Published in Economic Development

Stimulus funds trickle in for state, local governments but ‘massive hole’ remains

BY Tuesday, April 28, 2020 04:22pm

Federal stimulus funding has started trickling into Michigan to offset costs related to the COVID-19 pandemic, but pressure continues for more sweeping relief to offset losses in sales and income taxes.

Michigan was allotted nearly $3.9 billion from the CARES Act to offset costs specifically related to COVID-19 response. Local units of government with populations of more than 500,000 people qualify for a share of that funding, which includes four counties in Michigan and Detroit sharing about $800 million.

Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League, said other federal funds have come from the Federal Emergency Management Agency, Department of Housing and Urban Development Community Development Block Grants and the Justice Department.

But the widespread revenue losses anticipated from sales and income taxes still leave the state and local governments “in a massive hole,” he said.

With expected declines in state revenue sharing this year, “We’re going to see local governments taking big hits there,” Hackbarth said, adding that “ripple effects” are likely as local events and other revenue streams are canceled. 

“None of those federal stimulus funds helps in those situations,” he said.

Meanwhile, the growing calls for assistance are facing backlash from some GOP lawmakers and Trump administration officials who say federal funds shouldn’t be used to bailout states’ pre-COVID-19 budget woes.

Treasury Secretary Steve Mnunchin told CNBC today that “this is not going to be just a federal bailout of the states,” and that discussions are ongoing. Senate Majority Leader Mitch McConnell, R-Ky., suggested recently that bankruptcy would be a better path for some states.

The Mackinac Center for Public Policy echoed McConnell’s sentiments.

“Michigan’s decade-long recession and recovery proves that states are capable of weathering the storm without turning to Washington to bail them out,” Mackinac Center President Joseph Lehman said in a statement. “While bankruptcy should never be a first choice, Detroit demonstrated that it can be a tool governments use to begin to right the ship. Our state was better prepared for this latest crisis because we were practiced at fixing our own problems.”

Hackbarth called McConnell’s bankruptcy comments “unfortunate and inappropriate given the obvious impacts that reductions in revenue will have on front-line services. We can document that 50 percent of all local funding is going directly into public safety. There’s no question any reduction in the budget will impact those areas.”

While direct state and local budget support was excluded from the latest stimulus package, advocates and lawmakers are hoping to include hundreds of billions of dollars in future funding. House Speaker Nancy Pelosi has said state and local support will be a “centerpiece” of the next round of stimulus funding.

“I wish I was more optimistic than I am,” Deena Bosworth, director of governmental affairs with the Michigan Association of Counties, said of potential federal aid.

For counties, declining property tax revenues — if businesses close or residents are unable to make payments on homes — pose a concern that may surface in the coming years.

“You’re looking at the inevitable fallout of what’s going to be the reduction in revenue,” Bosworth said. “We’re trying to maintain but we’re going to need help from the state and federal government in order to keep things moving.”

Where state, locals stand

University of Michigan economists estimate the state’s current fiscal year 2020 budget will see a $2.6 billion shortfall, followed by $3.2 billion in the 2021 fiscal year and $2.2 billion in the 2022 fiscal year. This is primarily due to decreased sales taxes, but also lower income and gasoline taxes.

Meanwhile, local governments’ second-largest source of revenue behind property taxes is constitutional revenue sharing from the state. Twenty-four Michigan cities also collect a local income tax, which doesn’t collect payments from unemployment benefits.

Automobile sales comprise 30 percent of the state’s sales tax revenue while dine-in restaurants “represent another large percentage,” Jordon Newton, research associate with the Citizens Research Council of Michigan Inc., said during an April 28 webinar. Revenue data showed a 20-percent decline in sales taxes for March.

The $3.1 billion remaining from the federal government for Michigan’s COVID-19 response “won’t patch the hole,” Newton said.

Projected budget shortfalls and anticipated cuts have started surfacing across the state in recent weeks. 

The city of Grand Rapids’ fiscal year 2021 budget is $13 million less than what was budgeted this year because of COVID-19, or a 7-percent decrease. The city of Battle Creek is reportedly anticipating a 15-30 percent reduction in income tax and state-shared revenue this year, or $3.8 million.

Others’ outlooks are more unclear, and revenue declines may take longer to realize.

“It is too early to really know what the short and long term financial impacts will be,” said Ottawa County Administrator Al Vanderberg. “As this picture gradually comes into focus, we will be sharing our analysis with Commissioners and the public.”

The county isn’t considering layoffs or furloughs at this time, while more than 300 employees now work from home, Vanderberg said.

“Ottawa County is very stable financially,” he said.

Bosworth said county governments are “really on the front lines of dealing with this pandemic,” citing medical examiners and EMS responsibilities, to name a few.

“They’re just trying to adjust and continue government as best as they can at this point,” she said. “But quantifying the expenses associated with that is going to take a little time.”

Kent County Administrator Wayman Britt said the COVID-19 “tsunami” will have a domino effect on counties. While he didn’t have specifics, layoffs are possible, and the county has halted nearly $19 million in capital improvement projects because of the uncertainty.

“It’s going to hit the cities first and the counties second,” he said. “We’re going to see shortfalls eventually.”

Local governments in Michigan also don’t have many options to raise revenue on their own due to the Headlee Amendment of 1978 and Proposal A of 1994, both of which limit opportunities to raise more revenue. That’s coupled with recent declines in state-shared revenue.

“Revenue sharing has been decimated,” Hackbarth said. “When you have no ability to go beyond that, we’re really vulnerable.”

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