Details on the target agreement have begun to come out through various news outlets, including a copy of the formal GF/GP target list, which includes both on-going and one-time GF/GP allocations under the deal.  Reports indicate that key pieces of the agreement include $350.0 million in additional revenue for roads, $140.0 million for K-12 education, concurrence with the Governor on depositing $75.0 million in the state’s Budget Stabilization Fund, and a $16.0 million increase for local revenue sharing.   The table below outlines the new GF/GP targets and compares them with GF/GP appropriations recommended by the Governor and passed by the House and Senate for each budget.

Decision-making on individual budget items is generally (though not always) left to legislators that make up budget conference committees.   Conferees are likely beginning to meet now with conference committees following either next week or shortly thereafter.   However, the target agreement itself provides a useful framework to budget watchers on where key decisions are likely headed.   In particular, the document suggests that most of these major increases are being designated as one-time appropriations within the agreement.  Some of the key areas to watch are reviewed below.

Transportation Funding:  The new funding for road work appears to come in two pieces.   First, a direct GF/GP appropriation of $121.3 million is included in the target for the Transportation budget.   This is slightly below the $150.0 million GF/GP allocation included in the House-passed budget to address road funding needs.  The remaining $230.0 million is tied to a new “Roads and Risk Reserve” item included in the agreement.   Both of the new funding allocations are designated as “one-time” within the agreement.   What parameters are put on the use of the new reserve funding remains to be seen.   In particular, will other “risks” beyond “roads” be addressed with the funding?

Local Revenue Sharing:  The agreement includes a bump of $16.0 million over the original Executive recommendation for local revenue sharing.  This is equivalent to the total revenue sharing increase provided in the Senate version of the General Government budget bill.   The Senate bill added $10.8 million to the Economic Vitality Incentive Program for municipalities, $4.1 million for county revenue sharing, and $1.0 million for the County Incentive Program – equating to a 4.8 percent increase for each program.

While the target agreement matches the Senate increase in dollar amount, it differs with the Senate in designating the $16.0 million as a one-time appropriation.   The Senate appropriated its new funding as an ongoing appropriation that would become part of the FY2015 base.  The Governor’s original recommendation included $10.0 million in one-time revenue sharing funding.  The new target document shows the one-time allocation increasing to $26.0 million, incorporating the $16.0 million increase.  Thus, it appears the intent is to provide a larger one-time increase to local units for FY2014.

School Aid:  Early reports indicate that the target agreement includes $140.0 million in additional revenue for K-12 education.   However, the GF/GP target document does not include any additional GF/GP revenue appropriated for School Aid.  The GF/GP allocation remains $230.0 million ($50.0 million one-time), which is consistent with the Executive recommendation.   Thus, it appears the $140.0 million will come from School Aid Fund (SAF) revenue growth.   The recent May consensus revenue estimates project an additional $85.7 million in SAF revenue for FY2013 and $37.6 million for FY2014.   That adds to $123.3 million in new revenues across the two fiscal years.  Further, the consensus pupil estimates reduce the FY2013 pupil count by 800 pupil memberships and the FY2014 count by 1,500 memberships.   The Senate Fiscal Agency estimates state savings at $5.5 million with the 800 pupil decline in FY2013.   Assuming the FY2014 savings are roughly double that amount, the new revenue plus the pupil count savings add to around $140.0 million.   Thus, it looks like the additional K-12 appropriations will come from newly available SAF revenue.

For schools, the bad news is that revenue estimates for FY2015 call for only $43.9 million in additional School Aid Fund revenue.   That means that likely only around $50-55 million of the $140.0 million can be consider permanent in terms of baseline revenues.  Without an increase in the GF/GP appropriation or some other revenue enhancement for School Aid, a significant component of the $140.0 million might end up being one-time in nature rather than a permanent increase.

The legislature is currently debating a bill that would expand Medicaid to individuals and families at or below 133 percent of the federal poverty line. The Medicaid expansion was passed as part of the federal Patient Protection and Affordable Care Act of 2010, and in 2012, the Supreme Court effectively made this component optional. Medicaid is a means tested health insurance program that is co-financed by the federal and state governments. Medicaid spending consumed 15 percent of state resources in fiscal year 2012 making this program an important element in a healthy state budget. Approximately 20 percent of Michigan’s population relies on Medicaid as a primary source of emergency and preventative health care services.

General fund/general purpose revenues see the largest increase under the new consensus with an additional $390.7 million available in FY2013, $181.8 million in FY2014, and $200.3 million in FY2015.  The upward revision is particularly pronounced in FY2013.   State economists attributed most of this extra bump to additional personal income tax collections above levels forecast in January.  They theorize that the added revenue is due to individuals taking capital gains during tax year 2012 as protection against the potential of increased federal capital gains tax rates that were part of the “fiscal cliff” deliberations.  These revenues showed up in annual tax payments in April, which were up by more than 62% over levels forecast in January according to Department of Treasury data.

