget on October 1, while many of the tax changes take effect on January 1, 2012.
CRC's new state budget note The State of Michigan's New Fiscal Plan examines the major components of the state's financial plan for the coming fiscal year, including changes in state tax law and spending policy. The report suggests that major progress has been made towards addressing the state's chronic structural deficits affecting the General and School Aid Fund budgets. At the same time, it takes steps to improve the underlying condition of state finances, both in the near- and long-term.
Congressional and Legislative Redistricting Reform
Report 370 ( May 2011 ) 45 pages
Michigan's legislature currently has a relatively free hand in the redistricting process. Language establishing a redistricting process in Michigan's Constitution has been ruled invalid by the Michigan Supreme Court. Without a constitutional framework, the legislature can rewrite statutory guidelines as part of the redistricting process. The only redistricting restrictions on the legislature are the limited constraints contained in the U.S. Constitution and the federal Voting Rights Act of 1965.
The Michigan legislature is preparing to redraw the state's legislative and congressional districts. The Citizens Research Council of Michigan recommends that as part of this process the legislature should also propose changes to Michigan's Constitution to guide future redistricting efforts.
CRC recommends a number of provisions be added to the Michigan Constitution including the following:
- Recreate a redistricting commission,
- Limit redistricting to once per decade,
- Describe the appropriate redistricting procedures and timeline,
- Increase transparency and public engagement,
- Protect electors' right to challenge redistricting plans,
- Minimize population variance among districts,
- Ensure contiguous single-member districts,
- Create district boundaries that adhere to political boundaries, and
- Protect communities of interest.
Now the Real Work Can Start on the FY2012 State Budget
State Budget Note 2011-01 ( May 2011 ) 6 pages
Recently, the framework for the upcoming state budget began to take shape when both chambers of the Michigan legislature passed their respective spending plans. Eyeing a May 31 deadline set by Governor Snyder, both chambers have offered their responses to the Executive Budget issued in February. The Senate was the first chamber to complete its work on the Fiscal Year 2012 (FY2012) state budget when, in late April, it approved all operating appropriation bills financed by the General and School Aid Funds. This action was closely followed by the House of Representative's approval of all appropriations bills in early May. The two plans for the General Fund share some key similarities; however, the Senate's plan spends $179 million, or 2 percent, more than the House's budget and the two recommendations differ in other substantial and material ways.
CRC's State Budget Note Now the Real Work Can Start on the FY2012 State Budget looks at the two legislative proposals and examines the key differences on both sides of the budget ledger that will have to be reconciled before final budget action can occur.
"While a major milestone in the budget process has been achieved, much work remains before the final FY2012 state budget can be enacted," said Craig Thiel. "Perhaps the most notable difference between this budget and prior years is the precedent-setting plan to use the School Aid Fund to finance post-secondary education appropriations."
Equally important, and a key component of the revenue assumptions for the budget, is the tax restructuring plan proposed by Governor Snyder and the legislature's response to the suggested changes in business and individual income taxation. Finally, it is expected that the May 16 revenue estimating conference will revise upward, perhaps substantially, the General and School Aid Fund revenue estimates for both the current year and FY2012. These revisions will likely play a role in the final appropriation decisions made by the legislature, perhaps by lessening the extent of the cuts included in the budgets.
Reform of K-12 School District Governance and Management in Michigan
Report 369 ( May 2011 ) 72 pages
The Citizens Research Council of Michigan is pleased to announce the publication of Reform of K-12 School District Governance and Management in Michigan. Both the federal government and Michigan's state government have been encouraging, and in some cases actively mandating, governance reforms. Michigan recently enacted legislation mandating governance changes in the state's "persistently lowest achieving schools," and on April 27th Governor Snyder called for a number of governance changes including a move toward a P-20 system of education. The interest in reform comes from dissatisfaction with the educational outcomes in some districts, increasing financial pressures faced by schools, and the belief that governance reforms can improve outcomes.
"Governance reforms can make a significant difference, but they must be undertaken as a means to an end rather than as an end in and of themselves," said CRC President Jeff Guilfoyle. "Reforms allow you to change a dysfunctional system, but if they are not well executed and underlying problems are not addressed, they simply represent replacing one dysfunctional system with another."
