Banking & Finance, Economic Development, and Government

Cities not benefiting from recession recovery

Adjusted for inflation, reports show total revenues for cities dropped about 12%.

January 3, 2020
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Michigan cities suffered from declining revenues from 2002 to 2017, making them more vulnerable to the next recession, community leaders say.

State funding for cities declined across the board during that period, according to a recent Michigan Municipal League report.

Adjusted for inflation, total revenues for cities dropped about 12%, the league reports. State revenue sharing — the money that the state allocates to communities — fell 37% and property tax revenue dropped 15%.

“What this report shows is that there was no recovery for cities,” said Chris Hackbarth, director of state and federal affairs for the league. “If we haven’t been able to recover our local governments following the last recession, we should have zero hope that they’ll be able to recover from the next recession.”

The league represents cities and villages across the state.

Statewide, 173 Michigan cities studied saw revenue growth under 2% over the 15-year period. Only 52 cities saw growth of 3% or more.

“The state needs to realize what they’re doing to communities — I think they’re finally getting the message,” said Gary Simpson, Marquette’s chief financial officer. “I think they’re committed to gradually increasing the funding — I don’t know if we’ll ever get to the level it should be at — but I think there’s a sudden realization.”

In 2017, legislators began increasing the amount of revenue shared with local governments, including a 2.8% increase from 2018 to 2019, according to Plante Moran, a public accounting firm.

The Municipal League created an online tool with Department of Treasury data to allow each community to quantify its loss of state support.

The lack of recovery is due to continued cuts in state revenue sharing despite a period of state revenue growth from 2011 to 2017, Hackbarth said. That makes it difficult for cities to restore local services like ambulances, police patrols and road repairs.

“Revenue sharing was one of the key places that bore the brunt of the cuts in the last recession, and they have not restored those cuts,” Hackbarth said.

For example, the city of Marquette lost about 60% of its revenue sharing from the state after 2002, according to the league’s SaveMICity tool.

That stifled Marquette’s ability to repair aging roads and bridges — something many local governments aim to do, Simpson said.

“Just about every department we have needs more people, and we can’t bring in those people to provide the services that our citizens demand,” he said.

The revenue loss is particularly worrisome, as some economists sounded the alarm of recession after a bleak jobs report earlier last year and an analysis of local government revenue.

Since May 2019, Michigan’s unemployment rate has remained steady at about 4%, according to the federal Bureau of Labor Statistics. That is improved from the nearly 15% unemployment rate in 2009, but it also means job growth has been flat in the state since last January.

The challenges of the state government and local governments aren’t always aligned, Hackbarth said.

“We’re trying to show the disconnect that exists between what happens with the state’s economy, the state budget and local budgets,” he said.

Matt Grossmann, director of the Institute for Public Policy and Social Research at Michigan State University, said he agrees that city and state financial pressures are disconnected.

Stagnant job growth does not explain why cities struggle financially, he said.

Population growth, new development and housing are evidence that a city would be more likely to withstand a recession, Grossman said.

For communities in northern Michigan, the problem is magnified.

“The U.P. has long-running economic and population problems that I’m sure are exacerbated by recessions but are not caused by them,” Grossman said.

In some areas of the Upper Peninsula, the closest mental health facilities are across the Mackinac Bridge, Hackbarth said. Cuts in revenue sharing for cities reduce already understaffed government services, which complicates law enforcement’s response to an emergency involving someone’s mental health.

“What do you do if you only have two police officers and you need two people to transport someone? Now, all of a sudden, that community is left without a public safety presence until they get back,” Hackbarth said.

Without revenue sharing, local governments are forced to rely more on property taxes which, by state law, can be raised only at the rate of inflation or 5%, whichever is less, Hackbarth said.

This means when property values decline, income dries up for local governments, and that caused many problems during the last recession.

“We had communities that lost 20%, 30%, 40%, 50% of their tax base,” Hackbarth said.

Still, Simpson said he was encouraged when legislators began restoring the lost revenue.

Rhetoric from legislators including Rep. Sara Cambensy, D-Marquette, includes promises to restore revenue sharing. In the past, the issue wasn’t recognized. 

“There seems to be several, which is encouraging,” Simpson said.

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