Local government revenues lag state’s economic recovery

By KALEY FECH
Capital News Service

LANSING — The fiscal health of local governments in Michigan appears to be rebounding from a slight dip last year, according to a recent report.

But local officials say their revenues still lag the general economic recovery, making it hard to restore basic services like park improvements, pay employee benefits and invest in maintenance of buildings, sewers and streets.  

“Since about 2011 we had seen an improvement in fiscal health that had continued every year,” said Tom Ivacko, administrator at the Center for Local, State and Urban Policy at the University of Michigan. “ Last year that reversed, and we were surprised to see that.”

The center has surveyed local government leaders since 2009. And while the uptick is welcome, local leaders say improvements to the state’s economy are outpacing improvements to the bottom lines of counties, cities and townships.

The study shows a disconnect between economic improvement and improvement of fiscal health of local governments. While 51 percent of local officials are optimistic about next year’s economy, only 29 percent predict their local government will be better able to meet fiscal needs. Another 22 percent think they will be worse off.

“There’s a bit of a disconnect in that Michigan’s economy continues to improve, but local fiscal health is not necessarily keeping pace,” Ivacko said.

Local leaders were asked whether they are better able or less able to meet their fiscal needs compared to the previous year. They weighed expenses, revenue, debt and assets, Ivacko said.

Forty-eight percent of county officials and 70 percent of township officials rated their current fiscal stress as low.

Large jurisdictions are more sensitive to economic downturns.

“What we have found is there’s a lot more volatility in fiscal health for big jurisdictions compared to small ones,” Ivacko said.

That’s because small rural townships have  few residents, and don’t provide a lot of services, he said.

Townships don’t rely on manufacturing the way cities and counties do, said Larry Merrill, executive director of the Michigan Townships Association. That is one of the reasons some township officials rate current fiscal stress as low.

“If you’re a city that relies on that industry for your tax base, you’re going to be struggling,” he said. The townships are more suburban and rural. Most are more commercial or agricultural, and those industries didn’t get hit as hard in the recession.”

On the other end, large, complex cities and counties have a lot of employees providing a wide range of services.

Counties may be particularly vulnerable to what happens in the overall economy because they provide  far more basic public services, said Stephan Currie, executive director of the Michigan Association of Counties. These responsibilities stress county budgets more than most townships.

“The smaller jurisdictions are just much more stable,” Ivacko said. “Things don’t change on the same scale as they do in big jurisdictions.”

Merrill said that while townships are not necessarily struggling, but needs are going unmet.

“We’re relatively better off than we were, but we still aren’t taking care of the things that in most states people take for granted,” he said. Maintaining local roads is particularly a problem.

And it remains difficult to invest in repair and maintenance of a jurisdiction’s other long term assets, said Jim Storey, an Allegan County commissioner.

“We struggle to balance the budget for operations while trying to find the money for needed capital improvements to aging buildings such as the county building and juvenile home, not to mention improvements to our parks,” Storey said.

One reason local government lags a more general economic recovery is that while property values increase, property tax revenues do not rise as fast, Ivacko said.

“State laws in Michigan put very severe caps on how much revenue can grow for local governments from property taxes,” Ivacko said. “Since that’s the most important source of funding, that’s a severe restraint on local governments.”

Even as the economy grows and property values increase, the taxes stay fairly flat, and townships aren’t able to recognize revenues from that growth, Merrill said.

The constraint means it will take county governments decades to catch up from the effects of the Great Recession, Currie said.

The second major source of revenue comes from State Revenue Sharing program. This program distributes sales tax collected by the state to local governments.

Sales tax revenue has not increased much, so the revenues received have not increased much, said Merrill.  

“We’re very limited in the types of revenues that we can rely on,” Merrill said “State shared revenues are pretty stagnant right now. We’re not getting additional money from the state, and this factor impacts the cities as well.”

Pay increases, health care benefits, and retiree related expenses are a major source of stress for some local governments, Ivacko said.

An increase in state-mandated services that are not accompanied by the state revenue needed to deliver them can be another cause of fiscal stress, Storey said. A child care fund for county youth programs is an example.  

“The counties and the state government are required to share the expenses for this fund, but the state is perpetually behind in reimbursing the counties for their costs,” Storey said.

Other officials agree: “We get handed mandates we have to implement, but we don’t get money to do it,” said Marlena MacNeill, the Alcona Township supervisor.

Merrill said local government revenues that fail to keep up with the economic recovery has expensive and dire long term consequences.

“The infrastructure in Michigan has not been attended to to the degree that it needs to, in terms of the roads, water and sewer systems,” he said. “We’ve deferred maintenance and replacement of those things in order to take care of current financial needs, and we’re headed for a day of reckoning there.”