Financial Emergencies in Michigan Local Governments
April 2010, Report 362
Michigan’s general purpose local governments are facing extraordinary financial pressures. These general purpose local governments, which include counties, cities, villages, and townships, depend most heavily on revenues from property taxes and state revenue sharing. Both of these sources have been affected by the Great Recession that officially began in December, 2007. Property values have declined precipitously, in many cases eliminating the gap that had grown between state equalized value and taxable value and reducing the tax payments made by owners. While constitutional state revenue sharing payments to local governments are protected, statutory payments to local governments have been reduced or eliminated as a result of fiscal distress at the state level.
Some local governments have utilized additional tax bases. In the 22 cities that impose a municipal income tax, high levels of unemployment and underemployment caused by the loss of manufacturing, construction, and other jobs have affected income tax receipts. The state’s largest and most iconic city, Detroit, also has the most diversified tax base in the state, imposing property, municipal income, utility users’ excise, and casino wagering taxes. Factory closings, energy savings initiatives, and population losses affect utility use, and consequently utility users’ excise tax payments. Although surprisingly resilient, casino wagering taxes have also been affected by the economic malaise. In addition, a variety of fees, fines, and other local government revenues have been affected by the economic situation. In Detroit, declining tax revenues combined with increasing personnel and other costs, have contributed to an estimated Fiscal Year 2010 accumulated general fund deficit of $326 million on a $1.6 billion budget.
Related to the decline in the property tax base is the decline in the value of public pension funds. Although the value of most funds is smoothed over several years, the recent steep reduction in the value of assets available to make constitutionally guaranteed pension payments contributes to spending pressures. The Governmental Accounting Standards Board (GASB) requirement for disclosure of the present value of promised other post retirement benefits (OPEBs) adds to pressure on the appropriation side. Further, annual cost increases for negotiated employee health care and for retiree health care continue to stress budgets.
Local governments have a number of options for addressing a deficit between revenues and spending pressures:
- use fund balances accumulated in prior years;
- sell deficit financing bonds to be repaid from future revenue sharing payments;
- seek voter approval for new taxes or increased tax rates within charter and state limits; sell assets;
- defer purchases and maintenance;
- lay off employees;
- privatize functions;
- reduce or eliminate services;
- renegotiate contracts to reduce payments;
- consolidate functions with other governments.
In some cases, however, local government officials have not been able to control expenditures or increase revenues in a manner sufficient to avoid deficits. When strategies to balance revenues and expenditures fail, resulting deficits exacerbate the financial challenges. This has been the case over a number of years, but is increasingly common as a result of the national recession that began in December of 2007 (it should be noted that Michigan never recovered from the 2001 recession, and that this state has been in recession for nearly a decade).
The State of Michigan has adopted a number of statutes intended to prevent local government fiscal crises and to help deal with crises when they do occur. Prior to 1988, local government fiscal emergencies were handled on an ad hoc basis. PA 101 of 1988 was adopted in response the imposition of a court-appointed receivership on the City of Ecorse. The Local Government Fiscal Responsibility Act, PA 72 of 1990, replaced PA 101 of 1988. PA 72 of 1990 allowed direct state intervention in the affairs of local units of government, by providing a mechanism for state intervention in local governments that incur a financial emergency. PA 72 also extended the provisions of PA 101 to school districts: those provisions are outside the scope of this report.