Tom Ivacko, administrator of the University of Michigan Center for Local, State, and Urban Policy, said its annual survey found local governments faltering financially despite an improving state economy.

DALLAS -- Michigan's economy has continued to improve without helping the fiscal health of the state's local governments.

That's the finding of a University of Michigan report on the state's local governments.

The university's Center for Local, State, and Urban Policy found that for the first time since the 2008 recession, more local governments are reporting a decline in fiscal health. The reversal in the fiscal health of Michigan's cities in post-recession recovery signals potentially tougher times ahead.

Of the state's 1,856 units of local government, 31% say they are better able to meet their financial needs this year, down from 38% in 2015. Conversely, 22% say they are less able to meet their needs this year, up from 20% in 2015. The reversal is the first to be reported following five years of steady statewide improvement.

CLOSUP administrator Tom Ivacko said that the decrease of municipalities reporting improving fiscal health is a surprise.

"We think it's an early warning sign here that even though the Michigan economy is still improving but what we have seen this year in fiscal health in terms of local governments is reversal in a trend that we've been tracking since 2010," said Ivacko. "It appears that there is a disconnect now between economic growth and local fiscal health in Michigan."

This disconnect is largely a result of what Ivacko calls Michigan's broken funding system for local governments.

The report findings are based on responses from eight statewide survey waves of the Michigan Public Policy Survey conducted annually each spring since 2009. That timeframe covers a period of sharp economic decline in 2009 and 2010, followed by a trend of gradual improvement that first emerged in 2011. Each year the MPPS asks local leaders a summary question about changes in fiscal health: whether their jurisdictions are better able or less able to meet their financial needs at that time, compared to the previous year.

Property tax revenue is the most important source of funding for Michigan municipalities. This year's report found that fewer jurisdictions reported a rise in property taxes, a reversal from the increase municipalities had reported since 2010.

This year 42% of the local governments in the state reported their property tax revenues as increas¬ing compared to 25% reporting them decreasing; last year, 45% reported such revenue growth.

Ivacko said that the trend is all the more alarming given the benign economic backdrop; if the economy falters, he said, local governments will face an even greater risk for fiscal declines.

Forecasts for Michigan's economy from the University of Michigan Research Seminar in Quantitative Economics anticipate continued growth in the next few years, but predict gains will taper off soon after that. Similarly, the Michigan Senate Fiscal Agency expects both the U.S. and Michigan economies to expand at a slightly slower rate in the coming year, and Michigan is generally expected to grow more slowly than the nation as a whole.

State aid, the other major piece of the municipal funding puzzle, also showed a worsening trend in this year's report.

Only 18% of local governments reported an increase in state aid compared to 28% the previous year. It's the first such decline since 2011.

Michigan's Headlee Amendment and Proposal A are state level tax limitations on local revenues.

"These state level tax caps have really restricted revenue growth for local governments even as the economy has improved and many housing markets and home values have improved significantly," said Ivacko. "I think that is probably the single most important factor in why we are seeing local governments' finances not improving as much as they should."

Although the state is beginning to increase revenue sharing, it's a marginal increase relative to the $6 billion in cuts the state made between 2000 and 2013, said Ivacko.

The $1.2 billion in revenue-sharing payments Michigan will distribute to local governments in 2016 is down from nearly $1.6 billion in 2001.

"When you look at the credit of Michigan cities you have some that are ranked among the worst in the county like Wayne, Lincoln Park, Detroit, Flint and even Lansing are among the bottom 1% of all cities," said Richard Ciccarone, President & CEO of Merritt Research Services, LLC. "One thing that makes it worse is that their debt levels are up and that put more burden on these cities.

"Their flexibility is limited," said Ciccarone. "It looks like cities in Michigan are headed for challenges yet. Some of the most challenged cities in America are in Michigan and yet the majority also look like they are faced with the challenge of rising debt and decreasing reserves."

If local fiscal health continues to head in the wrong direction it is likely that local governments will increasingly rely on their savings and reserves. According to the University of Michigan report, 60% of jurisdictions say their general fund balances are at the right level.

"The one thing that they are holding their own on is that their fund balance is not that much different," said Ciccarone.

There may also be a return in intergovernmental cooperation or privatizations of public services, popular options in the wake of the recession. Since then there has been a very gradual increase in the percentage of jurisdictions boosting service provision levels each year, until today, when this trend has flat-lined. Still, while the trend of gradual improvement has stalled, more jurisdictions expect to increase services levels in the coming year (15%) than to decrease them (6%).

Homeowners in the city of Eastpointe and Hazel Park last year approved a 20-year, 14 mill property tax to cover the cost of fire and rescue service. The measure allows the two financially strapped cities to form a regional services authority to provide public safety services.

The struggling city of Wayne this month requested an emergency financial review from the Treasury Department after its voters on Aug. 2 rejected a proposal to join Eastpointe and Hazel Park in the South Macomb Oakland Regional Services Authority.

Wayne voters likewise turned down a millage proposal that would have raised approximately $5 million to help the city's strained liquidity.

No Michigan city is currently under financial emergency – six are in transition from under emergency managers, three are under consent agreements with the state and Detroit has an oversight from a commission as part of its emergence from bankruptcy.

Some cities are turning to unusual measures to deal with funding challenges.

Kalamazoo has over the years shown a willingness to make significant cost adjustments, but the revenue restrictions imposed by Michigan's tax framework were posing a challenge to them.

A $70 million injection of private capital from local philanthropists has changed the city's outlook.

"This public private funding model is credit positive for Kalamazoo because it will provide the city with significant additional resources and sets up a framework to leverage non-traditional revenues," Moody's analysts wrote in a report.

The lump sum injection to its Foundation for Excellence Fund is equal to nearly 35% of Kalamazoo's general fund budget and will be used to stabilize the city's finances, reduce the local property tax burden and provide resources for economic development and community improvements.

Cities and towns across the country have solicited private funds to make up for cutbacks in government programs from parks to music to art to youth sports programs.

Detroit's "Grand Bargain" during its Chapter 9 bankruptcy was a unique application of using philanthropic funds to bring additional cash into the city's restructuring plan of adjustment in exchange for transferring the city's art collection into a secure perpetual trust.

"In the broader context, local units of government need to look to creative ways to monetize City infrastructure to raise funds," said Detroit's finance director, John Naglick. "Assets like highway systems and water/wastewater systems all present opportunities in this regard."

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