Anthony Minghine of Michigan Municipal League said Michigan’s funding formula for local governments “doesn’t allow cities to share in prosperous times.”

DALLAS – Michigan needs to do more to help cities control the costs of infrastructure and healthcare spending, the Michigan Municipal League says in a new report.

To fix the state's local government funding woes, the group urged the state to consider cost containment measures and undertake measures that promote stability and greater options for local revenue collections.

"The system doesn't track with the economy," said Anthony Minghine, chief operating officer of the league. "It doesn't allow our cities to share in prosperous times. In hard times we do our fair share but we have to be able to grow as economy grows."

The report the group released Tuesday said that cities and villages lost over $7.5 billion in shared revenue since 2002, even as the state's economy prospered.

Michigan's local governments cover most of their costs for operations and services using revenues transferred from the state and property taxes. The group and others contend the state's local government funding system is broken and hope the report adds to the ongoing discussion over the problem and potential solutions.

One of the biggest costs local governments face, according to the report, is legacy post-employment health and pension benefit commitments and aging infrastructure – both of which Gov. Rick Snyder raised in his State of the State address last week.

"Retirement health care costs, in particular, have grown dramatically and unexpectedly over the last 20 years, and revenues have not kept up," the report stated. "When communities agreed to cover those costs many years ago, they were much lower because actuarial calculations were based on people dying younger, and pharmaceutical and prosthetic costs have skyrocketed. Local governments do not have enough tools to address these legacy costs."

Minghine said that the statewide, local governments are facing about $11 billion in unfunded post-employment health and pension benefit commitments

"Legacy costs are an important issue and we need to have a bigger conversation," said Minghine. "What we have now is a disconnect -- we have modern healthcare benefits that we are trying to present to retirees but we don't have modern healthcare design. Those two have to come in sync or is going to become unsustainable."

The legislative package for retiree healthcare reform introduced by House Republicans at the end of last year is a step towards finding a resolution, the group said.

The group also said that giving local government more options for local revenue raising is key to fixing the state's funding formula for municipalities. It has advocated for tax reform in the past and at Tuesday press conference said that the solution isn't to repeal the systems in place but to make them work better. Michigan's Headlee Amendment and Proposal A are state level tax limitations on local revenues that resulted in less than inflationary growth for Michigan communities.

"We are not talking about repealing proposal A or the Headlee amendment. What we have come to find out, post-recession is that the combination of those two things doesn't work as we once thought. It's not result of constitutional amendment it's a result of how they were put in place due to the implementation legislation. We can fix those things and it can change the trajectory of money going to local governments going forward."

On infrastructure, another big ticket expense for local governments, Minghine said that one solution could be to "fully utilize the infrastructure we have in place before we build new ones."

A report Snyder commissioned in December argued that Michigan is underinvesting in infrastructure by about $4 billion per year. Transportation infrastructure alone has an annual investment shortfall of $2.7 billion, the report said, that will exceed $40 billion over the next 20 years.

He added that the state's infrastructure problem is a symptom of Michigan's "broken" formula for municipal finances because it asks communities to find funding without any real growth in local revenue.

"We expect the expansion of the infrastructure without having any real growth in population," said Minghine. "It is impossible to think that the same numbers of people are going to sustain a growth of infrastructure."

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