The Key Role of States in Acting to Allow Fiscally Sustainable Municipalities.

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eBlog, 8/31/16

In this morning’s eBlog, we consider the narrowing fiscal options for Atlantic City—in a state which appears to have abandoned its long and strong reputation for working with—rather than against—its cities. Then we return to the seeming inability of  near-insolvent East Cleveland—the small Ohio municipality still awaiting authority to file for chapter 9 municipal bankruptcy—to craft a proposal to seek consolidation with neighboring Cleveland. Finally, we turn to grim fiscal findings in Michigan, where—notwithstanding a strong state fiscal recovery—the state’s municipalities—for the first time since the Great Recession are reporting a decline in fiscal health.

Is the Fiscal Deck Stacked Against Atlantic City? Atlantic City has reduced its budget by about 10 percent from a year ago; however, the new, proposed budget assumes requested state aid—assistance the city appears unlikely to receive. The proposed $243 million budget assumes some $106 million in state aid, including $37 million of requested Transitional Aid, or state funds for financially distressed municipalities. The request is more than double the $13 million in Transitional Aid the city received last year (along with eleven other municipalities), and Council President Marty Small, Chair of the city’s Revenue and Finance Committee, warns: “If they say they’re only going to give $15 million and the fund doesn’t come from another source, it will be a monumental tax increase on the city side.” To carve the budget as much as the city did, salaries and wages were cut by nearly 25 percent or $30 million from the current $110 million, according to a summary of budget appropriations—or, as Mayor Guardian put it: “I think everybody took a hit, a haircut…No one group represented the big savings.” The cuts were partially offset by the city making up for deferred group health insurance obligations and higher debt service. And although the budget assumes no change in the municipal tax rate, increases in county and school tax rates raised the total rate nearly 29 cents to an estimated $3.71 per $100 of assessed value, according to the tax assessor’s office. But even with those increases, the total revenues are down about 15 percent from last year, because the city’s ratable base has plunged from $20.5 billion in 2008 to about $6.6 billion today. The next step is to forward the proposed budget to the New Jersey Local Finance Board for adoption, albeit a spokesperson for the Board warns that any Department of Community Affairs said Transitional Aid “must be resolved prior to the adoption of the budget.” Councilman Frank Gilliam, who has proposed a public hearing on the budget, has expressed apprehension and stated: “I don’t think we should basically move forward with a line item in the budget that does not have either something committed in writing or some type of credits set aside for the city,” while his colleague, Councilman Jesse Kurtz, is urging the state to “sign an affidavit that they’re going provide this pledged revenue,” adding: “Because last time they didn’t, and as far as I’m concerned they still owe us over $30 million from last year’s budget.” Equally apprehensive, Councilman Moisse Delgado said he has “the smallest bit of trust that the state will provide the funds that we need.”

Play it Again, Sam. The East Cleveland City Council has voted once again to enter into annexation negotiations with Cleveland, with City Council President Thomas Wheeler noting: “When you make a mistake, you realize you make a mistake, and you correct your mistake. I think that’s big of us.” As we noted last week, Cleveland City Council President Kevin Kelley had termed East Cleveland’s proposal a “non-starter” because of the conditions that came with it. East Cleveland, with little tax base and almost no economic development, appears to offer little attraction to Cleveland—especially when, as last week, East Cleveland came to the table with significant demands. The situation governance-wise is complicated, as each city would have to opt to approve a proposal—and East Cleveland appears to have no other irons in the fire—except to press the state to allow it to file for chapter 9 bankruptcy.

Why is what’s good for the goose not so for the gander? A new study by the University of Michigan’s Center for Local, State, and Urban Policy reports that for the first time since the Great Recession, more of the state’s municipalities are reporting a decline in fiscal health: of Michigan’s 1,856 units of local government, 31 percent report they are better able to meet their financial needs this year—compared to 38 percent last year—all of which denotes a singular reversal in the wake of what had been five years of steady statewide improvement. If anything, the state’s exceptional role as a center of innovation in the emerging self-driving emergence has been a keystone to the state’s economic rise. However, according to Centers Director Tom Ivacko, the reversal in fiscal health at the municipal level is what he terms “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…It appears that there is a disconnect now between economic growth and local fiscal health in Michigan.” He attributes that to what he calls Michigan’s broken funding system for local governments. The findings have emerged from eight statewide surveys conducted annually since the sharp economic decline of the Great Recession, with local governments responding to questions 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.