The School Aid Fund (SAF) will see smaller increases in revenues under the new forecast, with $85.7 million in additional revenue in FY2013, $37.6 million in FY2014, and $43.9 million in FY2015.   Again, the capital gains effect is a major factor here in explaining the particularly large increase for FY2013.

The new revenue estimates will present both opportunities and challenges to lawmakers and the Administration as budget deliberations wrap up (both the Governor and legislative leadership have declared their goal of having budgets finished by June 1).  The new forecast adds roughly 2 percent to the January GF/GP revenue assumptions for both FY2014 and FY2015 and a much smaller 0.35 percent to the same SAF assumptions.  Lawmakers now have a decision on how to best allocate this new baseline revenue.   Perhaps more challenging, however, will be the decision as to how to utilize the FY2013 surplus revenue given that a substantial portion of that new revenue exceeds the out-year surpluses.   How will legislators and the Administration decide to utilize the roughly $260 million in combined FY2013 revenue that will be non-recurring, particularly as deliberations over road funding, Medicaid expansion and other budget priorities continue?  And will any of the new FY2013 revenue be added to the current FY2013 budget?  Yesterday’s consensus figures clearly represent good news for Michigan, but they may also add new challenges to budget discussions – which should make for a very interesting conclusion to the month of May in Lansing.

After my retirement from the board, the next Board of Commissioners “discovered” PA 88 was still on the books and levied a .5 mills property tax on the property owners of the county to support the local MSU Extention office and county economic development agency.  I and several others protested that they could not levy such a tax without a vote of the people because it violated Headlee. That is, my belief is that because of Headlee, if a tax was not in place in Nov 78, you must have a vote to establish it.

The Board at the time, in 2010, sought and received a legal opinion from a local attorney who is on the board of economic development agency, that stated they had the authority to do this.  In fact, it was pointed out, that Washtenaw County was already taxing under this authority.

I do not believe this is right because of Section 31, Art IX of the Constitution.  Can you imagine the amount of money sucked from the private sector if every County in Michigan did this.  I believe it was the spirit and intent of Headlee to prevent just such actions.

We, our group of opponents are looking for help fighting this.  Can you help or steer us to someone who can?

Thanks so much for your time.

CRC’s Response

I’m afraid my response will not be helpful to your cause.

Although Michigan is a strong home rule state (Home rule cities, villages, and counties are assumed to possess a broad range of powers and do not require authorization from state law to engage in most activities. The courts are to assume general law governments (e.g., townships, most counties, school districts) have powers that are fairly implied.), state law requires the enactment of specific laws to authorize the levy of taxes by local governments.  In some other states, local governments can design and levy taxes without action or authorization from their state governments.

The Michigan Constitution requires for many (but not all) types of taxes, in addition to the authorization in state law, that voters within the local jurisdiction must approve the levy of the taxes at the ballot box.  Article IX, Section 31 of the Michigan Constitution (part of the Headlee Amendment of 1978) provides in relevant part,

“Units of Local Government are hereby prohibited from levying any tax not authorized by law or charter when this section is ratified or from increasing the rate of an existing tax above that rate authorized by law or charter when this section is ratified, without the approval of a majority of the qualified electors of that unit of Local Government voting thereon.”

A key point here is that the language says that the tax must be authorized.  It does not require that the tax was levied by the individual unit of government in 1978.

Local government taxes can be authorized in four ways.  Those four ways can be sub-divided into two groups:

A. Those requiring voter approval:
1. Charter millage. The charters of home rule cities, villages, and counties provide for the levy of property taxes and limit the rate at which the taxes can be levied.  The home rule governments can work within those limits without going back to the voters every time, but voter approval is obtained when the residents approve adoption of the charter.

2. Charter township and extra voted millages.  Charter townships can exceed the limits generally placed on general law townships, levying taxes at rates that cannot exceed ten (10) mills.  Like home rule governments, the authorization to do so is obtained when residents of the townships vote to adopt charter township status.  Other taxes may be levied only with voter approval.  Extra voted millages can be levied for a wide range of activities and must be of limited duration.

It should be noted that these vote requirements extend to other types of taxes that were not authorized to be levied by individual local governments in 1978, including: local option income taxes, utility users excise taxes, and casino taxes for cities; and rental car and hotel room taxes for counties.

B. Those not requiring voter approval:
3. Tax Allocation.  General purpose governments are authorized to levy a limited number of mills for operations within certain tax limitations.  Those limitations generally confine the number of mills to be divided among the different types of governments to 15 mills, but it can be raised to 18 mills with a county-wide vote.

4. Taxes that Pre-Dated Headlee.  A number of taxes existed in state law to authorize the levy of taxes by different types of governments.  The section of the Headlee Amendment cited above specifies that local governments are, “… prohibited from levying any tax not authorized by law or charter when this section is ratified …”  These taxes were authorized by law when this section was ratified and therefore do not require voter approval to be levied.

For cities, these include:
A tax of up to 3 mills for garbage collection and disposal.
A tax of up to 1 mill for library operations.
A tax of up to 1 mill for senior services.

