Are Judgment Levies, Judgment Bonds, and Other Taxes Authorized without Limits Permitted under the Michigan Constitution?

ARE JUDGMENT LEVIES, JUDGMENT BONDS, AND OTHER TAXES AUTHORIZED WITHOUT LIMITS PERMITTED UNDER THE MICHIGAN CONSTITUTION?

CRC Report 284, May 1987

The Michigan Constitution limits directly or requires the Legislature to limit the power of local governments to tax and incur debt, and it calls for voter approval of local taxation and borrowing. In the recent and not so recent past, however, taxpayers in several Michigan communities have been subject to court-ordered property taxes in excess of voter-approved limits to pay outstanding debts incurred by their local governments. For example:

In August 1985, the Wayne County Circuit Court ordered the City of Ecorse to issue $4.0 million in judgment bonds to finance an operating deficit. The principal and interest were to be repaid over the next fifteen years from the proceeds of an ad valorem property tax. In 1986, a 2.56 mill tax was imposed for the first year’s debt repayment.
In August 1984, the Berrien County Circuit Court ordered the City of Benton Harbor to impose a judgment levy each year for the next thirty years to finance a $2.6 million unfunded liability in the police and fire pension fund. This amounted to a 4.25 mill property tax in 1985.
In June 1984, the Wayne County Circuit Court ordered the City of Hamtramck to impose a one-year judgment levy of 9.6 mills to pay a police and fire arbitration award. The levy was to finance approximately $1.4 million in “back-pay” due to the city’s police and fire personnel. In July 1987, the Hamtramck property tax levy will include a two-year Wayne County Circuit Court ordered judgment to pay a fire arbitration award and a three-year Wayne County Circuit Court ordered judgment to pay cost-of-living payments previously due to city employees. The total amount of the two judgments to be levied over the next three years is yet to be finally determined by the court; however, the estimated liability of the city currently exceeds $3 million (the equivalent of a one-year 30m ill property tax levy).
In May 1973, the Wayne County Circuit Court ordered the City of Detroit to impose a one-year judgment levy of 3.22 m ills to pay past-due obligations of $18.7 million to the city’s general retirement system.

In each case (and several others not identified above), the property taxes imposed by an order of the court were in excess of the property tax rates authorized by the local electorate in the municipality’s charter. In fact, the citizens of Hamtramck voted down a property tax increase to finance the above-mentioned 1984 arbitration award the day before the court ordered the judgment levy. It is unclear, however, what authority the tax increase was to be levied under since the city was al ready levying the 20-m ill charter limit authorized by state statute.

Each of the cases cited above involves a home rule city; however, unlimited property taxes imposed without voter authorization may be levied by virtually all types of local units of government in Michigan. Authority to levy taxes outside existing limits has been granted by the Legislature under several statutes adopted over the years. These statutes include:

The Revised Judicature Act (PA 236 of 1961), which authorizes the court to order a tax levy to satisfy a judgment against certain municipality municipalities. Any is also authorized under the act to issue bonds in order to pay a judgment. The municipality may then levy a property tax each year sufficient to pay the principal and interest due on the bonds. The act defines a municipality as any governmental authority having the power to levy an ad valorem property tax.
Solid Waste, Refuse, Garbage, Sew age and Waterworks Act (PA 320 of 1927, commonly called the Court Ordered Bond Act in the legal and finance communities) which authorizes the state Water Resources Commission, Department of Natural Resources, Department of Public Health, or a court of competent jurisdiction to order the issuance of bonds which pledge the full fa 1th and credit of a county, city, village, or township to construct, operate, and maintain sewage systems, solid waste facilities, Bonds issued under court order are not subject to debt limits and are to be repaid by the levy of an annual property tax without consideration of the tax limitations fixed by law or charter.
Drain Code of 1956 (PA 40 of 1956), which authorizes a county drain commissioner to impose special assessments on, and/or issue special assessment bonds for any county, city, village, or township for up to 30 years to finance drainage projects. The governmental unit subject to the special assessment is authorized to levy annually an ad valorem property tax without limitation as to rate or amount to pay the special assessment and/or the principal and interest due on the special assessment bonds. The taxing authority granted under the drain code is in addition to any taxes that the public corporation is authorized to levy.
County Public Improvement Act (PA 342 of 1939); Sewage Disposal, Water Supply and Solid Waste Management Act (PA 233 of 1955); and Sewage Disposal and Water Supply Districts Act (PA 211 of 1956) all of which authorize local units of government to contract with agencies established under these acts to provide specific services. The local units are authorized to impose property taxes without limitation as to rate or amount to finance these contractual obligations.

