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Challenges facing Michigan Local Governments

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March 15, 2023 - Author: <scorsone@msu.edu>,

 

Challenges facing Michigan local governments

General govt. subcommittee: March 15, 2023

Eric Scorsone, Ph.D.

Associate Professor and Director

Current situation

  • Federal funds (ARPA/CARES) has temporarily boosted local government balance sheets but only temporarily
  • Structural problems remain in Michigan’s local government finance system – State is the primary architect of that system
  • Fixes and new tools should be put in place before the next downturn hits to improve local resiliency and stability

Michigan local public finance is a three-legged stool

  • Property taxes (1)
  • State revenue sharing & other state revenues (2)
  • User fees (3)

State of Michigan is the key architect of the stool.

Property taxes: one leg of the stool

  • State restricts property tax base and rate
  • Michigan amongst the most restrictive in the nation
  • Has a major impact on residential and business land use decisions

Ranking state approaches to local government

  • States on the lower end tend to penalize local governments with combo of cuts in state aid and property tax restrictions​​
  • Michigan is 46th

PA 202-Legacy costs: pension and OPEB

  • PA 202 has had more success in reducing OPEB liabilities
  • State pension grant program will help many communities
  • State should consider OPEB grant program

Bottom line

  • State restrictions have curtailed local government revenue and spending with big implications
    • Reduced critical public services
    • Deferred infrastructure maintenance and lack of investment
  • Not equal across communities, some places have been severely impacted whereas others can afford these state policies

Policy options

  • Statutory changes for property tax law to relieve some pressure especially for distressed communities
  • Continue to push for fully restored state revenue sharing and revenues for county programs
  • Need long-term plan to stabilize infrastructure funding (water and sewer) to ensure rate affordability

Local government pension grant program

  • Very important program to help stabilize local finances especially for those communities most harmed by previous state policies
  • Program may come up short for some communities to reach 60% funding mark
    • $170 million cap may be an issue
    • Consider supplemental funds to ensure target is achieved for everyone
  • Program expansion to OPEB funding should be considered as well 
  • Even a small amount of pre-funding for communities can reduce annual payments and improve budgets

User fees and charges: policies

  • State should take action to consider policies for ongoing and long- term support for water and sewer infrastructure
  • Water and sewer affordability issues are rising rapidly

Emergency manager law changes

  • Law does not work as written – major revisions needed
    • Fails to ensure long-term stability, balances budget in short-term only
    • No need to remove local democracy
  • Tools already exist (or can be strengthened) for Treasury to monitor local government finances
    • New state oversight board for DEP’s
    • Craft a new stand-alone municipal bankruptcy law for extreme cases
    • Consent agreement process can be added to existing laws such as unform budget act and municipal finance act

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