Binding cities, with few ways out

The “Flint Syndrome” is a quick way of summing up the long-run consequences of disinvestment in our cities that have resulted in widespread breakdowns in public safety and the quality of life for citizens. While the phrase refers to the terrible water debacle in Flint, just about any expert in municipal finance will tell you the syndrome could easily apply to just about any sizable city in Michigan.

The puzzling and frustrating thing about this particular malady is that it has been largely caused not by any one error, but by a series of state policies adopted over nearly the past 40 years.

“Cities are bound and gagged financially by the state,” Mitch Bean, the widely respected former long-time director of the nonpartisan House Fiscal Agency, told the Center for Michigan’s online Bridge Magazine, as part of a series of articles on the state-inflicted crisis in municipal finance several weeks ago.

“And there’s no way out.”

One example: Bridge found that 2,300 police officers had been laid off by Michigan cities from 2005-2014, more than in any other Midwestern state. Squeezed by tight resources, many cities around the state are reducing services to residents, even undertaking such drastic measures as holding local fundraisers to buy fire equipment.

Working out why things have come to this requires connecting the dots from a series of Michigan policy changes over many years.

One big starting point: The Headlee Amendment to the state Constitution, adopted in 1978. Among other things, it limited increases in local property taxes to no more than the rate of inflation.

At the time, that made plenty of sense. Michigan was riding high in the late ‘70’s, and local property values were skyrocketing. But as a thriving economy increased the values of local real estate, homeowners discovered they were being driven out of their own homes by sharply increased property tax bills.

The solution -- restricting the rate of increase in local property taxes – seemed rational at the time. As I recall, nobody imagined that the Great Recession of 2007-09 and a series of other events would send local property values plummeting, reducing property tax income to cities.

But because of Headlee restrictions, local property taxes couldn’t make up the difference when the economy finally turned around.

Similarly, the debate in 1994 over Proposal A never addressed how the cap placed on increased local property assessments (five percent of the inflation rate) might restrict cities from making up for increased property values when the economy improved. Experts quoted in Bridge estimated it would take some cities decades to get property tax revenues back to even after the Great Recession ended.

Not only that, but long before that recession, the major way the state used to contribute to municipalities – revenue sharing – began to take repeated hits over the years from the Michigan legislature.

The basic law calls for the first four percent of sales tax revenues to be set aside for distribution to cities.
But the law does not – and cannot – require the legislature to actually appropriate funds to be passed out. The Michigan Municipal League says more than $5 billion destined for cities has been withheld over the years by legislative fiat.

Finally, a succession of Michigan’s Emergency Financial Manager laws placed control of distressed city spending entirely in the hands of emergency managers. The way the current law is written focuses almost entirely on cutting expenditures run up by incompetent local officials whose cities suffered financial distress.

How cities could maintain income (and essential services) was left unaddressed in the debate back in 1988, when the first Emergency Manager Law was approved by the legislature.

Nor did new stronger emergency manager laws enacted in 2011 and late 2012 deal with the problem.

As the articles in Bridge suggest, it doesn’t have to be like this. Michigan’s unusual set of state restrictions on municipal revenue are not found in most other states. In Pennsylvania, for example, emergency managers are empowered to assist cities both in managing costs and in generating local income, mostly through income taxes. In Pittsburgh, emergency financial managers develop budgets in collaboration with locally elected officials, unlike the unilateral power exercised by Michigan EM’s.

And municipal finance in Ohio depends to a high degree on local income taxes, something quite different from Michigan’s reliance on property tax revenue.

Defenders of the current emergency manager law say -- rightly, in many cases -- that it is a proper remedy against incompetent locally elected officials who cannot manage their towns.

And they add that often the main issue in municipal finance is to restrain uncontrolled spending driven by local politicians.

But the “Flint Syndrome” mess lurking in so many cities suggests that things have gone too far and that a serious reconsideration and retooling is in order. For the series of handcuffs the state has placed on many Michigan cities suggests there is some validity in the old cynical observation:

“The problem, is all too often, aggravated by the solution.”