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CAUSES AND CONSEQUENCES OF FISCAL STRESS IN MICHIGAN MUNICIPALITIES

Prepared for the Michigan State University Extension Fall Conference October 21, 2010. CAUSES AND CONSEQUENCES OF FISCAL STRESS IN MICHIGAN MUNICIPALITIES. Mark Skidmore and Eric Scorsone Michigan State University and Senate Fiscal Agency. Overview.

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CAUSES AND CONSEQUENCES OF FISCAL STRESS IN MICHIGAN MUNICIPALITIES

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  1. Prepared for the Michigan State University Extension Fall Conference October 21, 2010 CAUSES AND CONSEQUENCES OF FISCAL STRESS IN MICHIGAN MUNICIPALITIES Mark Skidmore and Eric Scorsone Michigan State University and Senate Fiscal Agency

  2. Overview • Fiscal and Economic Challenges in Michigan • Revenue Restrictions in Michigan • Measuring and Evaluating Fiscal Stress • Data and Analysis • Conclusion

  3. Literacy, Poverty, and Unemployment Functional IlliteracyPovertyUnemployment U.S 21% 14%, 9.6% Michigan 18% 15% 13.1% Detroit 47% 29% ~30%

  4. Manufacturing’s Share of the Economy Has Shrunk Dramatically

  5. Employment Losses During Michigan’s Structural Transformation June 2000 – December 2000: 29,000 2001: 171,700 2002: 20,900 2003: 64,100 2004: 4,300 2005: 28,800 2006: 79,700 2007: 50,900 2008: 203,900 2009: 207,100 2010: ~30,000 Total for the Period: 890,400 ~ 20% decline

  6. Income Growth in Michigan

  7. Detroit 1940s and 1950s

  8. Detroit Today

  9. An Extreme Case

  10. Detroit Home Prices

  11. Percent Change in Consumer and Housing Price Indices Sources: CPI from the Bureau of Labor Statistics and home price data from the Michigan Association of Realtors.

  12. MI Tax Policy • During the 1970s the overall level of property taxation was well above the national average • Property taxes accounted for roughly 41% of state and local tax revenues in MI, compared to the national average of about 30%. • This led to considerable dissatisfaction among citizens and to a long series of reform measures.

  13. MI Tax Policy: Revenue Growth Restriction “Headlee Amendment” (1978) • Restricts property-tax revenue growth • Any jurisdiction with potential revenue increases exceeding the Headlee limit is required to reduce property-tax growth rates (“Headlee rollback”) • A mechanism designed to uniformly provide limits on property-tax rates across jurisdictions

  14. MI Tax Policy: Proposal A • Proposal A implemented via referenda in 1994 • Number of key provisions including: • Cut “homestead” millage rates • Placed an 18 mill limit for schools on “non-homestead” property • Added a 6 mill “state education tax” • Increased the cigarette and sales tax to provide financing of elementary and secondary public education • Placed a constitutional cap on the growth of assessment increases for tax purposes

  15. MI Tax Policy: Proposal A • The taxable value of a property is allowed to increase by the lesser of the rate of inflation or 5%. • A couple rules • TV increases to SEV when a home is sold (“pop up”) • For new construction, TV = SEV • Growth in SEV and TV depend on: • The rate of property turnover • The rate of new construction • The rate of growth (or decline) in actual property values

  16. MI Tax Policy: Proposal A • The homestead rates were greatly reduced and the overall level of property taxation was brought to a level more comparable to the national average. • Headlee rollbacks were greatly reduced in both number and magnitude. • The Proposal A mechanism does not treat all properties in a jurisdiction uniformly. Instead, under Proposal A, the taxable value cap reduced effective tax rates for existing homeowners, but not for new homebuyers.

  17. Scenario

  18. Other Potential Sources of Revenue • Income Tax (22 cities) • Local Option Sales Tax not Available • Fees (Statutes and Court Rulings Limit Use to Covering Costs of Providing Service) • Property Tax • In most cases, rate increases requires referenda (even in the face of falling property values) The Michigan Local Revenue Environment Is Very Restrictive

  19. Measuring Fiscal Stress • Measuring “Fiscal Stress” or “Fiscal Capacity” • ACIR (1972)—six indicators of fiscal stress • Imbalance in operating fund • Pattern of expenditures exceeding revenues • Excess of current operating liabilities over current assets • Short-term operating loans at fiscal year end or borrowing of cash from restricted funds • High and rising rate of property tax delinquency • Substantial decrease in assessed values • Variations on This General Theme: Nathan (1978), CBO (1978), U.S. Dept. of Treasury (1978), MFGOA (1978), Groves and Valente (1994) Brown (1993, 1996), Kloha, Weissert, and Kliene (2005) • Hendrick (2004)—”slack”, “balance”, “environmental” • We Focus on External Forces

  20. Fiscal Stress Framework • Fiscal Stress (FS) = Change in Costs of Providing Services – Change in Revenues • Costs of Providing Services • Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/surveymost?ci) • Turner Building Cost Index (http://www.turnerconstruction.com/corporate/files_corporate/CI4q2007.pdf) • Revenues • Department of Treasury F-65 Local Government Fiscal Data

  21. Evaluating Impacts on Budgets • We examine the degree to which fiscal stress (FS) impacts the various functional expenditure categories: • EXPj= f(FS, Population, Assessed Value) where EXP represents a series of expenditure categories: • General Government, Public Safety, Public Works, Health and Welfare, Community Economic Development, Parks and Recreation, Other Expenditures • We also examine the impact of FS on Capital and Non-capital Expenditures.

  22. Data • Years: 2005-2009 • Municipalities: Most Municipalities in Michigan • Source: State of Michigan Department of Treasury • New web-based local government fiscal data management system (collaboration between Treasury and MSU) • Web-based data input • Data downloading publicly available • Real-time data access

  23. Summary StatisticsStatewide Average Municipal Fiscal Variables(standard deviation in parentheses)

  24. Summary StatisticsCapital and Non-Capital Expenditures(standard deviation in parentheses)

  25. Fiscal Stress

  26. Results from Statistical Analysis • Expenditure Categories Responsive to FS: • General Government, Public Works, Parks and Recreation (3), Other (2), Capital (1) Expenditures Categories not Systemically Related to or Generally Unresponsive to FS: Public Safety, Health and Welfare, Community Economic Development, Other, Non-capital

  27. Implications Spending Average Fiscal Stress=9 High Fiscal Stress=30 Category (average) (one std. dev. above average) General Gov’t -1.1% -3.6% Public Safety no measurable cut Public Works -1.5% -5.1% Health and Welfare no measurable cut Economic Dev. no measurable cut Parks and Rec. -6.3% -22% Other Spending -11% -39% Capital -16% -54% Non-capital -3.5% -11.4%

  28. Implications (continued) • In general, public safety, health and welfare, and economic development has been largely protected from cuts. • What does the FUTURE hold? • Property taxes will decline for one or two years, maybe three • Revenue sharing from the state is a big question • Federal stimulus funding will end or be reduced • State revenues probably will not increase without explicit policy changes

  29. Governmental Options

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