MSU Extension Center for Local Government Finance & Policy

Many local governments in Michigan face the challenge of funding legacy costs, including pension and retirement benefits for police and fire employees. Municipalities employ a variety of tools to provide adequate monies to fund pension and retirement benefits.

Michigan’s municipalities have very limited revenue-generating options other than the property tax. In 1964, the Michigan Legislature enacted Act 243 of 1964, prohibiting local governments from levying any taxes not authorized by law.[1] Therefore, all new taxes must be voted on by the taxpayers of the municipality. Revenue sharing between the state government and local governments has decreased, making property taxes all the more important as a revenue source for local governments.

The Headlee Amendment of 1978 (“Headlee”) limits the amount that a local government can tax its citizens’ property. This amendment requires a millage rollback whenever the revenue from existing property grows by more than the rate of inflation. Residents can vote to override the rollback and increase their property millage rate up to the maximum millage cap.[2] For cities and villages, the statutory operating maximum is 20 mills.[3] For townships, the millage maximum is based on a county’s allocation among the county’s townships and local schools.[4]

Act 345 of 1937 is one of the only ways a municipality can establish a new revenue stream. This law allows municipalities to adopt an Act 345 firefighter and police officer pension fund. Act 345 pensions must receive a majority vote from the citizens of the municipality or county. Once such a fund is approved by a majority of voters in a municipality or county, Act 345 authorizes the creation of an Act 345 millage and thus a new funding source to fund police and firefighter pensions. This Act 345 millage has no ceiling and is not restricted by Headlee.[5] Act 345 was passed in 1937; Headlee was not added to the Michigan Constitution until 1978 and “does not prevent imposition of a tax or tax increase that was authorized prior to the time the Headlee Amendment took effect.”[6] Even if a municipality is taxing at the maximum millage permissible, the municipality can levy a millage specifically for an Act 345 police and fire pension system fund. In turn, this ability frees up some revenue in the general fund to go toward other public services.

As of March 2017, 49 municipalities and counties had adopted an Act 345 pension system, and 37 are levying a separate Act 345 tax (see Chart 1). The municipalities not currently levying a separate tax have the power to levy an Act 345 tax if their elected officials decide to implement such a millage.

Three cities -- Cadillac, Dearborn Heights and Ironwood -- are levying their maximum operating millage and have an Act 345 pension millage. Additionally, 26 of the municipalities levying an Act 345 millage do not have the available mills within their cap to fund their public safety pensions out of their operating millage. A municipality with a lower taxable value (TV) per capita -- less than $20,000 -- faces an additional burden. To generate the required revenue to fund municipal services, it may be required to levy tax rates that make it economically uncompetitive relative to a municipality with a higher TV per capita.

Selling the idea of not only another property tax but a property tax with no maximum millage cap is difficult. The lack of a millage cap is a compelling reason that some voters are hesitant to vote in favor of an Act 345 pension system fund. For example, in 2015, Lincoln Park residents voted twice against adopting an Act 345 fund and millage. On the second vote, the proposal included a self-imposed cap of six mills, and it still did not receive the necessary support to pass.

Even without levying the additional Act 345 property tax, municipalities and counties can benefit from adopting an Act 345 pension. Benefits under an Act 345 pension system are generally regulated by the Act 345 statute; consequently, benefits do not increase or decrease often. This regulation can add some stability to the pension fund, even with collective bargaining agreements making adjustments to benefits from time to time. Also, per Act 345, both the employee and the employer are required to make contributions to the pension fund. Having multiple contribution sources increases the likelihood of a healthy pension fund. Indeed, many of the municipalities’ Act 345 pensions are funded at or above 80 percent.[7]

Good pensions and health care for police officers and firefighters help recruit new hires and retain current employees. Until 2015, Michigan police officers and firefighters already covered by a retirement system were not permitted to pay into Social Security, so they could not benefit from that social safety net when they retire. The Michigan State University Extension Center for Local Government Finance and Policy will publish another policy brief on Michigan local government public safety employees and Social Security benefits. It will address the connection between the federal Social Security Act and its subsequent amendments relating to public employees, and Michigan state law regarding retirement benefits for state and local government employees. 

Photo credit: Miss Lauralee Flickr cc