MSU Extension Center for Local Government Finance & Policy

With stakeholders from all levels of government and the private and nonprofit sectors making efforts to address the water crisis in Flint, the city’s financial condition appears to improve. However, a sole focus on financial solvency, which is narrowly defined as the balance between revenue and expense, has the danger of masking unmet needs of citizens due to declining revenues and service cuts. This paper’s purpose is to propose a systems framework for service solvency that examines the provision of public services beyond traditional financial condition analysis. It acknowledges and incorporates:

• Economic and socio-economic conditions impact service delivery in addition to internal financial management.
• Institutional constraints on local governments in Michigan that limit their autonomy and revenue-raising capacity.
• Legal standards for services that ensure the health, safety and welfare of residents.
• Residents as key stakeholders and not just captured debt servicers.

Michigan general purpose local units of government (county, city, township and village) cannot easily be altered, let alone dissolved. Should a local government find itself not generating enough revenues to cover expenses, Michigan requires local units to balance their budget yearly and requires local units to submit a deficit elimination plan to the state to show how it will increase revenues and/or reduce expenditures until the deficit is resolved. For some local units this has resulted in continued cuts to service operating expenses (personnel, capital improvements, etc.), regardless of these reductions’ impact on service delivery, a “cut your way to solvency” mindset. This short-term perspective to municipal condition analysis can lead to very detrimental decisions, which put at risk resident’s health, safety and wellbeing1 . Additionally, the State’s “penny wise and pound foolish” approach to Flint’s finances has resulted in hundreds of millions of dollars to be spent on Flint’s drinking water distribution system that surely would not have been spent but for the state-made water crisis.

We argue that legal and ethical responsibilities and standards shouldered by the government should be the foundation for financial analysis related to service delivery. The financial analysis should also take into account the city’s fiscal capacity and residents’ affordability, namely, fiscal solvency and price solvency, respectively. Applying this framework to the city of Flint, this paper examines service solvency related to drinking water management, wastewater management, stormwater management, financial and accounting management, and public safety. For each service, we outline the service level desired and required based on legal standards and discuss the revenue and expense gap Flint faces in order to sustain services at that level, as well as affordability from the perspective of citizens. This framework could help inform new policy approaches to local government finances that foster fiscally healthy communities that people and businesses desire to live and work in.