The COVID-19 pandemic upended life as we know it for everyone and required businesses and government alike to rethink how they provide some goods and services. It plunged us into a recession and the impact on government and tax revenues is well documented. The Citizens Research Council has reviewed the pandemic’s effect on state revenue sharing dollars, city income taxes, property taxes, and local government pension systems, but what about the opportunity it has created to rethink government service provision?
We are not alone in seeing this crisis as an opening to review how government currently operates and how change could improve both local government finances and service delivery in the future. An op ed in Bridge last month authored by two former legislators and State Budget Directors (Republican and Democrat) stated that we need to take advantage of the current situation to properly evaluate services and the appropriate level of government to deliver those services. We couldn’t agree more.
Local government finance system is broken
The Research Council, along with many others, has been saying for years now that the local government finance system is broken. Back in February, before the economy was shut down by stay-at-home orders, we pointed out the enormous fiscal challenges local governments face during a growing economy (you know, when things are supposed to be going well). We have done mounds of research on diversifying local-source revenue options.
Our research highlights the fact that the current revenue options available to local governments – property taxes and the current model of general state revenue sharing – are not designed to grow with local economies. State revenue sharing was originally designed to share state taxes and provide robust, diversified revenues to local governments. However, the program has been cut and changed so much since 2000 that it no longer serves that purpose.
The state relies on more diversified revenue sources, including income and sales taxes, and these are much more connected to broader economic trends. As a result, the mix of state taxes falls quicker during a recession, as we are seeing right now, but it also grows faster with an expanding economy.
We have been highlighting the need for more local revenue options for local governments for years (important note: more options does not mean more taxes!), but this is only one-half of the fiscal equation. Changes to how local governments provide services is an equally important part of the solution. The pandemic provides another opportunity to examine this part.
Government services for the 21st century
In 2017, we issued a report detailing county services across Michigan. Government as we know it today was put into place in the 1800s when methods of communication and transportation were drastically different. Because of that, many local services are provided by cities and townships instead of the counties because they were closer to the people. Today, counties are underutilized and could provide various local services to both residents and their constituent local governments. Regionalizing services opens the possibility to review if services are still needed and how to provide them most efficiently and effectively.
Service delivery at the city and township level allows local units to customize the services to meet the demands of their residents, but it is inherently inefficient. Redundancies, duplication of equipment and personnel is necessary in this model. Even if local governments are operating as efficiently as possible within the current structure, it is past time to question if the current model is appropriate for the 21st century. The COVID-19-induced recession provides us with the impetus to do just that.
Local governments are using technology in new ways to provide residents with services during the lockdown. Now we must ask: how can these new methods of doing business become the new normal and be utilized in the future. Our research suggests that benefits can be realized without consolidating governments, but by expanding the county role to handle more functions. Counties already provide a regional form of governance and they are well-suited to administer services to residents of smaller municipalities and to partner with larger municipalities to maximize economies of scale so that services can best be provided to benefit residents.
The Research Council has identified a number of services that might benefit from an expanded county role, starting with information technology and administration/general government services. Counties could be positioned as a regional support system capable of delivering services, performing functions, and facilitating cooperation that will enable cities, villages, and townships to concentrate their efforts on developing the identity and placemaking that will attract people and businesses.
Don’t waste a good crisis
This time-worn adage is appropriate in the current moment: A crisis highlights what is wrong with a system and gives policymakers the support needed for change.
The National League of Cities suggests that local budget shortfalls could reach $360 billion over the next few years. This comes on top of years of declining resources and growing expenditure pressures for local governments in Michigan. Faced with this staggering reality, no one thing is going to fix the predicament facing local governments. The path forward to weather the current recession will require a combination of federal aid, state and local revenue increases, service cuts, and changes to service provision.
Change will not come easy and any approach at regional governance has to understand and appreciate the population and community variance among counties. This cannot be a one-size-fits-all solution to regional government in Michigan, but rather a move to thinking of local government more in terms of the region and what county government can do in a more effective and economical manner than a city, village or township can do.