Michigan local government is an important sector in Michigan’s economy and its fiscal health is vital to Michigan’s economic prosperity. Local governments are the primary provider of services directly to citizens, delivering services based on local resident’s desires or at the direction of State and Federal governments. When the local library closes, the roads are full of potholes, emergency service responses are too slow, or there is a lack of safe drinking water, the quality of life of citizens will decline and their health and safety will be at risk.
The Great Recession of 2007-09 left scars across Michigan’s landscape of municipal government. Since 2009, 13 municipal governments have been determined by the Michigan Department of Treasury to be in fiscal emergency and have been and/or are currently still under state supervision. These county, city, and township governments have had to cut services and employee benefits and make other politically painful decisions to address deep fiscal distress. Even as the Great Recession fades from view, new fiscal problems are emerging in the form of underfunded pension systems, rising retiree health care costs, and low fund balance reserves.
Michigan operates its financial emergency program under PA 436 of 2012. This newest version of the law expanded the number of criteria that can trigger the review process to determine if a financial emergency exists, and provided additional options in lieu of an emergency manager, which include bankruptcy, a consent agreement, or a third party financial review.
However, the current system is deficient in that it provides no early warning system. Such a system was used in the past in Michigan, but is no longer in use. State policymakers need to identify communities trending toward fiscal distress in order to avoid a state takeover or municipal bankruptcy given the high economic, political and bond market costs of such actions.
Many states are developing and implementing local government fiscal monitoring systems, including Louisiana, Virginia, New York and Tennessee. States are recognizing the benefits of detecting early signs of local distress which in turn allows them to help local governments address problems before they become unmanageable. Early detection of fiscal distress can allow states to help in less intrusive ways than could be needed in a full fiscal crisis.
In order to assist local governments in not only being aware of their current and future fiscal conditions but also in planning for the future, the State of Michigan implemented in 2007 a system to analyze the fiscal distress level of each locality through a fiscal stress indicator scoring system. The Michigan Department of Treasury had the responsibility for implementing and maintaining the local government fiscal indicator system. The state of Michigan used this fiscal distress indicator system from 2007 to 2010. The Institute for Public Policy and Social Research awarded a Michigan Applied Public Policy Research grant to the MSU Extension Center for Local Government Finance and Policy to update and improve the original fiscal distress scoring system for Michigan local governments that reflect recent changes to laws regarding the structure of financial reporting, as well as advances in fiscal distress analysis.
The scope of this project is to collect financial, economic, and demographic data from audit reports and other sources for all Michigan cities and counties and selected villages and townships (based on population size), and to calculate two fiscal scores. The first will measure the financial strength of local governments based on five indicators for cities and four indicators for other local governments. The five indicators are taxable value (TV) per capita, growth in TV per capita over the last three years, population growth over the last three years, per capita income, and the levied millage rate as a percentage of maximum allowed millage rate. All five indicators are used for cities, and the first four are used for other local governments. The second score measures the fiscal performance of local governments based on a number of financial measures such as liquidity, fund balances, assets to liabilities ratio, and long-term debt.
Once all the scores are calculated the two scores will be compared and local governments will be classified into four categories:
- Strong financial base, strong fiscal performance;
- Strong financial base, weak fiscal performance;
- Weak financial base, weak financial performance;
- Weak financial base, strong financial performance
Thinking about local government fiscal health in this way will provide a good framework to identify those local governments that are experiencing fiscal problems largely beyond their control -- such as population loss or low TV per capita. It will also identify those local governments that are managing well despite below average resources and those that are managing poorly despite above average resources.
The goal is for all data collection, verification of data and the final report to be completed by June 30, 2018. Depending on the rate of collection, the number of villages and townships included in the analysis may be reduced.
The calculation of the first score, financial strength, has been completed for all cities and counties, villages with population of 1,000 or more (91 villages), and townships with a population of 5,000 or more (243 townships).
The average financial strength score for cities using 2016 data was 3.12 (out of 5), and 73 cities, or 26% (out of 280) had a score of 4 or higher. The average score for counties was 2.49 (out of 4), and 20 counties, or 24% (out of 83) had a score of 3 or higher. The average score for townships was 1.6 (out of 4), and 34, or 14% (out of 243) townships had a score of 3 or higher. The average score for villages was 2.48 (out of 4), and 31, or 34% (out of 91) villages had a score of 3 or higher. Not surprisingly, cities and villages have a larger share of locales with a weak financial base than counties or townships.
If the state decides to reinstate an early warning fiscal distress system, this framework and analysis can help state government identify local units needing an Emergency Manager (those with a strong financial base and weak fiscal performance) to improve fiscal performance and those units where additional resources are vital to improving the fiscal performance (those with a weak financial base and weak fiscal performance).
Mary Schulz is an economist and associate director of the MSU Extension Center for Local Government Finance and Policy. Bob Kleine is a former State Treasurer of Michigan and has served as interim director of the MSU Extension Center for Local Government Finance and Policy.