Court: Michigan shortchanged cities for years. But windfall isn’t certain.

Michigan incorrectly calculated its required payments to local governments, a state appeals panel ruled Tuesday, an action that municipal advocates say has had the effect of reducing the amount of state aid local governments are owed.

But that doesn’t guarantee local governments would receive more money from Lansing following a Michigan Court of Appeals ruling in a case alleging the state for years shortchanged communities by violating a tax-limiting provision of the state Constitution known as the Headlee Amendment.

That’s because the court’s ruling is limited to one part of the dispute, and can be appealed.

And unless the case goes to the Michigan Supreme Court and its justices give communities a clear victory, it’s not yet clear whether the state would have to pay more, said Eric Lupher, president of the nonpartisan Citizens Research Council of Michigan. 

Absent a win at the state’s highest court on the plaintiffs’ biggest contention, related to funding of public schools, “it is mostly a paper win,” he said. The courts are “able to slap the state on its hands and force it to change some behavior, but probably not result in new money for local governments.”

At issue is whether the state of Michigan violated terms of the Headlee Amendment, which forbids the state from paying any less in aid to local governments — such as cities, villages and townships, but also school districts, community college districts and others — than it did when the amendment was adopted in 1978. Today, that equates to at least 48.97 percent of all state spending that must be paid out to local governments.

A coalition of about 20 local governments known as Taxpayers for Michigan Constitutional Government brought the suit, contending the state has improperly counted spending on traditional public schools, charter schools and funding for local governments to comply with state mandates toward its minimum local government spending requirement under Headlee.

The group argued that money Michigan gives to local governments to comply with state mandates isn’t state aid, and should be counted separately from what’s more commonly considered revenue sharing. They contend the state incorrectly counted funding it gave K-12 public schools under 1994’s Proposal A toward its local government spending minimum under Headlee, calling it a “tax shift” that has created a burden on local taxpayers through higher property taxes or cuts to services.

And, the group argued, the state shouldn’t count charter schools toward its Headlee spending requirement because they don’t meet the definition of a local government.

John Mogk, president of Taxpayers for Michigan Constitutional Government and a professor at Wayne State University Law School, told Bridge Magazine the group is considering whether to appeal the ruling.

So is the state, which “will take us some time before we are able to determine any next steps,” state budget spokesman Kurt Weiss said.

Depending on how the case is resolved, experts say the lawsuit could have significant impacts on both state and local government funding. Mogk said billions of dollars could be at stake.

Local governments have struggled to recover from the Great Recession in the late 2000s. Property values tanked during the housing crisis, but the state constitution limits how fast they can rise. That means local revenue from property taxes fell faster than it has recovered, putting a strain on communities’ ability to provide services.

Taxpayers for Michigan Constitutional Government contends the state has also played a role in local governments’ financial strain, beyond the Legislature’s diversion of statutory revenue sharing meant for municipalities to plug state budget holes.

“To the extent that we are correct as it relates to all three claims, the state’s action has unquestionably contributed to the financial stress of many communities,” Mogk said.
The appeals court this week unanimously agreed with Taxpayers for Michigan Constitutional Government that the state should not count spending it provides local governments to comply with new state mandates toward its Headlee requirement. The court ruled that doing so is essentially counting funding for mandates twice, and “would force units of local government to choose between cutting services or raising taxes to make up for the funds lost to pay for the necessary costs of new mandates.”

The judges unanimously disagreed with the plaintiffs, however, on their Proposal A claims, writing that the constitution doesn’t support the group’s argument.

And it split on the charter school question. Two judges ruled in the majority opinion that charter schools are local governments — in this case, school districts — “for the purposes of receiving state aid. Given that, we see no reason to overrule the state’s decision to count those funds as payments to local government under the Headlee Amendment.”

But appellate Judge Patrick Meter dissented on the charter school question, writing that he did not consider them to be local governments under Headlee in part because they are not accountable directly to voters and because they have “a lesser capacity for self-governance” than other governmental bodies, in that they are under the control of an authorizing entity, such as a university, that can grant or revoke its charter.

“The implications of this [case] are very big, both for the state and for local governments,” said Lupher. “This lawsuit alleges that the state has played some financial games to keep its own budget balanced and sustainable, but done that at the expense of local governments.”

Should the case be appealed to the state Supreme Court, a favorable ruling for plaintiffs on their Proposal A claim would have a bigger impact on local government revenue from the state because spending on public schools is likely greater than for charter schools or state mandates, Lupher told Bridge. That means if the state is determined to have actually spent less than the nearly 49 percent it’s required to spend on local governments, “then the state is going to have to find new money to send to local governments,” he said.

Michigan Municipal League CEO Daniel P. Gilmartin issuing a statement late Wednesday saying the ruling "will ensure transparent and proper funding for local services that improve residents’ quality of life across the state.”