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May 28, 2020

COVID-Recession is Affecting Michigan Local Governments in Unusual Ways

Like the virus that causes it, COVID-19 doesn’t respect borders or boundaries. It has spread around the world and infiltrated down to the lowest levels of government. The recession caused by this pandemic is dealing a heavy blow to local-government finances, driving up costs and drying up revenues, including business-related fees not often affected by recessions, at the same time. 

Let’s walk through some of the specifics here.

Reduced State Shared Revenues

While the 24 Michigan cities that levy an income tax are feeling the effects of the stay-at-home order, property taxes, the primary source of all other Michigan local government revenues, do not usually experience significant reductions reflecting the economic fluctuations (the Great Recession was the major exception). 

And that’s about all the good news there is.

The state, specifically tax revenues that are shared with local governments through both constitutional and statutory formulas, is taking a major hit on revenues because it depends heavily on sales and income taxes. Motor fuel tax revenue and motor vehicle registration fees are also down because people are driving less and new car purchases have stalled. 

Some of these revenue sharing payments are automatic: Part of the revenue sharing payments are made on a per capita basis from a percentage of the sales tax revenues collected. Likewise, Public Act 51 of 1951 shares motor fuel and motor vehicle tax revenues with local governments. So, local governments suffer alongside the state when decreased economic activity causes reductions in these tax revenues.

But other revenue sharing payments are dependent on policy decisions, and policymakers are likely to cut a statutorily designated program that shares sales tax revenue with local governments, in an effort to balance the state budget.

Reductions in Other Funding Sources

Some counties are suffering from reductions in revenues from minor taxes. Eleven of the 83 counties levy accommodations taxes. Hotel stays are down significantly because of the stay-at-home order and will remain so with major events cancelled and fewer people likely to travel this summer. Similarly, Wayne County’s tax on car rentals is yielding less revenue since the pandemic. 

All counties levy a real estate transfer tax when property is passed to a new owner (usually through a sale). Those revenues are down because people have put selling and purchasing houses on hold. The pent up demand may allow these tax revenues to rebound when the pandemic is less of a crisis.

Locally collected and state-shared tax revenues are usually relied on to fund general operations – police, fire, libraries, general administration. Local governments often have another side to their operations; one that is funded by fees or charges from consumption of the services provided. These activities usually are immune to economic fluctuations, but during this pandemic and recession, local governments are experiencing revenue declines in their business operations as well.

With recreation centers and golf courses closed and many municipal parks and recreation activities cancelled or postponed, those admittance, participation, and greens fees are not being collected. This will stretch into the summer with recreation centers and community pools altering their operations. 

With construction halted, building permits are stagnant. Meeting places are closed, and rental fees are stagnant. With stores closed and people working from home, local governments with parking lots, meters, or ramps are collecting less revenue. 

Many have sought ways to avoid going to the hospital, even though they should, and consequently, ambulance billing fees are down.

Water usage charges are down from normal levels because industry uses far more water than residential properties. This matters if bonds are sold with financing based on future revenues. It also matters in Southeast Michigan where suburban communities that are part of the Great Lakes Water Authority have minimum water usage guarantees in the contracts and may need to use general operating funds to meet those minimums with reduced usage.

New Costs

The news doesn’t get better on the other side of the ledger. Traditionally, recessions do not tend to add costs to the operation of local governments. At most, local governments must respond to the effect that stock market declines have on their investments, usually for pension trust funds, by directing funds away from current operations. 

This COVID-19 recession is different. Local governments are incurring costs that were not budgeted for. 

Local governments are dealing with many of the same costs as private businesses: software for online meetings, personal protection equipment for front line workers, reconfiguring office space, and safety measures such as plexiglass dividers and sanitizer stations added. Other costs are unique to governments: legal ramifications if government changes infringe on public participation and access to government, hazard pay to public safety workers, deep cleaning and reimagining transit systems. 

Households that previously had water shut off for failure to pay their water bills have had it turned back on again in the interest of improving hygiene. The requirements to reconnect these properties to allow the residents to wash more often imposes uncompensated costs. Further, these governments can count on few owners of these properties compensating them for water consumption after being reconnected. 

City, village, township, and county buildings come in many shapes and sizes. Many are older buildings with limited space. Antiquated heating and ventilation systems may need updated. Some are integrated with community meeting spaces that create problems segregating bureaucrats from the public. 

Conclusion

Thus far, the COVID-19 virus has afflicted residents of Southeast Michigan more than other parts of the state, but the financial impact of the pandemic and ensuing recession reaches far beyond the region. All local governments are affected by tax revenue losses, have had to adhere to social distancing, and have borne new costs to keep their employees and the public safe. 

This pandemic-induced recession shares traits with those that came before it, but it is different in many ways. While state policymakers are likely to cut state revenue sharing in an effort to keep the state budget balanced, they can offset some of the harm that would create by distributing some of the federal CARES Act funding allotted to Michigan to local governments to offset some of the unbudgeted costs being incurred. 

