Funding local government in Michigan: Broken system puts services at long-term risk

ANN ARBOR-The system of funding for local government in Michigan is broken, as confidence of officials across the state to meet their fiscal needs has been stagnant for the past three years despite a growing economy, according to ongoing analysis of the Michigan Public Policy Survey.

The root of local leaders’ concerns is a system that has been constricting local governments’ ability to raise enough money to keep up with rising service costs and demands, says Tom Ivacko, interim director of the Center for Local, State, and Urban Policy (CLOSUP) at the University of Michigan’s Gerald R. Ford School of Public Policy.

“Michigan is experiencing its longest-ever period of sustained economic growth, but because of a web of policy factors, local governments are not reaping the benefits,” Ivacko said.

Costs for health insurance for public employees, infrastructure repairs and capital expenditure have been rising faster than revenues, as funding streams for municipalities, counties, townships and villages are restricted because of a number of factors.

Property tax revenue increases are limited by two voter-approved constitutional amendments: the 1978 Headlee Amendment, which constrains property tax increases at the jurisdiction level, and the 1994 Proposal A, which further constrains tax increases at the individual parcel level. Further, state government revenue-sharing has not been fully funded since 2001, leaving a funding gap estimated at more than $8 billion over the past nearly 20 years.

In addition, the state has imposed numerous unfunded mandates on local governments, despite a constitutional prohibition on doing so. And finally, localities are severely restricted in the types of revenues they can raise and keep locally.

CLOSUP initially indicated the flaws in the system in 2016 based on reports by local leaders, and the evidence since then has confirmed the trend and now shows stagnation despite Michigan’s strong economy.

The data come from the Michigan Public Policy Survey, which CLOSUP has been conducting since 2009, and which seeks data from the 1,856 general purpose local governments in the state, with an average participation rate above 70%. The program is conducted in partnership with the Michigan Association of Counties, Michigan Municipal League and Michigan Townships Association.

“If the situation does not change, less than half of local leaders say they will be able to maintain local services at current levels,” according to Debra Horner, MPPS project manager at CLOSUP.

The survey does indicate that a majority of respondents see three possible solutions which require statewide action: pay for unfunded mandates; return revenue-sharing to full funding levels; and reform the Headlee Amendment to allow greater property tax revenue growth.

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