For counties, this includes Public Act 88 of 1913 for economic development purposes.

Referring to the point made above, you can see that taxes may have been authorized, but not levied, in 1978 1) if charter authority existed, 2) if taxes were allocated to a county or township, and 3) because the authority existed in state law for cities and counties to levy taxes for garbage collection, libraries, senior services, and economic development.

I have purposefully avoided going into too much detail in this explanation.  If there are any details I can provide that would help to fill in holes or answer further questions, please do not hesitate to ask.

——————————————————-
Eric Lupher
Director of Local Affairs
Citizens Research Council of Michigan
734.542.8001
elupher@crcmich.org

The Legislature took its first formal action on Governor Snyder’s budget proposal yesterday morning as several House Appropriations subcommittees reported their own budget recommendations.   Among those recommendations was the eagerly awaited proposal for the Higher Education budget.

The House Appropriations Subcommittee on Higher Education reported House Bill 4221 with no overall change to the funding level recommended by the Governor.   However, the Subcommittee included significant changes that could affect the distribution of that funding across individual universities.

Perhaps of greatest significance, the House subcommittee proposed withholding 15% of overall base funding ($186.5 million in total) from universities that do not comply with specified “fiduciary responsibility in employee  contracting” requirements that relate to efforts discussed by some universities to extend existing labor contracts prior to implementation of “right-to-work” restrictions that take effect later this month.   In order to avoid the reduction, universities would have to refrain from extending, renewing or entering into a new labor contract between December 10, 2012 (date on which “right-to-work laws were enacted) and March 28, 2013 (effective date of “right-to-work” laws) unless all of the following apply:

• Any  extension/renewal of a non-expiring contract generates at least 10% annual      savings from the existing or expected future contact (as certified by an independent certified public accountant)
• The term of the new agreement does not exceed the length of the contract being      replaced unless the same 10% savings requirement is met
• The contract does not only contain terms that constitute a union security agreement, closed-shop provision, or other specified agreements related to membership in or payment to a labor organization as a condition for obtaining or continuing employment

To the extent that universities fail to meet these requirements, 15% of their FY2013 base funding is unappropriated and then reappropriated, with up to $2.2 million redirected to MSU AgBioResearch and MSU Extension; up to $7.0 million of remaining amounts to universities with retiree health care premium obligations to the Michigan Public School Employees’ Retirement System (MPSERS); and the rest to remaining universities through a modified performance funding formula.

That performance funding formula is also revised by the House Subcommittee from the model proposed by the Governor.  In particular, the House eliminates a specific tuition restraint component of the Executive formula and instead ties all other performance funding to the prerequisite that universities keep tuition and fee rate increases for resident undergraduate students at or below 3.0% for the 2013-14 academic year, slightly below the 4.0% threshold used in the Governor’s performance funding allocation.  The $6.2 million in the Governor’s proposal based on tuition restraint is then reallocated to the other performance funding factors.   Finally, the House Subcommittee combines three separate performance factors included in the Executive recommendation based on how universities compare to national Carnegie classification system peer universities.   The two formulas are compared in the table below.

The performance funding changes result in a re-distribution of funds across the individual universities.   Below is a review of how each university fared under both the Governor’s February proposal and yesterday’s House Subcommittee recommendation, including a look at what a 15% withholding could mean to each.

A CRC paper released last week explains that the controversy stems from conflicting directions in state laws that a) direct tax increment financing authorities (DDAs, LDFAs, brownfield redevelopment authorities, etc.) to capture revenues from all taxes levied on properties within their districts and b) say that revenues that will be captured must be enumerated in the ballot question that seeks voter authorization to levy a tax.

The CRC paper is available at www.crcmich.org/PUBLICAT/2010s/2013/note201301.html

 CRC recently addressed the topic of recall in Michigan’s Recall Election Law. This paper discusses recent recall trends in Michigan, Michigan’s current recall model, and alternative models for recall. 

CRC’s 2012 Annual Meeting was taped by CDTV, City of Dearborn Television and will be broadcast in the City of Dearborn on Comcast channel 12, WOW channel 10 & in Southeast Michigan on AT&T Uverse Channel 99/Dearborn/CDTV.  Online and streaming links are also available.

CDTV will be playing the CRC meeting at the following times through November 4 (the Sunday before the election):

             – Fridays at 8 pm

             – Saturdays at 7 pm

             – Sundays at 4 pm

 The video is also available online at    http://cdtv.pegcentral.com/player.php?video=67abdea5dfe767a300e4251174e12937

 CDTV is also streaming its broadcast feed on the web, so at the times listed above you can go to http://video.discovervideo.com/accounts/play/?id=500334&type=flash  & view the meeting online. 

 CDTV is City of Dearborn Television.  It is available in the City of Dearborn on Comcast channel 12, WOW channel 10 & in Southeast Michigan on AT&T Uverse Channel 99/Dearborn/CDTV.