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.
Photo Credit:
Alexis Mette / Unsplash

COVID-Recession is Affecting Michigan Local Governments in Unusual Ways

Like the virus that causes it, COVID-19 doesn’t respect borders or boundaries. It has spread around the world and infiltrated down to the lowest levels of government. The recession caused by this pandemic is dealing a heavy blow to local-government finances, driving up costs and drying up revenues, including business-related fees not often affected by recessions, at the same time. 

Let’s walk through some of the specifics here.

Reduced State Shared Revenues

While the 24 Michigan cities that levy an income tax are feeling the effects of the stay-at-home order, property taxes, the primary source of all other Michigan local government revenues, do not usually experience significant reductions reflecting the economic fluctuations (the Great Recession was the major exception). 

And that’s about all the good news there is.

The state, specifically tax revenues that are shared with local governments through both constitutional and statutory formulas, is taking a major hit on revenues because it depends heavily on sales and income taxes. Motor fuel tax revenue and motor vehicle registration fees are also down because people are driving less and new car purchases have stalled. 

Some of these revenue sharing payments are automatic: Part of the revenue sharing payments are made on a per capita basis from a percentage of the sales tax revenues collected. Likewise, Public Act 51 of 1951 shares motor fuel and motor vehicle tax revenues with local governments. So, local governments suffer alongside the state when decreased economic activity causes reductions in these tax revenues.

But other revenue sharing payments are dependent on policy decisions, and policymakers are likely to cut a statutorily designated program that shares sales tax revenue with local governments, in an effort to balance the state budget.

Reductions in Other Funding Sources

Some counties are suffering from reductions in revenues from minor taxes. Eleven of the 83 counties levy accommodations taxes. Hotel stays are down significantly because of the stay-at-home order and will remain so with major events cancelled and fewer people likely to travel this summer. Similarly, Wayne County’s tax on car rentals is yielding less revenue since the pandemic. 

All counties levy a real estate transfer tax when property is passed to a new owner (usually through a sale). Those revenues are down because people have put selling and purchasing houses on hold. The pent up demand may allow these tax revenues to rebound when the pandemic is less of a crisis.

Locally collected and state-shared tax revenues are usually relied on to fund general operations – police, fire, libraries, general administration. Local governments often have another side to their operations; one that is funded by fees or charges from consumption of the services provided. These activities usually are immune to economic fluctuations, but during this pandemic and recession, local governments are experiencing revenue declines in their business operations as well.

With recreation centers and golf courses closed and many municipal parks and recreation activities cancelled or postponed, those admittance, participation, and greens fees are not being collected. This will stretch into the summer with recreation centers and community pools altering their operations. 

With construction halted, building permits are stagnant. Meeting places are closed, and rental fees are stagnant. With stores closed and people working from home, local governments with parking lots, meters, or ramps are collecting less revenue. 

Many have sought ways to avoid going to the hospital, even though they should, and consequently, ambulance billing fees are down.

Water usage charges are down from normal levels because industry uses far more water than residential properties. This matters if bonds are sold with financing based on future revenues. It also matters in Southeast Michigan where suburban communities that are part of the Great Lakes Water Authority have minimum water usage guarantees in the contracts and may need to use general operating funds to meet those minimums with reduced usage.

New Costs

The news doesn’t get better on the other side of the ledger. Traditionally, recessions do not tend to add costs to the operation of local governments. At most, local governments must respond to the effect that stock market declines have on their investments, usually for pension trust funds, by directing funds away from current operations. 

This COVID-19 recession is different. Local governments are incurring costs that were not budgeted for. 

Local governments are dealing with many of the same costs as private businesses: software for online meetings, personal protection equipment for front line workers, reconfiguring office space, and safety measures such as plexiglass dividers and sanitizer stations added. Other costs are unique to governments: legal ramifications if government changes infringe on public participation and access to government, hazard pay to public safety workers, deep cleaning and reimagining transit systems. 

Households that previously had water shut off for failure to pay their water bills have had it turned back on again in the interest of improving hygiene. The requirements to reconnect these properties to allow the residents to wash more often imposes uncompensated costs. Further, these governments can count on few owners of these properties compensating them for water consumption after being reconnected. 

City, village, township, and county buildings come in many shapes and sizes. Many are older buildings with limited space. Antiquated heating and ventilation systems may need updated. Some are integrated with community meeting spaces that create problems segregating bureaucrats from the public. 

Conclusion

Thus far, the COVID-19 virus has afflicted residents of Southeast Michigan more than other parts of the state, but the financial impact of the pandemic and ensuing recession reaches far beyond the region. All local governments are affected by tax revenue losses, have had to adhere to social distancing, and have borne new costs to keep their employees and the public safe. 

This pandemic-induced recession shares traits with those that came before it, but it is different in many ways. While state policymakers are likely to cut state revenue sharing in an effort to keep the state budget balanced, they can offset some of the harm that would create by distributing some of the federal CARES Act funding allotted to Michigan to local governments to offset some of the unbudgeted costs being incurred. 

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

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