News Story

Local Government Bankruptcies May Become Reality

With Michigan cities facing budget crises, many experts say the worst is yet to come, and some believe the state will begin to see municipal bankruptcies. Pressure from both the revenue and spending sides is creating the risky financial situations. Some say it may be the worst since the Great Depression.

Public employee compensation is just one factor on the cost side creating trouble. Mackinac Center Fiscal Policy Analyst James Hohman and research intern Adam Rule noted last year that annual state and local government employee benefit costs in Michigan had grown to $5.7 billion higher than if government employees were receiving benefit packages comparable to their neighbors who work in Michigan's hard-hit private sector.

And the problem is a comparatively recent trend, with $2 billion of the $5.7 billion total gap opening up just in the five-year period between 2002 and 2007.

"State and local governments can save money by addressing this disparity," the authors observed, "especially considering just how large the gap has become."

On the revenue end, local governments face declining property tax revenues — the bulk of city finances — and the reduction of state-shared revenue.

"It's a one-two punch that communities can't deal with," said Anthony Minghine, associate executive director of the Michigan Municipal League, speaking about the revenue side of the equation.

Minghine said the state has not given municipalities "billions" in state-shared revenue that cities were supposed to have received.

And many fear the state will need even more of that money once the federal stimulus money is gone.

"You haven't seen the worse yet by a long shot," said Lou Schimmel, who served as court-appointed receiver for the city of Ecorse and worked as the emergency financial manager in Hamtramck. He currently works for the mayor's office in Warren and is an adjunct scholar at the Mackinac Center.

Schimmel said some municipalities may file for bankruptcy in the near future.

The only benefit is filing for bankruptcy would void union contracts, he said. But the downside is that a city's financial reputation would be ruined and it would have problems getting credit necessary to do big-ticket construction projects.

Schimmel said some good could emerge from the fiscal crisis — including consolidation of services.

Six Michigan communities have been placed in receivership and have emergency financial managers appointed, according to an April 2010 study done by the Citizens Research Council of Michigan, a public policy research group.

They are: Hamtramck (2000), Highland Park (2001), Flint (2002), Three Oaks (2008), Ecorse (2009), and Pontiac (2009). Benton Harbor was declared a financial emergency in February by the governor.

The state of Michigan's Treasury Department gives each city, village and township a fiscal indicator score from 1 to 10. It is based on debt, deficits, fund balances and property taxes. A score between 8 and 10 indicates "fiscal stress."

The number of cities, townships and villages that fell within the 8 to 10 range jumped from five in 2006 to 14 in 2008. The 2009 scores haven't been released.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.