State and Local Governments Fiscal Issues Intertwine – No Quick Fix on the Horizon

At the Leadership Summit conducted by the Business Leaders of Michigan on May 17, Robert Daddow, Deputy County Executive for Oakland County pointed out several areas related to local government solvency that he believes are being overlooked. His comments reinforced the idea that the fiscal fortunes of the state and local governments are truly linked.

My take on his comments are:

• Foreclosures are on the rise again. Declining property values will continue to drop assessed values, which in some places remained above taxable values, but now will begin to drop below taxable values, such that property tax revenues will drop even more than in the past years.
  
  
• The assessed values of properties are determined by the increase or decrease in the average price of property sold in the previous year (at least for residential property). The lag in the drop in assessed values will result in past years’ property value drops now showing up in assessed values. In other words, the taxable values will continue to drop even after the actual property values level off until the lag time is worked through.
  
  
• Recourse payments (aka “chargebacks” by county treasurers) are expected to be larger than normal as tax delinquencies rise.
  
  
• Michigan Tax Tribunal losses will finally begin to show up as backlogged cases start being cleared in late 2011, causing not only a drop in taxable values for current and future years, but also refunds for previous years.
  
  
• Many schools and other municipalities have passed millages and issued unlimited general obligation bonds. These were approved on the assumption of increasing property values, but as property values drop, the debt service must still be paid. The municipalities will have two choices: increase the millage rate or cover the property tax shortfall from the already stressed General Funds.
  
  
• Debt issued by DDA’s, TIFA’s and LDFA’s were projected to be paid from property taxes collected on assumed increasing property taxable value. Even if the debt is solely backed by the entities’ revenues, will defaults affect the local government’s bond rating? Will local governments need to step in to prevent default?
  
  
• Lag in funding due to different fiscal years results in need for borrowing which is increasing as fund balances drop. For example, school districts are paid in 11 convenient installments (August is skipped), two months late. Will there be adequate borrowing capability by the municipalities on their own via tax anticipation notes or for schools, “state aid notes”? If access to the Michigan Municipal Bond Authority will be needed, what about the state’s credit rating and ability to access money? Municipal bond insurance is more difficult to get at reasonable rates. How will this impact the interest rates municipalities will need to pay?

Result: Taxable values are expected to decline by roughly a third in the next several years, such that even with optimistic economic forecasts, it will take until 2020 – 2025 to return property tax revenues back to the 2007 collection levels. When these property tax impacts are added to the huge unfunded liability for pensions and retirees’ healthcare and declining revenue sharing payments to the municipalities from the state, you can see why local governments are truly in peril. Local governments will need to significantly tighten the belt, and get all the help they can get in controlling its wage and benefit costs. But, even given that, state revenue sharing or local millage increases will be needed to maintain essential services.

Further:

• with the state 6 mill school tax based on taxable values, the state property tax collections will decline.
• the per pupil foundation grant received by school districts is comprised of the amount per student collected from the 18 mills levied on non-homestead property in the district plus whatever additional the state needs to make up. With taxable values declining, the amount extra the state will need to make up will continue to increase.

We truly are in this together – state and local fiscal issues intertwine. We need to work together to reposition the state to turn this state around economically. To get more tax revenues, we need to get more businesses making money, more workers earning pay checks and paying taxes, fewer homes in foreclosure, and stabilizing property values. There is no quick fix, and attempting to get the quick fix by simply raising taxes and making the state even less competitive in attracting and encouraging businesses will only prolong the agony.

The good news is that there are plenty of very smart people who have put together a collection of ideas or proposals that can turn the state around economically - to make Michigan a Top Ten state again. That was the impetus for the Leadership Conference, to promote the Michigan Turnaround Plan proposed by the Business Leaders for Michigan. We can and must do better. Daddow’s presentation is valuable, for the first step to finding solutions is a brutal recognition of the facts.

Double Dipping Permitted Under New Retirement Law and Should be Stopped

“School administrators in metro Detroit districts are considering whether to retire and then return to their jobs as independent contractors . . . . Retiring allows them to begin drawing a state pension, while being rehired privately for the same job allows them to continue to collect a salary . . . .

Drawing both a pension and a paycheck was once considered "double dipping," but is allowed under Michigan's new pension reform law . . . . School districts save money when they re-hire the retiree privately, because the district typically does not offer benefits and is no longer required to contribute to the state retirement system on behalf of that employee . . . . “ Michigan Education Digest, June 8, 2010

This process has been called “retire-rehire” and has been a tactic some school districts have used to save money, by, in effect, dumping the benefit costs onto the retirement system. When an administrator retires and then is rehired on a contract, the district avoids not only the about $16,000 per year health insurance cost and the 2010-11 MPSERS rate of 19.41% (minus the 3% the employees will need to pay under the new law), but the district also avoids the 7.65% combined Social Security tax, the unemployment tax and workers compensation insurance costs.

This all adds up, with most superintendents and many other administrators earning over $100,000 per year. For example, as cited in the Michigan Education Digest report, the “retiring” Clawson Public Schools Superintendent will continue to receive her $140,000 annual salary, but the district will no longer pay $65,000 in benefits.

Many will ask, “Well, if the school districts are saving so much money, what’s wrong with that? It sounds like good management to me.”

The problem is that the benefit costs are not avoided, but merely shifted. That is, the stressed MPSERS system now absorbs the cost, and this cost is then paid by higher contribution rates paid on wages by all school districts for their employees. This practice has been under attack as “abuse” by the MPSERS system for years, and while not completely legal, many districts continued to do it. The “retired” employee is hired on a contract through a third-party employer, rather than directly. That, in itself, should be a red flag that something is not right with the tactic.

The tactic appears to have been less effective with hiring back teachers than with administrators. The excuse is that “good school administrators are hard to find”, but often this is just a smoke screen for protecting the good ole boy system within the current and former school administrator ranks. Many teachers are ready to step into principal roles when given a chance. And, with all of the laid off management skill in Michigan today, there is ample transferable talent available to run our schools at the superintendent level.

While the school district retirement system reform law recently enacted was a step in the right direction, it could be improved by eliminating the double dipping it still allows.