To see positive results, state and local officials must use the governance change to actually change the administrative and educational practices of district leadership and educators. While there are a number of models of governance reform, effective implementation of these reforms generally includes adherence to a number of key principles:
- A clear division of labor, authority, and responsibilities with the scope and limit of responsibilities defined
- A coherent strategy that can be understood and pursued
- Financial and operations transparency
- Representativeness and encouragement for participation
- Engagement of civic leadership and broad constituencies
- A mechanism for different actors in the governance system to learn their roles
- An agenda focused on student learning
In addition, the importance of good leadership cannot be overstated. This includes superintendents, principals, and teachers. A well functioning leadership team provides a foundation for effective governance and administration and an environment in which student achievement can be fostered. The key to effective school governance may be in combining good leaders with good governance structures; it is not clear that governance reform by itself can produce the desired results on a large scale.
The governance reform models reviewed in this paper include the following:
Dependent Schools - A system where authority is moved from the locally elected board to a higher level of government. The best example of this in Michigan is Detroit Public Schools, which are currently run by a state appointed manager.
Diverse Provider Model - A system in which parents are provided with a choice of different kinds of schools: district run schools, charter schools, and contract schools managed by private operators.
Private Manager Model - A system in which school districts contract with private companies (for profit or nonprofit) to manage and operate the districts and/or schools within the district.
Decentralized Decision Making - A system of education where authority and responsibility to make decisions on significant matters related to school operations are decentralized from the district to the school building level within a centrally determined framework of goals, policies, curriculum, standards, and accountabilities.
Integrated School Systems - A comprehensive and integrated system of education that links all education levels from early childhood education through post-secondary training. Such systems are often known as K-16, P-16, or P-20 systems.
While there are virtues to all of the proposed reform models, none of them is a panacea. In particular, the diversity of Michigan's school districts means that it is likely that reforms models well suited for some districts will prove inappropriate for others.
Local Government and School District Fiscal Accountability Act
Report 368 and Memorandum 1106 ( April 2011 ) 35 pages
Many Michigan local governments and school districts are facing significant financial stress. Declining revenues, reductions in state aid, and rapidly increasing healthcare and retirement costs are creating huge challenges for local governments and school districts. Many local governments appear to be on the brink of a financial emergency.
Michigan's law for dealing with local governments facing a financial emergency (Public Act 72 of 1990) was deemed inadequate for the current crisis. To allow for a more robust response to the current fiscal crisis, the state has repealed PA 72 and replaced it with PA 4 of 2011, the Local Government and School District Fiscal Accountability Act. The Citizens Research Council of Michigan has just released an analysis of this Act.
Child Care and the State
Report 367 and Memorandum 1105 ( March 2011 ) 40 pages
The quality of care of young children reflects the values of the larger community, and can have a lasting impact on children's success in school and life. There are tens of thousands of individuals and organizations that provide child care in Michigan, and these providers vary drastically in quality. State government has defined a role in regulating, licensing, organizing, and in some cases funding, the multitude of child care providers.
The Citizens Research Council of Michigan has just released a study, Child Care and the State, that describes child care options and average costs and reports what is known about the effects of various child care arrangements on children's development. The study notes the evolving ideas about the "best" child care arrangements, describes state laws related to non-parental child caregivers, and reports on state and federal programs that provide funding for child care.
In Michigan, it is generally illegal to provide child care services for even one unrelated child without being registered or licensed by the Bureau of Children and Adult Licensing of the Michigan Department of Human Services. Child care facilities are defined and regulated by category: in home care, small family day care homes, larger child care group homes, and center-based care. The State of Michigan regulates child care in several ways: developing standards of quality care; licensing child care providers; and inspecting facilities. The state also administers a program that subsidizes day care for low income families, to allow the mother to attend classes, work, or engage in other specified activities.
