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Survey: Despite Woes, Michigan Locals Are Seeing More Stability

CHICAGO — A growing number of local governments in Michigan are beginning to see glimmers of fiscal stability for the first time in years, according to a new report by the University of Michigan.

Challenges like falling property-tax revenue and rising infrastructure needs continue to plague many jurisdictions, especially larger cities in the southeast part of the state around Detroit, the 2012 annual survey shows. Nearly half of communities with more than 30,000 residents reported a declining ability to meet their fiscal needs in 2012 compared to more than 60% in 2011.

Despite struggles, local officials across the state are the most optimistic about their future fiscal health since the report began being issued four years ago.

“It is the best since we started in 2009,” said Tom Ivacko, program manager at the university’s Gerald R. Ford School of Public Policy, which publishes the annual survey of local government fiscal health. “In 2011 we saw some initial signs of easing, but we were cautious and weren’t sure if it was a blip or a trend. Now we can say certainly it was the beginning of a trend.”

The survey’s results jibe with what other Michigan local government experts are seeing, pointing to a fragile recovery that still faces several challenges.

Michigan has among the highest number of fiscally stressed local governments in the country, due in part to a long local recession that began in 2000 and was worsened by the post-2008 national housing collapse.

Seven local governments are currently in state-declared emergency management, and three more operate under consent decrees with the state.

Fiscal stress lingers, due partly to cuts in property tax revenue and state aid and high retirement-related debt. The survey, which tallies how local officials respond to stress, notes that more are relying on their general funds to cover shortfalls, as well as shifting costs of health care benefits to employees, and trimming or outright eliminating services.

Problems remain significant in most key fiscal areas measured, but have seen improvement since last year.

Among the key findings: One-third of local government officials said they will be somewhat or less significantly able to meet their fiscal needs this year compared to last year — a drop from last year’s figure of 48% and 61% in 2010.

Just under one quarter said they are somewhat or significantly better able to meet their fiscal needs this year compared to last year, up from 16% last year and 9% in 2010.

Looking ahead, 27% predict good financial times in 2013 while 22% forsee bad financial times next year.

“These trends mark a clear easing in fiscal stress overall, though it is important to note that hundreds of jurisdictions are still suffering ongoing declines in fiscal health,” the report said.

Ivacko said the drop in the number of local officials who said they were less able to meet their fiscal needs this year — down to 33% from 61% two years ago — was one of the most surprising results. “That’s a pretty steep drop, almost cut in half,” he said.

But problems remain. Nearly two-thirds of local governments saw their property taxes fall this year compared to last year. Along with state aid — which 46% of governments reported declining this year — property taxes make up the bulk of revenue for most local governments.

“Sixty-four percent is pretty bad still, so it’s hard to be real happy about that,” Ivacko said. “But it’s down from last year, so it’s an improvement.”

John Kaczor, principal of Municipal Analytics, a local government consulting firm, said the survey’s findings are similar to what he’s seeing around the state, especially among smaller or mid-size communities.

“There’s a little less stress, a little less concern,” he said. “As I’m meeting with assessors, more and more are saying that things are starting to plateau. We’re starting to see what you might call the bottom of the housing market.”

Results vary according to region and population. Michigan’s bigger cities face more problems than many of the smaller communities.

Among municipalities with more than 30,000 residents, 47% reported a declining ability to meet their fiscal needs in 2012 compared to 2011, down from 61% last year, and compared to 34% among smallest jurisdictions.

Larger communities also reported greater property-tax declines — 75% of cities with more than 30,000 reported they saw property taxes fall in 2012 compared to 2011 — as well as drops in aid from the state. 

“A lot of cities, especially smaller ones, haven’t had nearly as many problems, and some have even had revenues go up,” said Eric Scorsone, an economist at Michigan State University who specializes in municipal finance.

“A lot of our problems are concentrated in the southeast. A lot of us thought there were some really big problems, but when you look at it, it’s kind of concentrated,” he said. “A lot of communities have managed through pretty well even when they did have to make cuts.”

Local governments big and small are turning more toward collaboration and privatization to deal with fiscal challenges. Among the larger municipalities, 36% said they expect to increase privatization of services next year, a still-large number that is down from 58% in 2011.

Many local officials said they plan to rely on general fund balances and rainy-day funds to manage through problems, with 46% of mid-size governments saying they plan to increase their reliance on their general fund balances and 21% saying they plan to increase their reliance on rainy-day funds.

“A lot of communities are relying on fund balances,” Kaczor said. “But a lot of places see that as the purpose of a fund balance. Some communities have sufficient reserves to do that and some have very little.”

About half of local governments said they did not see much change in their debt level this year compared to 2011.

Half of all jurisdictions also said there was no change in their ability to repay debt this year, including 77% of counties saying there had been no change and 66% of cities saying the same.

But 15% of cities reported a somewhat decreased ability to repay debt this year compared to last.

Looking forward, most local governments said they do not expect to take on more or less debt next year, with 15% saying they plan to somewhat decrease the amount of their debt, including 22% of cities. Another 12% of local governments, including 25% of cities, said they plan to somewhat increase their levels of debt next year.

General obligation debt often poses less of a strain on local governments than pension and other post-employment benefit liabilities, Scorsone noted.

“Michigan is not a heavy user of debt. If you look at some of these cities in California, and the kind of debt they’ve incurred, you don’t see that in Flint or Lansing,” he said. “It’s much more on the cost side, with OPEBs and pensions. Other than in Detroit, which does have a lot of debt and is an anomaly, we’re really conservative in debt.”

Like governments across the country, Michigan’s communities face problems tied to pension and retiree benefit costs that will continue to pose problems in the future.

The university survey notes that one common response to fiscal stress in 2012 was to shift more health care costs to employees.

Among the jurisdictions that offer benefits — most of which are larger — 62% plan to have employees cover more of their own costs next year, including 81% of the largest governments.

Trimming or cutting services is another common response, and the survey reported that 22% of the state’s largest municipalities completely eliminated a service last year and 21% plan to do so next year.

Calling this an “extreme action,” the report says that the cuts “indicate a continuing retrenchment for many local governments across Michigan in 2012.”

Ivacko said there are several factors that could affect local government fiscal stability over the next few years. One is Gov. Rick Snyder’s push to eliminate the personal property tax, a revenue stream that is dedicated almost entirely to local governments.

The national and state economy will continue to have a big impact on local governments, according to Ivacko.

“If it takes a turn for the worse, it will hit local governments faster than it tends to, because they’re just starting to come out from their fiscal difficulties,” he said.

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