CHICAGO — A close look at Flint, Mich.’s long-standing fiscal problems provides a glimpse into the challenges facing many of America’s older industrial cities, according to a case study released last week by Michigan public finance scholars.
Falling revenues due to weak housing and employment markets coupled with declining populations and rising pension and health care obligations are among the many woes afflicting Flint and other aging cities, according to the report, “Long-Term Crisis and Systemic Failure: Taking the Fiscal Stress of America’s Older Cities Seriously,” written by Michigan State University professors Eric Scorsone and Nicolette Bateson.
Located 60 miles outside Detroit and the seat of Genesee County, Flint relied on the domestic automobile business for most of its history.
It has now suffered its fourth straight decade of double-digit population decline, and nearly a quarter of its residents were unemployed as of fiscal 2010.
The city’s other post-employment benefit liability alone is the second-highest in Michigan.
The annual OPEB cost was the same as the city’s entire general fund revenue for fiscal 2010. The path to improvement will require structural and legislative changes at both the state and local government levels, the report said.
Flint’s current revenue structure is insufficient to solve the city’s problems, and controversial policy changes must be made on both the local and state levels, according to Scorsone.
The MSU report came out the same week that Gov. Rick Snyder announced the creation of a review team to scrutinize Flint’s finances.
The team is the second step toward a possible state-mandated emergency financial takeover under Michigan’s newly expanded emergency management law.
A state takeover is not new to Flint and may not be the solution, the MSU authors said.
An emergency financial manager was appointed to oversee Flint’s finances in May 2002 and remained in place until early 2006. During the takeover, the city moved from a $26.6 million general fund deficit to a $6.1 million surplus, the report said.
But by June 2008, the city was in the red again. “The cycle of returning to a deficit position after an EFM appointment ends is not unique to the city of Flint,” Scorsone said in the report.
“If cities with chronic fiscal stress are suffering from structural challenges beyond their control, improved management will only be able to cure a limited number of problems.”
Like many cities, Flint relies on a mix of property and income taxes and state aid. All the revenues have fallen steadily for years.
Over the past five years, income tax has dropped 31% due to high unemployment while property tax revenue has fallen 24%, the report said.
The state, meanwhile, struggling with its own decade-long recession, has chipped away at state aid for years.
New and deeper cuts are on the horizon as another one-third of state aid was enacted as part of Snyder’s 2012 budget and the governor is pushing to eliminate or trim the personal property tax, a tax on business equipment and machines.
“The local government revenue structure is failing communities across the board,” Scorsone wrote, noting that local units are shifting funds to meet operating costs and asking voters to approve millage increases.
“When combined with unwillingness to either raise taxes and fees or cut services, real adjustments to align with long-term ability to pay were not made,” the report said.
“To really implement long-term solutions and stabilize Flint and other such communities, realistic changes must be made.”
Flint’s OPEB accrued liability totals $775 million, the highest second-highest among Michigan’s 10 largest cities. Detroit’s liability is the highest, at $4.9 billion.
On the pension side, the report noted that Flint’s pension liability totaled $171 million and was nearly 80% funded in 2010. But the system’s net cash flow was negative in 2010. Flint had $134 million of outstanding bonds as of fiscal 2010, most of which are hospital revenue bonds issued for Hurley Medical Center.
Flint’s relatively low debt burden sets it apart from many other stressed cities, Scorsone said. That’s because the city has not been able to access the capital markets for years and does not maintain a long-term capital improvement plan.
The problems afflicting cities like Flint have festered for decades and it will take long-term solutions to overcome them, Scorsone said.
Among his suggestions are multi-year budgeting, reviewing revenue structures, and introducing zero-base budgeting, which the new chief financial officer of Detroit Public Schools said he is doing this year.