Michigan has its own Katrina-like crisis brewing. It’s an exodus from the state, and those leaving are taking their high paychecks along. The loss: in 2007 alone, about $1.2 billion. If the money had stayed, experts predict Michigan would have received at least a $3 billion jolt as it rippled throughout the economy. The economic decline since 2000 – at least 400,000 jobs lost – has taken a toll and for a time earned Michigan the “one-state recession” title.
Statistics like these are hard to swallow and do not bode well for municipalities left scrambling to determine how best to distribute a forever diminishing supply of revenue.
Michigan Fiscal Indicator Scores: The “Watch” List
So, to better monitor the financial soundness of local government units, the Michigan Department of Treasury instituted Fiscal Indicator Scores a few years ago. They offer a snapshot view of the performance of a municipality. The rankings, not meant to predict future conditions, are available for public view on the state website. “We did it for transparency. It’s one way to keep everyone in the loop and give them access to the same local government data,” said Valdemar Washington, deputy state treasurer for local government services at the Michigan Department of Treasury.
Measuring fiscal health involves examining several factors in nine categories, with each assigned weighting and points by the Department of Treasury. The factors, which include population and real taxable valuation growth, general fund operating deficits and other data, are considered good measures of Michigan’s 1800+ units of local government.
Scores below four indicate fiscal soundness, while ratings five and above merit placement on the state Watch List. Municipalities with a rating above five can still handle their financial circumstances at the local level, but should exercise special care when making decisions. Scoring eight or higher indicates distress and possible need for more direct intervention.
According to Terry Stanton, the Department of Treasury’s public information officer, “It’s a 10,000 foot view. None of the scores are used as analysis to determine whether Public Act 72 of 1990, the Local Government Fiscal Responsibility Act, gets tripped.” Only Michigan law dictates when the Department of Treasury can get involved with a “distressed” municipality and take an active role to resolve issues but waiting until criteria are met means doing nothing until there’s a crisis and by then it’s often too late. Appearance on the Watch List at least signals a warning.
Municipal Bankruptcy: Not in Michigan
Unlike California and other states, struggling Michigan municipalities do not simply enter receivership and declare bankruptcy. Instead, if a local unit continues to falter, it eventually comes under PA 72, under which the governor declares a financial emergency. An emergency financial manager may be appointed who has broad authority, including the right to renegotiate contracts. “Several municipalities in Michigan have emerged from PA 72 and moved forward, including Flint and Hamtramck,” said Washington. The Village of Three Oaks will soon join them.
A local unit financial emergency can only proceed to Chapter 9, municipal bankruptcy, after a financial plan has been in place for at least 180 days, and the emergency financial manager has determined that there is no way to remedy the emergency in a timely manner. In addition, the emergency financial manager must petition the Emergency Financial Assistance Loan Board who must not disapprove the request. To date, Michigan municipalities have always avoided Chapter 9.
PA 72 is considered a last step. “The state does not want to take over local units of government,” said Stanton adding, “That’s not our goal. The fiscal scoring process gives elected officials and the public a sense of where the community is on a 10 point scaled system.” By engaging the public, citizens become more aware of their own circumstances, hopefully avoiding emergency financial management. It’s a system similar to the report cards posted for individual school districts.
Washington said, “Our goal is to help local units of government. We also have a Treasury Rapid Response Team available that doesn’t get much press.” It is designed to offer municipalities alternatives to the PA 72 process. “The service has been in place since 2007 but only used once,” said Washington. Local government units can also use the features of a fiscal forecasting estimator tool to “evaluate the financial impact of future economic changes on their local unit by inputting data and looking forward a few years.” Washington said 16 vetted local unit financial advisors with expertise in financial management and turnarounds are listed on the state website “and along with other online tools, are there to help.”
He reiterated, “We act when the statute calls for it. The tools are there to encourage local governments to be proactive. We have no interest in running things at the local level.”
The Michigan Spiral
Much of the current fiscal crisis is due to the decline in the manufacturing sector over the last eight years. As workers lost their source of income, they moved and took with them their children, the future of Michigan. According to Jonathan Williams, director of tax and fiscal policy at the American Legislative Exchange Council, “Michigan needs to reinvent itself. The auto industry isn’t going to come back soon so the state must take drastic steps to lower taxes and reduce the cost of labor. That’s how you attract business.”
ALEC recently released the Rich States Poor States report, which ranked each state according to competitiveness and economic outlook. Michigan’s rank: dead last in economic performance and in economic outlook, a drop from 17th to 34th place in just one year, “mainly due to the Michigan Business Tax surcharge,” said Williams. He added, “You can’t pick winners [film industry] and losers, and you can’t tax your way to prosperity.”
The Road to Recovery
Despite the gloomy news, there are glimmers of hope. Each year, the Edward Lowe Foundation highlights the Michigan 50 – Companies to Watch. These are successful businesses and many are small, with less than 100 employees. Data from the Edward Lowe Foundation presented at the Small Business Association of Michigan annual meeting in June 2009 drives the point home. Between 1997 and 2007, Michigan companies with more than 500 employees shed 158,000 jobs while businesses with fewer employees added over 232,000 people to their payrolls, the bulk of it at businesses with less than 10 employees. Small business is big business – in Michigan.
About the Author
Madeleine Miehls, CEO of Write Side of Business LLC, lives and works in Michigan.
NEW_SECTIONFiscal Indicator CriteriaEND_SUPP_HDRAccording to the Michigan Department of Treasury, the following fiscal indicators "are intended to provide State officials, local officials, and the general public with objective, measurable, and straightforward information concerning the degree of, or absence of, fiscal health in units of local government."
- Population growth
- Real taxable valuation growth
- Large real taxable value decrease
- General fund expenditures as a percent of taxable valuation
- General fund operating deficits
- Prior general fund operating deficits
- Size of general fund balance
- Fund deficits in current or previous years
- General long-term debt as a percent of taxable value
Source: Michigan Department of Treasury, Fiscal Indicator Scores