Almost 60 Michigan counties lacked the financial resources in 2017 to cover the public services they need to provide, even after accounting for state aid such as revenue sharing, says a new analysis from a Michigan State University professor.

Shu Wang, an assistant professor at MSU who has presented at MAC on local government finance issues, compared a county’s revenue-raising capacity (RRC), its expenditure need and its state aid in the years 2011 and 2017 to assess the “fiscal gap.” While 24 counties did not show a gap in 2017, after adjusting for all county and state resources, 59 did, with the largest problems concentrated in the Upper Peninsula and Southwest Michigan. (See full county-by-county results here.)

The report states the “main drivers for counties’ needs are violent crime rate, population density and distribution, and employment in the manufacturing industry.”

MAC spoke with Dr. Wang this week to learn more about the report and what Michigan counties face fiscally:

What finding surprised you the most?

Wang: “I don’t have preconceived assumptions so can’t say any result to be surprising. Rather, I’d share a few noteworthy points. One is the different equalizing effects of state revenue sharing (SRS) and other forms of state aid. Figure 2 (above) shows SRS does not close fiscal gap as much as other state aids. From a policy standpoint, SRS has some sort of formula, whereas other state aids are more difficult to track or to structure. Counties may want to further investigate the roles played by other aids from state in addition to SRS.

“A second point is variations of fiscal gap between regions and within regions. Again, figure 2 shows the northern Lower Peninsula has a small fiscal gap to begin with, and additional state support actually creates a fiscal surplus, whereas the Upper Peninsula still has a wide gap after all state support. In terms of within-region variation, Oakland and Wayne counties in the southeast can have quite different challenges. The fact that state support seems to close fiscal gap for that region shouldn’t mask their differences.”

What is the greatest misconception about county finances right now?

Wang: “It largely depends on who we talk to. I’d like to remind officials (or general public) not to overestimate the role of property taxes. I don’t mean to discount the fact that it is the most stable major revenue source; however, due to prop A the taxable values have remained stagnant. Counties levy a lower mill and raise millage less frequently than cities, and that further limits their revenue-raising capacity from properties.”

What’s the no. 1 thing that county leaders should be doing to drive reform in financing?

“I’d suggest not to be tempted into easy, oversimplified formula such as dollars per capita. It is important to understand the structural needs faced by each county, including structural deficits, unfunded mandates and underlying socioeconomic issues that are driving county spending. While doing so counties should also pay attention to how state policies contribute to addressing these needs and affecting their revenue-raising capacity. This is largely what motivated my study. Fiscal gap is a thought exercise for understanding these issues. Just like treating a disease, fiscal distress is a symptom and county leaders as doctors should focus on the cause for the symptom.” 

MAC’s Podcast 83 team will lead a special live edition on Monday, Sept. 21 to field questions from county leaders on the FY21 state budget and all other legislative matters coming to a head in Lansing this fall.

Executive Director Stephan Currie will moderate the discussion that will include Deena Bosworth, governmental affairs director, and Meghann Keit, governmental affairs associate.

Click here to register for the free webinar, which will run from 1 p.m. to 2 p.m.

If the event doesn’t work with your schedule, don’t worry. A video recording will be made available on the Podcast 83 homepage on Sept. 22.

To ensure your question gets the full Podcast 83 treatment, send it in advance to Bosworth at bosworth@micounties.org.

Key trial court costs bill to become law

Legislation to extend the authority of trial courts to levy costs to defendants will soon be law, after the Senate this week approved House Bill 5488 and sent it to Gov. Gretchen Whitmer for her expected signature.

The bill, a major priority for MAC in 2020, extends cost authority to Oct. 1, 2022. Without the legislation, by Rep. Sarah Lightner (R-Jackson), county courts would have lost this source of funding for operational needs in a few weeks. The final Senate vote on HB 5488 was 29-8, with all “no” votes from Democratic senators. 

The state’s Trial Court Funding Commission has said court costs “directly account for as high as $291 million annually in support (most of the 26.2 percent generated). Additionally, approximately $127 million of the annual funds transferred from the State originate from court assessments at sentencing. When totaled, Michigan trial courts are supported, in significant part, by over $418 million assessed to criminal defendants.”

Of course, the work on this issue is far from over. The new deadline is just two years way, and the next phase will be to finally solve the long-standing problem of a stable court funding system. MAC stands ready to continue the work with the Legislature to help streamline and improve the overall system. While a variety of reforms are needed, a key one is to rebalance state and local funds in the court system, as reported by the Trial Court Funding Commission. 

For more information on this issue, contact Meghann Keit at keit@micounties.org.

 

By: Dan Papineau, Director of Tax Policy and Regulatory Affairs, Michigan Chamber of Commerce

(Editor’s note: This article originally appeared in the August edition of Michigan Counties, MAC’s bimonthly e-newsletter.)

Perhaps it was the recent remark I made about Michigan’s broken municipal finance system while testifying in front of a state legislative committee that prompted the invitation to contribute to this publication.

