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Dollars and Sense? Municipalities wrestle with disconnect between state revenue sharing and the economy

BY Sunday, August 07, 2016 12:53pm

As Michigan’s private sector continues to expand, municipal executives remain concerned that the state’s local units of government have limited options to share in that growth.  

State revenue sharing, historically one of the largest streams of income for Michigan’s local units of government, has diminished significantly over the last two decades, only picking up somewhat in recent years, according to municipal government experts.

“The state has turned revenue sharing into a gift, and that’s not how it used to be,” said Anthony Minghine, associate executive director and chief operating officer of the Ann Arbor-based Michigan Municipal League (MML). “This isn’t some benevolent act. This is supposed to be a part of how cities get funded.”

Recent data released by the MML show that four West Michigan counties — Allegan, Kent, Muskegon and Ottawa — lost more than $312 million from 2003 to 2015 as a result of diminished revenue sharing from the state. 

Ask municipal executives about that loss of dollars, and they’ll note those funds could have gone for core services such as police and fire departments, mass transit improvements or other economic development initiatives. Instead, they’re left with trying to figure out how to provide those services with less help from the state. 

“What we need is a system that tracks with the economy,” Minghine said. “Now we’re in a recovery so you’d expect that … cities would share in the recovery, and (they) don’t.”

As economists caution that some sort of economic downturn looms in the coming year or two, municipal stakeholders warn many local governments around Michigan could find themselves in trouble. “They’re not able to take advantage of that growth because the revenue stream coming into the city … doesn’t translate into revenue that allows cities to make sure they have adequate, basic services,” said Eric Scorsone, an economist, associate professor and founding director of the MSU Extension Center for Local Government Finance and Policy. “I think there’s a real danger if there’s a recession — there will be a recession — that (cities) are on a thin margin. They don’t have a lot of reserves.”


State revenue sharing has served as a source of funding for Michigan cities for decades. 

The state started doling out taxed revenue — largely from sales taxes — to local units of government back in the late 1930s, according to Scott Buhrer, chief financial officer for the City of Grand Rapids.

However, the cuts began in the 1990s and have occurred consistently under both Democratic and Republican-controlled state governments, Scorsone said.

According to MML data, the state revenue sharing dollars for Grand Rapids alone decreased about $83 million during the 12-year period from 2003 to 2015. 

Historically speaking, about 60 percent of revenue raised by the state was distributed to local units of governments, according to a 2012 study by Citizens Research Council of Michigan, a Lansing-based nonpartisan research group.

It wasn’t until 2012 that the state began modestly increasing those allocations. And while municipal advocates applaud the state’s decision to boost revenue sharing, they also say it’s unlikely the funding will ever return in full. 

“It’s not going to happen,” Scorsone said, adding that funds were diverted to take care of crises like Flint’s water and the Detroit Public Schools. “(Full revenue sharing is) not feasible.”

Even with revenue sharing picking up, the state would need to provide an additional $400 million to fund the local units at historical levels, he said. 

Given the pressure on state and local units of government to maintain balanced budgets, there are  just not enough resources to go around, according to sources contacted for this report.

“The business of government is important, but it tends to be in the business of scarce resource allocation,” said Andy Johnston, vice president of government and corporate affairs at the Grand Rapids Area Chamber of Commerce. “That will continue to be a struggle of government at all levels.” 

In times of diminishing revenue, Michigan’s local units of government have few options to boost funds to continue providing the needed services: Under state law, municipalities cannot levy their own gas, alcohol or local sales taxes.

“The problem is we don’t give local options and we’re not really fully funding revenue sharing,” Scorsone said. “It seems like you would do one or the other — we’re not doing either. Most states do one or the other: Raise whatever money you think you need or we the state will give you adequate money. That’s the dilemma here, I think.”


Those restrictions have made many of the state’s local units of government reliant on ballot initiatives as a method of boosting revenue. 

While the state Legislature has largely opposed ballot initiatives to raise taxes and create revenue for municipalities, Buhrer finds that ironic given Lansing has made it difficult for cities like Grand Rapids to make up for lost funding elsewhere. 

“Their very actions almost force locals to increase taxes,” Buhrer said. “If you’re at a local level, you can’t escape the irony of that position.” 

In some cases, ballot initiatives have drawn the ire of members of the Lansing-based Michigan Chamber of Commerce, said Tricia Kinley, the organization’s senior director of tax and regulatory reform.

“While our membership is sympathetic, they also contribute very generously,” Kinley said.

The statewide chamber and many of its members feel that the more than 2,800 local units of government in the state should consolidate services before seeking to increase revenue and asking for higher taxes, she said. 

“(Our members) deserve to know whether they’re getting the most bang for their buck. You can’t help but wonder if there’s some sort of redundancy,” Kinley said. “Our members want to see well-functioning local government, but there seems to be some resistance to really buckling down.” 


In Grand Rapids, Buhrer has a long memory when it comes to West Michigan’s largest city and its tumultuous relationship with the state over decreases to revenue sharing. 

A decade ago, Buhrer and other city leaders would hold press conferences outside City Hall “to rail against the most recent raids” on the state’s revenue sharing obligations.

“But at the end of the day, what we concluded was, no one is going to save us but ourselves,” Buhrer said. “Rather than continuing to squawk about the cuts in state revenue sharing, we put our full attention on transforming our organization and learning to live with the new reality, as harsh as what it may be. We certainly never approved of, nor did we condone (the cuts) or agree to stop fighting for state revenue sharing. But we realized that our voice was falling on deaf ears.” 

Rather, the city worked to transform its fiscal situation, negotiating with its unions and focusing on stability in its long-term pension obligations, according to Buhrer. As a result, Grand Rapids went from projected deficits of more than $30 million to reserves of about $30 million.

“I think that the city’s financial condition right now is more solid than it has been in anybody’s collective memory,” he said. “We are in much better position in terms of our ability to sustain services when the next economic downturn comes.”

Several sources contacted for this report applauded cities like Grand Rapids and other municipalities that have taken steps to put their fiscal houses in order. While Grand Rapids may stand out as one such example, sources say they remain concerned about the health of many communities around the state. 

To Minghine of the MML, it’s a clear choice between providing local government services that could be attractive to private investors even in tough conditions, or choosing not to do that. 

“If you diminish services, you diminish value, (and) that only brings in less revenue,” Minghine said. “We need a clear system that will track with the economy and share in a prosperous economy. We don’t have that right now. We should be investing rather than disinvesting. We keep deferring investment. That all comes home to roost.”  

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