Municipalities’ fiscal outlook gloomy despite economy
Lansing — Eight years into Michigan’s economic recovery, the fiscal outlook is still unnerving for municipalities seen as ill-equipped to withstand the next recession.
Despite continued job growth and record auto sales, the state’s per-capita personal income lags the national average after a long-lasting downturn. Taxable values of property — which largely determine revenue for local governments — are below peak levels in 85 percent of municipalities, according to the nonpartisan Citizens Research Council. And their other major revenue source, state aid, is down 20 percent from 15 years ago.
“It’s really a story of fiscal stress,” Jeff Guilfoyle, a vice president of Lansing-based Public Sector Consultants, said this past week at a “fiscal stability” summit hosted by Business Leaders for Michigan, a group of executives at the state’s largest companies and universities. “That fiscal stress is worse in cities than it is in townships and it’s worse in southeast Michigan than it is in the rest of the state.”
Bigger, old cities especially have been thumped with a combination of state revenue-sharing cuts, substantial property tax declines and heavy unfunded retiree pension and health care obligations, Guilfoyle said.
“It’s only a matter of time before the next recession, and we really haven’t seen a significant improvement in the fiscal health of these cities,” he said.
Concerned business executives, while optimistic about Michigan’s progress since the prolonged recession, want the Legislature to do more. Recommendations include addressing public retiree pension and health care benefits that account for a fifth of budget in some cities and creating a state commission to detect local financial problems earlier. Business Leaders for Michigan also suggests strengthening the certification requirements for local finance officials, instituting education requirements for school districts’ chief financial officers and spending state money on training.
Republicans who control the Legislature are waiting for a task force formed by Gov. Rick Snyder to issue recommendations on municipal retirement changes this spring. Senate Majority Leader Arlan Meekhof supports putting all newly hired public employees into 401(k) plans to align with the private sector, though attempts to close the pension system to new teachers have stalled previously and it would be politically difficult to curtail the benefits of police and firefighters. Legislators also might consider incentivizing current workers to voluntarily move from a pension to a 401(k).
Other proposals under review include no longer offering health care benefits in retirement, or paying retirees a fixed stipend or contributing extra toward employees’ savings plans instead of covering their premiums.
“When we’re digging a hole in terms of debt, we got to stop digging,” Meekhof said.
Municipal officials say while they support designing “modern” health care plans, cities’ problems extend well beyond unfunded liabilities and there has been little discussion about other factors. For instance, property taxes drop when the economy falters but do not recover as much during recovery periods due to Michigan’s constitutionally imposed tax limitations.
“Our system’s just broken,” said Anthony Minghine, associate director and chief operating officer of the Michigan Municipal League. Property taxes and revenue sharing, which generally fund two-thirds to three-quarters of a local government’s budget, “have been horribly constrained for over a decade,” he said.
“We’re not equipped to deal with another recession. … If we were go to into another recession, I think we’d see widespread communities failing because of our system. We’ve got to rethink how we do this so that we share in a prosperous economy.”
Continually cutting services may balance the budget but also make the community an unattractive place to live, diminishing taxable values, Minghine said.
The Business Leaders for Michigan did not weigh in on revenue sharing at its summit. But Guilfoyle, a former state treasury official, said Michigan must have robust revenue sharing because it has so many local governments.
If older core cities with more low-income residents who are more dependent on government aid are forced to raise taxes, it encourages middle- and higher-income people to move elsewhere, he said.
While revenue sharing from sales taxes is constitutionally required, the governor and Legislature have discretion over what are known as statutory revenue-sharing payments. That portion was $868 million 15 years ago, bottomed out at $325 million in Snyder’s first year in office and is now $466 million.
Snyder has proposed no statutory boost for cities, townships and villages in the next budget. The House is calling for a 5 percent increase while the Senate wants a 1 percent increase for all eligible municipalities including counties.
House Minority Leader Sam Singh, a former East Lansing mayor, said the state “has balanced the state budget on the backs of local governments” under Snyder and former Gov. Jennifer Granholm. Tackling municipal retiree costs should not occur without also committing much more in revenue sharing, he said.
Singh said lawmakers “pat ourselves on the back” for adding new state troopers when there are 5,000 fewer local police and firefighters than in 2000.
Meekhof countered that legislators also have other spending priorities.
“No, we’re not taking any money away from you,” he said. “It is money for us to decide how to split up.”