"Overall, you have to say it's good news in that the trend of fiscal improvement is continuing for a fourth straight year," said Tom Ivacko, director of the University of Michigan Center for Local, State, and Urban Policy.

CHICAGO — Though Michigan's largest city remains mired in a historic bankruptcy, fiscal conditions appear to be improving for the rest of the state's local governments, according to a new report from the University of Michigan.

For the first time in the Michigan Public Policy Survey's six-year existence, more local governments reported that they are better able to meet their fiscal needs this year than reported than they were less able, compared to the previous year.

Despite the improving trend, economists who study the state's governments still sound a note of caution, warning that another economic downturn, long-term liabilities and rising infrastructure needs could hurt the fragile recovery.

"It's a good news-bad news story," said Tom Ivacko, director of the university's Center for Local, State, and Urban Policy in the Gerald R. Ford School of Public Policy, and one of the authors of the report. "Overall, you have to say it's good news in that the trend of fiscal improvement is continuing for a fourth straight year," Ivacko said. "But it's such a slow trend, and it still leaves more than 400 jurisdictions here in fiscal decline."

The center launched the survey, which measures local officials' response to questions about their governments' fiscal health, in 2009. Its first years saw some of the grimmest reports, as the state's 1,856 cities, townships and counties struggled with the effect of the national recession and Michigan's own recession, which began in 2000. The survey does not include school districts.

The report found steep declines in local finances in 2009 and 2010, followed by a general trend of improvement through 2012. The trend continued in 2013 and 2014, but at a much slower pace, according to Ivacko.

This year, for the first time since the report began, more local governments have passed a "tipping point" of fiscal health, with 36% of jurisdictions saying they are better able to meet their fiscal needs this year compared to 24% who said they are less able to do so. But an additional 40% reported no change in their fiscal health status.

The almost one in four jurisdictions still seeing declining fiscal health represent more than 440 local governments.

"They come in all population sizes and they're spread all over the state; it's not just big cities," Ivacko said. "We're walking a tightrope between optimism and, 'Boy, it feels like it should be a lot better'."

The only category of local government that did not see gains in the percentage reporting improved fiscal health are mid-sized jurisdictions with populations between 10,000 and 30,000, the report found. In 2013, 48% said they were better able to meet their fiscal needs, compared to 42% this year.

The jurisdictions reporting distress are more likely to have experienced cuts in property taxes and state and federal aid, are more likely to have taken on debt, and are more likely to report growing employee health care costs and increased infrastructure needs.

The majority — 56% — of the state's cities are still facing falling property tax revenues, according to the report. When all jurisdictions are taken together, 36% are seeing an increase in property tax revenue, up from 8% in 2010. Another 38% of local governments said they continue to see a decrease, compared to 78% that saw decreasing property taxes in 2010.

Part of the story of improving finances comes from local governments that have cut wages and services and found other ways to deal with falling revenues. It would be difficult to make more cuts if another downturn arrives, Ivacko said.

"If the economy continues to improve and revenues continue to increase, that creates a buffer between really bad times," he said. "But if the economy turns, or revenues take a major hit, I think it's going to be very difficult for many jurisdictions."

The suburbs, especially the older ones dealing with changing demographics and aging infrastructure, bear special attention, according to Eric Scorsone, an economist at Michigan State University who specializes in local government finance and Detroit.

"I think the next real wave of fiscal distress is going to be the suburbs of the metropolitan areas of Michigan, and arguably the whole Midwest," Scorsone said. "A lot of these suburbs are going to be facing a lot of the same problems of the central cities."

The income and racial makeup of Michigan's suburbs, particularly the numerous communities that ring bankrupt Detroit, is changing, and the governments are also grappling with decades-old water and sewer systems, long-term liabilities, and caps on property tax growth.

"We think the central cities are still facing a lot of challenges, and that's still going to be there, but we're trying to look beyond that now," Scorsone said. "This is the cutting edge of where we might be heading in Michigan."

The suburbs in southeast Michigan around Detroit face particular challenges, he said. The state has already taken over four cities in that area with emergency managers or consent decrees, as well as several school districts.

Both Ivacko and Scorsone remain cautious about the fiscal recovery of Michigan's local governments.

"In terms of short-term budget solvency, I would have expected some improvement," Scorsone said. "But there's always a context, and if you shrunk the government enough, you may be surviving but services are way below what they used to be, which could do damage to the quality of life."

The report found that overall 54% of all jurisdictions and 82% of the largest jurisdictions said they have increased infrastructure needs this year, up from 71% last year. Only 2% of all local governments said they've experienced a decrease in infrastructure needs.

The report found that 12% increased their amount of debt — which is not limited to bond debt — and 39% said they decreased their amount of debt.

In another big change in 2014, 25% said they had increased ability to repay their debt and only 3% said they had decreased ability to pay. That compares to 2011, when 8% said they had increased ability to repay their debt, and 6% said they had decreased ability to pay.

"From my perspective, that's one more indicator of improving fiscal health," said Ivacko.

In what Ivacko called a "steady pattern," each year since 2011 only about 12% of jurisdictions say they have increased their amount of debt and about 20% say they have decreased it.

"Like individuals cutting their credit card debt, local governments are doing the same thing," he said.

The report also tracks cash flow, considered a key indicator of fiscal health. In 2014, only 7% of jurisdictions said cash flow is either somewhat of a problem or a significant problem. In the largest governments, a full 69% of local officials said they had no cash flow concerns at all, compared to 54% in 2013. Again, the mid-sized governments with populations between 10,000 and 30,000 proved an exception, with 11% of local officials saying cash flow is a problem, up from 6% last year.

The survey also attempts to provide a glimpse into the future by asking local officials a range of questions about their plans and expectations over the next year.

More than a quarter, 27%, said they plan to increase their reliance on their general fund, a number that is down from a high of 49% in 2010. Among cities, 39% said they expect to increase their general fund reliance next year.

Relatively few officials said they plan to lay off employees, but 43% said they plan to have increase employee contributions to health care benefits in the coming year and 18% said they plan to increase employees' contributions to pensions.

In general, four in 10 local governments predicted good fiscal times in the coming year compared to 12% who predicted bad times. Local officials from the state's largest governments predicted the best times, with 68% saying they face good times, up from 57% last year.

Amid the rising optimism, Scorsone said many local officials still fail to realize the impact of long-term liabilities, especially other post-employment benefits liabilities.

"From their perspective, things are better, relatively speaking," Scorsone said. "But truthfully, it's a minority that sees the long-term problems."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.