A version of this blog appeared in the June edition of Michigan Counties.
- A funding shift initiated in FY2004 temporarily halted county revenue sharing and replaced it with funding from reserve funds.
- The reserve funds were created when county property taxes were shifted from the winter to the summer tax bill, creating surplus revenue.
- This tax-switch gimmick diverted more than $1 billion since FY2004 from county revenue sharing to other state purposes.
Difficult budgetary decisions at levels of government are addressed by cutting spending, raising revenue, or by using what might be called gimmicks. Popular gimmicks have included shifting expenditures into a different fiscal year, funding programs from different temporary sources, changing accounting processes, or otherwise obfuscating the budget imbalance. Michigan’s county revenue sharing program was a pawn in a state budget gimmick that has played out over several years.
As background. the nation went into a recession in the wake of the September 11, 2001, terrorist attacks. That eight-month national recession grew into a six-year, single-state recession for Michigan., placing considerable on-going stress on the state budget.
The Granholm administration was often at odds with the majority-Republican legislature in dealing with the structural and cyclical imbalances of the state budget. So, agreed-to budget solutions most often focused on blanket, across-the-board expenditure reductions, supplemented with a variety of one-time budget fixes.
State revenue sharing was an early and easy target for these cuts. By FY2004, more than $275 million (30 percent) of statutory revenue sharing for all local governments was being diverted to other state purposes, including portions of county revenue sharing that is distributed on a per capita basis.
To avoid further state cuts, a budget gimmick shifted the timing of the county property tax levy. This shift from the winter to the summer tax bills, was phased in over three years. In 2005, one-third of the allocated mills were levied as a summer tax, and the remaining two-thirds were levied in the winter. This process was repeated in 2006 and 2007, with another one-third of the millage moved forward each year to the summer bills.
This tax shift accelerated the payment of county taxes within a calendar year, resulting in more revenues than counties needed to operate on an annual basis. It also moved the receipt of taxes sooner in a county’s fiscal year. The “excess” revenue was deposited into revenue sharing “reserve funds”, with the aggregate amount equaling the December 2004 property tax levy.
Once the tax collection shift was completed, the state payment of county revenue sharing was halted, and counties instead withdrew from their reserve funds amounts equal to what they would have gotten in state payments. In short, the cancelled county revenue sharing payments helped fix the state’s budget hole, and the timing gimmick ensured county revenues were maintained on a fiscal year basis.
Once counties depleted these temporary reserve funds, state revenue sharing payments were restored; but because the initial reserve fund balances varied by county, they exhausted their balances in different years.
In 2004, 36 of the 83 county tax levies yielded per capita collections less than state average. This is significant because these counties would be the first to deplete their reserves. Tuscola County was the first to deplete its reserve fund in FY2009, followed by Gratiot, Houghton, Montcalm, Saginaw, and St. Joseph counties in FY2010.
Those with greater than average per capita tax yields maintained their reserve funds longer. Leelanau County exhausted its reserve fund in FY2020, and Emmett County will be the last to exhaust its funding in FY2023.
Overall, the tax-switch gimmick diverted $182 million a year (with inflationary adjustments) from FY2004 to FY2009 and diminishing amounts in each year since from county revenue sharing to other state purposes. This gimmick provided minimal state budget relief each year (just 0.02 percent of the $8.9 billion FY2004 state General Fund budget), but cumulatively the state was able to divert more than a billion dollars to other purposes through this action.
This gimmick allowed counties in aggregate to maintain a revenue source totaling $182 million plus inflation but did so using their own tax dollars. It is impossible to know how funding of county revenue sharing would have changed without this gimmick as the state remained in a fiscally retrenched mode for several years after the shift. The tax shift created cashflow challenges for some counties that continue even today.