Perhaps the most important marker of the turn in local fiscal fortunes can be gleaned from local property tax revenues—the most important source of funding for Michigan municipalities: according to the report, the slow increase in property tax revenues dating from 2010 appears to have topped: this year 42% of Michigan municipalities reported their property tax revenues as increasing compared to 25% reporting them decreasing; last year, 45% reported such revenue growth. Mr. Ivacko notes the trend is of such great concern, because, should the economy falter, the state’s municipalities will face an even greater risk for fiscal declines. And, worryingly, the University of Michigan Research Seminar in Quantitative Economics 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.

Adding a double whammy, the report also found a worsening trend in state aid to local governments: only 18% of local governments reported an increase in state aid compared to 28% the previous year—the first such decline since 2011. The state preemption or limitation—the so-called Headlee Amendment and Proposal, which preempt local revenue authority have, as Mr. Ivacko notes: “really restricted revenue growth for local governments even as the economy has improved and many housing markets and home values have improved significantly…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.” Worse, the state preemption is more than offsetting the gradual increase by the state in general revenue sharing—which, even if rising slightly, is down some 25% or $6 billion since 2000. Or, as the ever insightful Richard Ciccarone, President & CEO of Merritt Research Services, puts it: “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; 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…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.” According to the report, 60% of Michigan’s local jurisdictions claim their general fund balances are at the right level.

A guest editorial, “Lansing, are you listening to Michigan cities?” was posted yesterday by the Tribune News Services.

For the first time since 2010, a growing number of local governments are worried about money — and the future.

We hope Lansing is listening.

After the 2008 economic crash, local governments lost tax revenue, in part because the state continued to cut the amount of tax dollars it sends back to cities, but also because a wave of foreclosures dropped the value of commercial and residential property on which owners are taxed. Think about your own tax bill — if you paid less, it means your city, county and school district had less money to pay cops and firefighters, pave roads and pay teachers.

But since 2010, things have been looking up, according to the University of Michigan’s Center for Local, State, and Urban Policy’s annual survey of local leaders. As the state’s economy has improved, those leaders have reported improved financial stability, and a positive outlook.

This year, that changed.

Just 31% of Michigan local leaders said they’re better able to meet their community’s fiscal needs, down from 38% in 2015. While 42% say property tax growth is increasing, that’s also down from last year, when 45% of leaders saw growth — and the number of communities who say state aid is declining grew, from 18% in 2015 to 20% this year. Thirty percent say they’ll rely on savings to cover budget gaps, up from 26% last year. And only 28% believe their area will be better able to meet its financial needs next year, down from 36% in 2015.

In other words, thanks to stagnant property-tax growth and declining state aid, as well as rising costs for infrastructure — many communities delayed or deferred necessary maintenance during the recession — and higher personnel costs, including pensions and retiree health care, a growing number of local leaders say they’re worried about the financial future.

It’s true that the study’s findings don’t represent radical jumps. But taken in total, it’s a worrisome reversal of a six-year long trend of improving conditions.

And it’s just another reminder that our elected officials in Lansing should amend the way our state funds cities.

Because Proposal A and the Headlee amendment cap the way cities collect property tax, dramatic losses in value like the ones our state experienced in the foreclosure crisis — an unprecedented crash that the authors of Prop A couldn’t have foreseen — can’t be quickly recouped.

The state has aggressively cut the number of tax dollars it returns to cities. Between 2003 and 2013, a Michigan Municipal League analysis found, the state cut $6 billion in revenue-sharing. In 2003, the state sent about $900 million to cities each year. In 2013, it was $250 million. The impulse to disconnect state and local government financial health is a peculiar understanding that’s informed Gov. Rick Snyder’s budgetary priorities. Snyder has focused on improving the state’s fiscal health, even if that means making cuts to local governments. But the plain truth is that the state cannot claim financial health while its cities, counties and townships struggle to provide services.

Neither Snyder nor the legislative leaders who set Lansing’s agenda have shown willing to take these problems on. But a reconsideration of the way we fund cities — the way we pay for retiree pensions and health care, the way cities collect property tax, and the state’s obligation to fund local government — is long overdue.

 

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