Policy Research

Causes and Consequences of Fiscal Stress in Michigan Cities

Eric Scorsone, Mark Skidmore

Summary

The authors examine the relationship between the 2008 Financial Crisis, and local municipalities’ financial situations. The authors first examined the relationship between the crisis and local municipal financial situations. They found that property tax revenue fell, although not as significantly as expected due to a lag between the crisis in 2008 and the last year data was collected, 2009, while revenue gained from income taxes fell significantly, as did Federal revenue sharing. The authors then examined expenditures and found that spending decreased in regards to Capital projects, as well as Parks and Recreation and General Government. The authors found that Public Safety, Health, and Economic Development were not impacted significantly as a result of the 2008 financial crisis.

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Policy Implications

It is important for states, particularly Michigan, to recognize the link between the Financial Crisis and municipal financial distress. Further exacerbating the issue is Proposition A in Michigan, which impacts cities abilities to generate revenue when property values fall, but fails to provide mechanisms to increase revenue as property taxes rise. States need to understand that external constraints have large impacts on cities, and that failing to recognize these external constraints harms the long term viability of a city. Finally, states should address pressures placed upon cities in expenditures, especially when it impacts capital projects and general government services.