I agree with the nonpartisan Tax Foundation that all tax policy should be based on four cornerstone principles: simplicity, transparency, neutrality and stability. The revenue side of our municipal finance system fails in all four of these categories. This is not hard to believe since local government revenues are overwhelmingly made up of property taxes. County governments depend on property taxes for 60 percent of their revenues. The crux of the problem behind our state’s municipal finance system is the over-reliance on property taxes. When we think about property taxes through the lens of the four principles of sound tax policy, we see why.

Simplicity

Since 1893, Michigan has had an ad valorem property tax system that relies on the current value of a subject property. Assessing a value to every piece of real property and all nonresidential personal property is no easy (or simple) task.

While the practice of assessment and appraisal has evolved into a complex science over the last 127 years, it is still a relatively subjective process. This subjectivity erodes simplicity. Both taxpayers and local units of government see this problem play out far too frequently in the form of property tax disputes that end up in court wasting the time and resources of everyone involved.

Property taxes can be looked at as a fair way to spread the cost of local government services across varying portions of the population but, our system has become so complicated and hamstrung by a plethora of minor tweaks and/or major deviations that our property tax system is caving in on itself. The mechanism that brings in the most significant portion of revenues county governments need is about as simple as the internal workings of the human brain.

Transparency

With increased accessibility to BS&A and other technologies, the principle of transparency has been greatly bolstered but, the process of assessment to state equalization is anything but transparent.

While summary appraisal record cards are available online either through free access or paid access, the level of detail made available lacks full transparency. For example, the building valuation work up, land value tables, economic condition factor tables and supporting studies are not available unless a Freedom of Information Act request is filed. Even the body that audits the entire property tax system, the State Tax Commission, does not share the results of their audits with the public.

Neutrality

The principle of tax neutrality is summarized as follows: “Taxes should neither encourage nor discourage personal or business decisions”. The fact is the property tax system Michigan imposes today does the exact opposite. The property tax system is actually designed to influence the decisions businesses make and to a lesser degree, the ones individuals make.

Property taxes have been used to compete for investment across local units of government and between states. Much of the policy that promotes this behavior is not within the control of the governing body of the local unit.

Policy-makers at all levels use the property tax system to encourage or discourage different behaviors. Michigan has a few parameters to promote neutrality, but they are so ineffective they are practically nonexistent.

Stability

By nature of its design, the property tax is unstable.

First, the personal property tax is based on depreciating value. It is literally designed to go down and therefore be anything but stable. Real property tax revenues or the values of which they are based on, while not as heavily affected by depreciation, are constitutionally prohibited from increasing beyond a certain level after being allowed to decline without restriction. Stable on the way back up but not down.

Second, value itself is not stable. A property worth a certain amount one day could be worth half the next. Our economic cycle contains peaks and valleys not a flat line of prosperity.

Third, policy-makers are constantly rearranging the property tax system to address its numerous faults; however, the never-ending alterations result in instability and effect budgets of police departments, public works departments and general fund spending of county governments everywhere.

Fixing the revenue side of our municipal finance system is extremely difficult while decrying its faults is easy. I respect those who dedicate their careers to finding ways to improve the system we have. We really must look at local government revenue from a completely new perspective. I believe this starts with revamping the complete service delivery method our state is currently straddled with. My friends at MAC hear me say often that county government is the best form of government. Counties should be the ones administering practically all of the services a citizenry relies on. To transfer to this type of service delivery model we must also permanently address the compounding debt burden facing counties across Michigan. Lastly, we can discuss opportunities to reinvent the property tax system (or scrap it) and create a more diverse revenue stream for local units of government to depend on.

Revenue sharing replacement funds to hit accounts on Monday

Replacement dollars for the cancelled August revenue sharing payments will reach county accounts on Monday, Aug. 31 as scheduled, MAC was told this week by state officials. Although the amount listed on the SIGMA website is correct, the name of the municipality is wrong, and is a glitch that if fixed will cause more problems than it fixes.

For exact amount and accurate county name, please see this list from the Department of Treasury. 

Hazard pay premium payments are still being processed and will not be ready for another week. Additional staff has been assigned to this division of the Treasury Department to speed up the processing of applications. Those local units that have requested advanced payment of these funds before expending them should receive the funds within the next two weeks, long before the Sept. 20 deadline to make the payments to eligible employees.

As far as the payroll reimbursement program goes, those figures are still being calculated at Treasury. As reported last week, the number of applications received will greatly exceed the amount allocated for the program. The appropriation was for $200 million, but Treasury anticipates the requests will total about $350 million.

Therefore, each payment to locals for this program will be prorated based on the amount your locality requested as a percentage of the total amount requested. Those figures are not available yet. Once the hazard pay applications have been fully processed, department resources will be redirected to the payroll reimbursement program.

For more information on this issue, contact Deena Bosworth at bosworth@micounties.org.