October 5, 2023
Public Sector Challenges and Opportunities
State and local government are not responsible for solving all of Michigan’s challenges, but the public sector’s ability to respond to problems worsened between 2000-2010 when economic decline and scarce public resources constrained government funding, workforce, and investments to make the state a destination for people and businesses. We are in the bottom third of national rankings, including 34th in household income, 36th in K-12 educational outcomes, 39th in health outcomes, 45th in electric service reliability, and 47th in road condition. A healthy and more functional public sector is key to addressing these challenges. This paper examines the sufficiency of Michigan’s current revenues and ability to improve service delivery to invest in Michigan’s people, drive the economy, and create places where people want to live.
- Efforts to be competitive on taxes have caused Michigan’s state and local governments to make difficult decisions, often reducing funding for key services. They are smaller and less capable of providing services than they were 20 years ago.
- Under current projections, inflation-adjusted GF/GP revenue will remain 25 percent below its FY2000 level in FY2025.
- In FY2001, state revenue supported 69.8 percent of the total state budget. By FY2024, that percentage fell to 58.5 percent, and had dropped below 50 percent during the pandemic years of FY2020 through FY2022.
- While total appropriations to state universities have increased over time, inflation-adjusted funding in the FY2024 state budget is down by 25.6 percent from the FY2001 level.
- On an inflation-adjusted basis, funding for state revenue sharing to local governments remains 35 percent below its FY2001 peak.
- Appropriations for health and human services have nearly tripled between FY2001 and FY2024 and have grown by 76.1 percent even after adjusting for inflation. However, spending within this budget has moved in different directions. The federally-administered Supplemental Nutrition Assistance Program and Medicaid spending have increased significantly while funding for the Family Independence Program and Child Development and Care Program has declined.
- Taken together, the combined General Fund, School Aid Fund, and Budget Stabilization Fund balances give the state just over $2.4 billion in revenue reserves – just shy of 7.6 percent of combined GF/GP and SAF revenue.
- State generated tax revenue in FY2022 was equivalent to 7.1 percent of all Michigan personal income. In FY1991 that percentage was 6.5 percent. However, it is important to note that state tax revenues are used to fund more services today than they were 30 years ago.
- Michigan local governments are more constrained in their tax options than those in many other states.
- Michigan’s property tax limitations create incentives to develop land, thus encouraging urban sprawl, and to increase tax rates.
- State revenue sharing was modeled to provide some diversification in the revenue structure of local governments in place of local-option taxes. The chronic underfunding of this program over the past 20 years has left local governments without the funding or options to raise revenues on their own.
- Advances in communication, technology, and transportation make small local governments a less than efficient way to provide services. Furthermore, it prevents communities from adopting a regional focus and policies that benefit the region, which is necessary to create vibrant economies and regions that will attract and retain residents.
- Strong vibrant cities are important elements to attract new (young) residents but the ability for Michigan cities to compete is frustrated by the municipal finance model, the inability to use local-option sales taxes, urban areas that reflect years of urban sprawl, the degree residents have self-segregated themselves by income and race, and the lack of regional focus.
- Michigan’s low-income, minority-majority communities will feel the consequences of Michigan’s broken local government model before the wealthier, homogonous places.