These statutes do not necessarily rep resent all the statutes that authorize taxes to be imposed or debt to be incurred outside existing limitations on the taxing and borrowing authority of local governments.

This report focuses on the primary is sue raised by all such laws: Does the Michigan Constitution give the Legislature power to authorize local governments to impose taxes and contract debts without voter approval and with out or outside defined limits? A strong argument can be made that such laws violate the spirit, if not the letter of constitutional provisions on local government in Article 7 and the power to tax in Article 9 of the 1963 Constitution (and similar provisions in the 1908 Constitution). This report walks the reader through the labyrinthian history of tax limitation and local home rule in Michigan by examining the intent of the framers of Michigan’s Constitutions and amendments added by the electorate, as well as how the State Supreme Court has construed these provisions throughout the state’s history. Finally, the report shows how judgment levies, judgment bonds, and the other taxes and debt currently authorized without regard for limitations can be reconciled with the spirit of this state’s framework for local tax limits.

ARE JUDGMENT LEVIES, JUDGMENT BONDS, AND OTHER TAXES AUTHORIZED WITHOUT LIMITS PERMITTED UNDER THE MICHIGAN CONSTITUTION?

CRC Report 284, May 1987

In August 1985, the Wayne County Circuit Court ordered the City of Ecorse to issue $4.0 million in judgment bonds to finance an operating deficit. The principal and interest were to be repaid over the next fifteen years from the proceeds of an ad valorem property tax. In 1986, a 2.56 mill tax was imposed for the first year’s debt repayment.
In August 1984, the Berrien County Circuit Court ordered the City of Benton Harbor to impose a judgment levy each year for the next thirty years to finance a $2.6 million unfunded liability in the police and fire pension fund. This amounted to a 4.25 mill property tax in 1985.
In June 1984, the Wayne County Circuit Court ordered the City of Hamtramck to impose a one-year judgment levy of 9.6 mills to pay a police and fire arbitration award. The levy was to finance approximately $1.4 million in “back-pay” due to the city’s police and fire personnel. In July 1987, the Hamtramck property tax levy will include a two-year Wayne County Circuit Court ordered judgment to pay a fire arbitration award and a three-year Wayne County Circuit Court ordered judgment to pay cost-of-living payments previously due to city employees. The total amount of the two judgments to be levied over the next three years is yet to be finally determined by the court; however, the estimated liability of the city currently exceeds $3 million (the equivalent of a one-year 30m ill property tax levy).
In May 1973, the Wayne County Circuit Court ordered the City of Detroit to impose a one-year judgment levy of 3.22 m ills to pay past-due obligations of $18.7 million to the city’s general retirement system.

The Revised Judicature Act (PA 236 of 1961), which authorizes the court to order a tax levy to satisfy a judgment against certain municipality municipalities. Any is also authorized under the act to issue bonds in order to pay a judgment. The municipality may then levy a property tax each year sufficient to pay the principal and interest due on the bonds. The act defines a municipality as any governmental authority having the power to levy an ad valorem property tax.
Solid Waste, Refuse, Garbage, Sew age and Waterworks Act (PA 320 of 1927, commonly called the Court Ordered Bond Act in the legal and finance communities) which authorizes the state Water Resources Commission, Department of Natural Resources, Department of Public Health, or a court of competent jurisdiction to order the issuance of bonds which pledge the full fa 1th and credit of a county, city, village, or township to construct, operate, and maintain sewage systems, solid waste facilities, Bonds issued under court order are not subject to debt limits and are to be repaid by the levy of an annual property tax without consideration of the tax limitations fixed by law or charter.
Drain Code of 1956 (PA 40 of 1956), which authorizes a county drain commissioner to impose special assessments on, and/or issue special assessment bonds for any county, city, village, or township for up to 30 years to finance drainage projects. The governmental unit subject to the special assessment is authorized to levy annually an ad valorem property tax without limitation as to rate or amount to pay the special assessment and/or the principal and interest due on the special assessment bonds. The taxing authority granted under the drain code is in addition to any taxes that the public corporation is authorized to levy.
County Public Improvement Act (PA 342 of 1939); Sewage Disposal, Water Supply and Solid Waste Management Act (PA 233 of 1955); and Sewage Disposal and Water Supply Districts Act (PA 211 of 1956) all of which authorize local units of government to contract with agencies established under these acts to provide specific services. The local units are authorized to impose property taxes without limitation as to rate or amount to finance these contractual obligations.