Expert Says State is Partially to Blame for Emergency Managers and Fiscal Stress

Posted on March 16, 2012 by Dene Westbrook

Mitch Bean speaks to the Michigan Municipal League Board in 2010.

There was an excellent article from MIRS (Michigan Information & Research Service) this week about who is to blame for the ongoing financial strain in Detroit and other Michigan cities.

MIRS interviewed Mitch Bean, the former House Fiscal Agency Director, and he said many of the things the Michigan Municipal League has been saying all along. Here are some of the highlights of the Q&A between Bean and MIRS. Bean said there’s plenty of blame to go around, but state administrative and legislative decisions over the past decade have had a hand in worsening Michigan’s local government financial crisis.

Q. It will be one year Friday (March 16, 2012) since P.A. 4 – the emergency manager law – went into effect. Is it just local units of government are unwilling to solve their own problems? What’s the root of all the economic distress we’re hearing about?

Bean: Michigan has over 1,800 units of local government and over 500 school districts. It’s well known that local governments and schools have been in fiscal distress for a number of years. While there are notable exceptions, for the most part both local units of government and schools have done whatever was necessary to remain fiscally sound under very difficult circumstances. What is poorly understood by the public and by a term-limited Legislature is how previous state government decisions, and decisions that will be made later this year, have and will continue contribute to that fiscal distress and the need for the EM law.

As a rule-of-thumb, local governments receive on average about 75 percent of their funding from local property tax collections and about 25 percent from state revenue sharing. Both sources have declined as costs and the demand for services have increased.

There are two parts of state revenue sharing: a constitutional distribution to cities, villages, and townships (CVT’s) based on population; and a statutory distribution that goes to CVT’s and counties. Unlike many states, local governments do not have the ability to levy local option taxes, such as a local sales tax. About 20 have the ability to levy a city income tax that is limited as to the rate at which they may levy it.

Q. What are the state government “decisions” you referenced that impacted this issue?

Bean: Decisions made by three administrations (including the current one) and during many legislative sessions since 1998 to not fully fund statutory revenue sharing have contributed to the local government fiscal crisis.

Q. What’s the total amount that state government has clipped from local revenue sharing?

Bean: The cumulative reductions to statutory revenue sharing since 1998 exceeded $4.4 billion by 2010-11.

Q. What decisions are pending that will impact local financing?

Bean: The administration has announced that within the next couple of weeks they will propose that most taxes businesses pay on personal property be eliminated. Depending on the actual language of the bill, it would be a business tax cut of $600 million to $700 million. The problem is that personal property taxes are part of local government’s tax base and no local government official I know believes that the lost revenue will be replaced. We need to look at this in the context of what just happened. State government was facing a shortfall this year that exceeded $1.4 billion. We solved the problem by cutting the budget almost $1.6 billion. Then we reduced business taxes about $1.7 billion (83 percent) and increased taxes on individuals about $1.34 billion to pay for it. As a result of the tax changes about 95,000 businesses no longer pay a state business tax. The proposed tax cuts of $600 million to $700 million would be in addition to what happened as of January 1st.

Q. So what does this mean?

Bean: In some circles, the entire blame for the fiscal distress faced by local governments and schools, and the potential need for an Emergency Manager, is placed almost entirely upon employee costs, unions, and an unwillingness to look for efficiencies. And platitudes such as “We all have to live within our means” solemnly spoken are the norm. These same individuals also seem to think the solution to every problem is a tax cut for business and right-to-work legislation. What they fail to understand or do not want to admit, that there is plenty of blame to go around, and part of the problems faced by local governments and schools are the result of fiscal and tax policy initiated in Lansing. They also don’t seem to remember how much money was diverted to the state budget in order to reduce the need to make even tougher decisions.

Summer Minnick is Director of State Affairs for the League. She can be reached at 517-908-0301 or [email protected].

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