Finance Model Is Broke And Broken

April 12, 2004
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GRAND RAPIDS — A report commissioned by the Michigan Municipal League claims that the state’s fiscal policy is financially crippling Michigan’s communities and is leading cities, townships and villages on a road to fiscal ruin.

“The state cannot continue to undermine communities financially. Ultimately our citizens bear the brunt of the state’s ill-advised fiscal policy towards local government through cuts to services they care about and use every day,” said Curtis Holt, Wyoming city manager.

The Grand Valley Metro Council, a coalition of 32 governmental units that serves as the region’s planning agency, is keenly aware of the disastrous scenario the MML laid out at its legislative conference late last month.

“The specter this report points to is frightening,” said Don Stypula, Metro Council executive director.

At the conference held in Lansing, the MML released findings from a report done by Plante & Moran called “System Failure: Michigan’s Broken Municipal Finance Model.” The report argues that the Headlee Amendment and Proposal A, along with changes to the General Property Tax Act, have interacted to penalize communities that have grown and expanded their property-tax base.

How? By forcing rollbacks to their millage rates.

“These create a formula that intermixes these in a way that is very detrimental for local communities across the state,” said Summer Minnick, a legislative associate with the MML, which represents cities and villages.

“If a community is doing everything it can to become a type of community that everyone will want to come to, and the property values rise, it will be hurt more. The better it does in terms of developing that type of a city, the worse it is punished,” she added.

Even when a city’s taxable value rises, it doesn’t always result in more tax revenue —especially for an older city that has reached its tax cap. Headlee, Proposal A, and changes to the property tax law don’t let every city capture the additional tax revenue.

“Headlee said total revenue couldn’t exceed inflation, and Proposal A said everybody was capped at taxable value. It was always assumed when a home was sold and a community could be rewarded for being the type of place where property values would increase, then communities would realize that lost value,” said Minnick

“But that’s not the case because the way that statutory language was written, every time a home sells and that value increases, you have to rollback your millage rate proportionally. So everybody else is getting a reduction.”

In some instances, Minnick said these reductions have resulted in property owners paying taxes that are lower than the inflation rate. Add state cuts to revenue sharing and Minnick said it gets more difficult for a community to keep its fiscal head above water.

All 11 governments that reported to the study projected they would have shortfalls in their general funds through at least 2007. Six said deficits in those funds are likely by then.

“They are using up any extra fund balance that they have. Their costs are increasing at a rate much greater than inflation, and they’re capped and getting cut,” said Minnick.

The report also claims that a greater tax burden has been placed on homeowners due to changes that were made for businesses.

Revisions to the personal property tax tables by the State Tax Commission in 2001, new personal-property tax tables for the transmission and distribution property of utilities, and a state Supreme Court decision (WP Acquisition Co. vs. City of Troy) have resulted in lower property tax values for businesses.

The Plante & Moran study concludes that the municipal finance model is broken and local governments are on a financial collision course.

The MML wants Lansing to make a change to the property tax act that would exempt the higher property tax value from a rollback. Doing that, Minnick said, wouldn’t force a city to lower its millage when a resident sells a house and the property’s value goes up.

But before the MML can get that change, Minnick said more people have to be made aware of the situation.

“I’ve talked to a lot of people who’ve said they had no idea that the statutory provision required these things,” she said.

Plante & Moran partner Frank Audia, who co-wrote the report with Denise Buckley, will join the Metro Council at its Legislative Committee’s monthly meeting this week.

“This issue is so germane to all of us,” said Jim Buck, Metro Council chairman and Grandville mayor, “and so critical.”

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