"Michigan's efforts to license, regulate, and inspect the tens of thousands of child care providers are intended to protect the children's safety and welfare, but very high caseloads assigned to state licensing staff raise questions about the effectiveness of enforcement" according to Senior Research Associate Bettie Buss.
A complex of child care coordinating and advocacy organizations has been developed in an effort to ensure the availability and quality of child care. The CRC report identifies the organizations and programs that are included in this complex.
The Health Care Obligations of Michigan Counties
Note 2011-01 ( February 2011 ) 16 pages
"It is becoming increasingly clear that the budget problems facing Michigan governments cannot be adequately addressed until the cost of health care benefits for governmental employees is confronted," says Eric Lupher, CRC's Director of Local Affairs. To help understand the magnitude of the problem and the actions that are being taken to address it, CRC's newest paper looks at just one type of local government: counties
The Health Care Liabilities of Michigan Counties presents findings about the impact of growing health care costs on Michigan county governments. A survey of county governments was able to document that the total actuarial accrued liability of other post-employment benefits for just 50 counties of Michigan's 83 counties, is nearly $4 billion, more than $3 billion of which is unfunded. While some counties are taking aggressive steps to address their liabilities, others have yet to respond.
Counties responses to their health care liabilities have been varied. While many counties are closing retiree health care plans to new hires, increasing their pre-funding, raising health care plan deductibles, increasing vesting requirements and shifting to defined contribution plans, some have yet to take action. And yet health care costs continue to grow, Baby Boomers are beginning to retire, and GASB statements 43 and 45 are drawing increasing attention to the problem. Michigan counties continue to struggle to fund OPEB.
"A recent survey by CLOSUP in the Ford School of Public Policy at U of M reported that 32% of Michigan local governments, mostly smaller governments, say that they do not provide fringe benefits to their employees. This means that more than 2/3 of our local governments do offer fringe benefits, often including health care benefits," said Mr. Lupher. "The general story told in this paper holds true for all of those governments: Michigan's prolonged recession has severely impacted government revenues; health care costs for active and retired employees is increasing; the number of employees eligible for retirement is increasing with the aging of the Baby Boomers; and the GASB standards are drawing increased attention to how local governments fund their OPEB liabilities. Extrapolating the finding of the CRC survey of counties to the other local governments reveals a government finance issue in need of attention."
Early Childhood Education
Report 366 and Memorandum 1104 ( February 2011 ) 77 pages
High quality early childhood education and preschool programs that implement best practices have been shown to improve school success and graduation rates for disadvantaged children. A new report by the Citizens Research Council of Michigan, Early Childhood Education, describes programs that invest in the "front end" of formal education: kindergarten, Head Start, and Michigan's Great Start Readiness Program. It also describes research on brain development that helps to explain why investing in early education may be a more effective strategy than other strategies that are being pursued.
Local-Option City Income Taxation in Michigan
Memorandum 1103 ( January 2011 ) 10 pages
Michigan's prolonged economic recession is creating fiscal stress for many local governments and causing city government officials to seek alternative revenue sources. Michigan law has authorized local-option income taxes for city governments since the 1960s, but only 22 cities have chosen to levy this tax. CRC has released a new paper to explain how city income taxes work, analyze the history of the cities levying this tax, and investigate the incentives and disincentives municipal policy makers may wish to consider relative to imposition of this tax.
CRC's analysis found that the city income tax has worked best for the smaller core cities that levy the tax. These cities serve as employment hubs in their regions, but are relatively small relative to other Michigan cities, with populations of 2,000 to 11,000. "Income tax revenue growth in the cities of Portland, Big Rapids, and Albion has outpaced revenues from the state income tax and income tax revenues for most of the other cities," reporter Eric Lupher, CRC's Director of Local Affairs.
Lupher continued, "While local-option income taxes have proven a suitable supplement to property taxes, the pace of revenue growth, even with the property tax limitations, and the reliable pattern of growth cannot be replicated by income taxes."
More cities may consider local-option income taxes in the coming years to supplement property taxes because of the property tax limitations that will constrain revenue growth when housing markets finally turn around and because state revenue sharing is likely to continue to be diverted to fund other state functions.
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Last Updated May 7, 2013