MSU Extension Center for Local Government Finance & Policy

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