The Budget-Balancing Tightrope

Has Proposal A worn out its welcome? Legislators may need to address plunging property tax revenues in 2014.
Illustration by Darcy Muenchrath

If there’s one collective way we measure our cities, villages, and townships, it’s the quality of life. Is our city safe? Do services match what we think we should get for the taxes we pay? Do we have recreational opportunities for kids and programs for our seniors?

Too many cities in Michigan have had debates about which of these things is more important. Financial constraints, many rooted in the great recession, have forced us to pick which services to maintain and which to reduce or eliminate.

Such decisions aren’t limited to cities like Detroit; nearly every city has had budgetary pressure. The latest data from the University of Michigan’s Center for Local, State, and Urban Policy finds that 29 percent of Michigan municipalities are still seeing their financial picture worsen. Property taxes, a major funding source, dropped by 15 percent between 2007 and 2012. State revenue sharing dollars have also been cut by almost $5 billion over the last 12 years. Cities have been forced to tighten belts. Services have been cut; employees laid off. The Citizens Research Council of Michigan found that public sector employment dropped 13.2 percent since 2000.

Many cities have stabilized, but don’t see things getting better without major changes at the state level. Why? Even as jobs come back and Michigan’s economy rebounds, most cities can’t regain lost tax revenue soon, by law: The reason? Proposal A doesn’t allow cities to rebound quickly.

Proposal A became law in 1994. It was a big compromise between legislative Democrats and Republican Gov. John Engler. It shifted public school funding to a state sales tax, which increased from 4 to 6 percent. In exchange, cities were limited on how much they could raise property taxes: 5 percent annually or the rate of inflation … whichever is lower.

For a long time, Proposal A worked well. It greatly evened the level of funding between school districts and stopped what many felt were arbitrary property tax increases. But nobody really considered what might happen in a major downturn.

As the job market collapsed, people moved or were foreclosed on. Others stayed put. The real estate market was in free-fall. Property tax rates stagnated in some places — or plummeted. Cities simply had less revenue to work with and made changes to balance their budgets. In some instances, there was some fat to cut. But even in cities operating efficiently, the numbers no longer added up.

That’s when the tough questions came. Where to cut? Should we stop funding pensions properly? Lay off cops and firefighters? Cut out recreation programs? Tough decisions, ones that get to the heart of the quality of life.

Even as the economy rebounds, many cities in Wayne County won’t be at the property tax revenue levels they were at five years ago until the 2020s. That means cuts will likely remain.

The result? Our cities are less competitive — and as a result, Michigan is a less attractive place to live in and raise a family.

So far, the state’s answer to cities in financial distress has been emergency management. But that solution is likely not enough when we are talking about approximately 500 communities in financial trouble.

A legislative fix may be required, and it’s more likely than we think. Michigan Senate Majority Leader Randy Richardville (R-Monroe) says it might be time to intervene.

“In order to avoid bankruptcy in the future, what legislative priorities, what legislative action can we put together?” he says. “I was asked to appoint a senator to a group [on municipal finance], and I appointed myself because I think it’s one of the most important things we are dealing with. We do have a proposed agenda [for the new year] that would help these cities cope with some of the problems that they have. … We went right to the five next biggest cities in the state, had them sit down, their city managers, their mayors, and talk…about what we can do to un-tie their hands and help them with their budget.”

What might that entail? So far, there isn’t much discussion of major changes to Proposal A. But there’s talk of easing some rules to allow citizens to decide if they want to increase taxes to pay for services. The legislature is considering a bill to allow cities to put millage votes on the ballot to pay for additional police and fire protection. Democrats, meanwhile, suggest that the state needs to do more to help cities that are struggling to fully fund employee and retiree pension benefits. Both could help in the short term. But the relief being discussed seems to be targeted to specific situations, rather than an across-the-board solution.

There’s the rub: A big picture solution will require leadership in Lansing to cobble together a majority capable of passing bills that may lead to an increase in taxes.

If I were a mayor, I’d plan on sucking it up and tightening that belt for a bit longer.