Wolverine Recovery?

In this year’s annual survey, the University of Michigan finds that a growing number of local governments in Michigan are beginning to experience greater fiscal stability for the first time in years, despite ongoing falling property-tax revenues and rising infrastructure needs continue to plague many jurisdictions, especially larger cities in the southeast part of the state around Detroit. Nearly half of communities with more than 30,000 residents reported a declining ability to meet their fiscal needs in 2012 compared to more than 60% in 2011. Nevertheless, local officials across the state are the most optimistic about their future fiscal health since the report began being issued four years ago. Michigan ranks high in terms of fiscally stressed local governments. Seven local governments are currently in state-declared emergency management, and three more operate under consent decrees with the state. Adding to the fiscal misery are cuts in property tax revenue and state aid and high retirement-related debt. The survey, which tallies how local officials respond to stress, notes that more are relying on their general funds to cover shortfalls, as well as shifting costs of health care benefits to employees, and trimming or outright eliminating services.

Key findings: One-third of local government officials said they will be somewhat or less significantly able to meet their fiscal needs this year compared to last year — a drop from last year’s figure of 48% and 61% in 2010; just under one quarter said they are somewhat or significantly better able to meet their fiscal needs this year compared to last year, up from 16% last year and 9% in 2010; 27% predict good financial times in 2013 while 22% foresee bad. The number of local officials who said they were less able to meet their fiscal needs this year was 33% — a drop from 61% two years ago. Nevertheless, nearly two-thirds of local governments realized reduced property tax revenues this year compared to last; and 46% of governments reported declining state aid this year. Among municipalities with more than 30,000 residents, 47% reported a declining ability to meet their fiscal needs in 2012 compared to 2011, down from 61% last year, and compared to 34% among smallest jurisdictions. Larger communities also reported greater property-tax declines — 75% of cities with more than 30,000 reported they

The survey indicates that both larger and smaller cities are turning more toward collaboration and privatization to deal with fiscal challenges. Among the larger municipalities, 36% said they expect to increase privatization of services next year, a still-large number that is down from 58% in 2011. Many local officials said they plan to rely on general fund balances and rainy-day funds to manage through problems, with 46% of mid-size governments saying they plan to increase their reliance on their general fund balances and 21% saying they plan to increase their reliance on rainy-day funds. Some half of all jurisdictions also said there was no change in their ability to repay debt this year, including 77% of counties saying there had been no change and 66% of cities saying the same. But 15% of cities reported a somewhat decreased ability to repay debt this year compared to last. Looking forward, most local governments said they do not expect to take on more or less debt next year, with 15% saying they plan to somewhat decrease the amount of their debt, including 22% of cities. Another 12% of local governments, including 25% of cities, said they plan to somewhat increase their levels of debt next year.

Like governments across the country, Michigan’s communities face problems tied to pension and retiree benefit costs that will continue to pose problems in the future. The university survey notes that one common response to fiscal stress in 2012 was to shift more health care costs to employees. Among the jurisdictions that offer benefits — most of which are larger — 62% plan to have employees cover more of their own costs next year, including 81% of the largest governments. Trimming or cutting services is another common response, and the survey reported that 22% of the state’s largest municipalities completely eliminated a service last year and 21% plan to do so next year. Calling this an “extreme action,” the report says that the cuts “indicate a continuing retrenchment for many local governments across Michigan in 2012.”

Looking ahead, the report found there were a number of factors that could affect local government fiscal stability over the next few years, including Gov. Rick Snyder’s efforts to eliminate the personal property tax, a revenue stream that is dedicated almost entirely to local governments.