BLOOMFIELD HILLS, Mich., June 28 /PRNewswire/ — School districts and many local-level governments in Michigan must approve balanced budgets for fiscal year 2010-2011 by June 30, and most will succeed thanks to cutbacks in staffing and services, fee increases and non-tax revenue injections. But the state’s economic outlook will require stepped-up regional cooperation and consolidation of municipal services at the township, city and county levels to forestall even deeper cuts in the future, according to Plunkett Cooney, one of the Midwest’s leading law firms.
“As hard as municipal and school leaders worked to balance their budgets, the effort will feel like a light workout compared with what’s in store for next year,” said Dennis Cowan, a Plunkett Cooney partner and the former mayor of Royal Oak. “Service and staffing cuts, and a lot of creative quick-fix solutions, were found to balance budgets. Looking ahead, we think leaders should start thinking more in terms of consolidating services – not cutting them. Consolidation is a strategic solution to Michigan’s new economic reality.”
Evidence that future municipal revenues will continue to be under pressure is growing. The state’s population continues to decline, the Michigan treasury department said taxable property fell 9.2 percent to $385 billion this year and property tax revenues aren’t likely to rebound, with communities adopting a one-year market study for assessments instead of the typical two-year study. At the same time, healthcare and other costs are expected to increase, state revenue sharing will be flat at best for many communities and voters are reluctant to support millage increases.
“Many municipalities and school districts drew from their general funds, received injections from downtown development agencies and took other actions to reduce the size of budget cuts, but these steps don’t address the real issue, which is declining economies of scale,” said Plunkett partner Robert Marzano, who advises communities in Southeastern Michigan. “Many communities already share water and sewer services. Others share building departments and public transportation networks. But the biggest potential savings will come from consolidating public safety services and school districts.”
Two state laws dating back to the 1960s make it difficult but not impossible to pursue municipal consolidations, Cowan noted. One, PA312, requires binding arbitration when police and firefighters reach an impasse with a government employer. Another, the Urban Cooperation Act, says employees cannot be harmed by service-sharing agreements. If two cities were to merge their fire departments, for example, it would require the new entity to adopt the higher of the two cities’ wage scales.
“Legislators and the new governor may seek to reform these laws,” Cowan said. “But even if they don’t, consolidation savings can still accrue through joint purchasing, centralized dispatching, consolidation of facilities, reductions in administrative costs and purchased services and more. The savings can be used to support and even enhance service. It takes political courage and strong leadership to consolidate, but it can be done.”
While budgets at all municipalities and school districts in Michigan are under pressure, some are much closer to a financial abyss. Since 2000, emergency financial managers have been appointed in seven Michigan cities, Detroit’s credit rating is in junk status and recent reports suggest that some townships in Lenawee County aren’t generating enough tax revenue to cover debt issued for infrastructure improvements. All of this has fueled speculation that bankruptcy might be used to restructure municipal finances, but Plunkett Cooney believes that is unlikely.
“The law allows municipalities to pursue corporate-style bankruptcies, but the state constitution requires approval by the governor and therefore a Chapter 9 filing should be viewed as an absolute last resort,” said Doug Bernstein, a Plunkett partner and head of the firm’s banking, bankruptcy and creditors’ rights practice. “No judge in Michigan in recent memory has handled a municipal bankruptcy, and there’s also a well-deserved fear that a bankruptcy by a city like Detroit will taint the entire region, discourage new investment and accelerate population losses. The ultimate solutions for financially distressed communities, whether they are big cities or small townships, will probably be found through negotiated workouts. The question everyone will try to answer is ‘What’s the least bad solution?'”
One possible scenario would be for the state and counties to extend credit to distressed communities and work to restructure payment terms with bondholders. Ultimately, the costs of any bailout will have to be allocated regionally and across the state.
“If the state or counties have to fund solutions for distressed communities,” Bernstein added, “the fear of higher taxes and new program and service cuts might be enough to overcome political, civic and union barriers to consolidation.”