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Tom Ivacko

Tom Ivacko

(Part 2) Cities Responding to Fiscal Challenges

December 9, 2011

Caught between the rock of rising costs and the hard place of falling revenues, many cities in Michigan are suffering through various stages of declining fiscal health. Part One of this two-part column focused on those problems.

Now we turn the page, to see how Michigan’s city leaders are responding with tough policy decisions. Whether they are going far enough fast enough is an open question; whether they are taking action is not.

First, though, a disclaimer: I don’t suggest that all city leaders are doing the right things today. There will always be cases of mismanagement and even corruption in city government. Embezzlement happens. So, too, does cronyism, negligence, dysfunction and more. But that is a universal truth whenever large numbers of humans are involved, whether in government, business or even the nonprofit sector. In a large bushel, there will always be some bad apples.

Those rotten public apples, however, are the exception. More common are local leaders wrestling with an unprecedented fiscal crisis, now making hard decisions that many people call for, but for which few give credit.

For instance, many argue that Michigan’s local governments must consolidate service delivery across jurisdictions to cut costs. Yet conventional wisdom says this doesn’t happen, in part on the assumption that leaders are more concerned with protecting their own power. State policymakers this year even replaced the former statutory revenue sharing program with the new Economic Vitality Incentive Program (EVIP), withholding funds from local governments unless they increase cooperative efforts.

But is it true that our local governments don’t work together? No, it is not.

The Michigan Public Policy Survey (MPPS) at the Gerald R. Ford School of Public Policy finds that intergovernmental cooperation is extremely common: 91 percent of Michigan cities report that they already participate in some kind of formal cooperative effort with another jurisdiction. Most participate in numerous such efforts, across a wide array of services.

Is there room for more? Certainly.

Existing research, however, finds that consolidation doesn’t always lead to savings; sometimes costs actually rise. Therefore, each opportunity should be evaluated on its own merits. Rushing too fast, or pushing blindly forward, could be counterproductive.

At any rate, it turns out that just being between the financial rock and hard place may be enough on its own to foster additional cooperation. Given cuts to staffing and services in recent years, cities now have fewer options and even tougher choices to find further savings. The best, if still difficult, choice today in many cases is more service sharing with neighbors. And this is what city leaders are doing. The survey finds that 71 percent of cities expect to increase their cooperative activities with neighboring jurisdictions this year. In our largest cities this increases to 86 percent. It’s happening all over Michigan.

Note that these efforts pre-date the new push from Lansing: local leaders were already planning to increase cooperative efforts, even before the EVIP program was created.

Beyond service consolidation, cities are also changing their employee and retiree compensation policies to address some of the key drivers of their declining fiscal health. And again, they were taking these steps before the advent of the EVIP program, which is designed to foster these kinds of local reform, too.

Forty-three percent of Michigan cities expect to have their employees cover more of their own retirement contributions this year, while 48 percent expect to increase the share of health care costs that are paid by retirees. In our biggest cities these figures rise to 82 percent and 65 percent, respectively.

Cities are also positioning themselves for improved future fiscal health by moving away from pension plans. Among cities that offer only defined benefit (pension) plans today, 56 percent say they’re likely to introduce defined contribution plans, such as a 401(k) or hybrid plan, this year.

And cities are reducing pay rates and fringe benefits for new hires: 55 percent took this action in the last year, and 69 percent expect to initiate or continue such policies next year.

Finally, there are the rapidly rising health care costs for current employees, a major source of cities’ fiscal stress today. Seventy-five percent of Michigan cities expect to have current employees pay a larger share of these costs next year. Among our biggest cities, this increases to 90 percent.

These types of policy actions are among the most contentious in the public arena. When they play out in state capitals, things tend to get ugly fast. But they’re happening in a quieter and more diffused way, somewhat below the radar, at the local level. And they’re helping to put our cities on course for a healthier future.

State policymakers in Lansing have moved aggressively this year for local government reform, pushing intergovernmental cooperation and reduced employee compensation through the EVIP program and other new laws. I don’t know if those top-down solutions will succeed at cutting local costs or not. They may be effective, for instance by forcing unions to accept cuts they might otherwise fight. Or they may lead to unintended consequences, such as new intergovernmental cooperative activities that didn’t make financial sense on their own merits. Time may tell, if we keep a sustained view on these details.

Meanwhile, what I do know is that Michigan cities weren’t waiting around for instructions. They were already reforming themselves in important ways, addressing their biggest challenges proactively. They just aren’t getting much credit for it.

Tom Ivacko is administrator and project manager of the Center for Local, State and Urban Policy at the University of Michigan Gerald R. Ford School of Public Policy.

December 8, 2011 · Filed under Ivacko Tags: , ,

10 responses so far ↓

  • 1 Edward Schmidt // Dec 13, 2011 at 2:40 am

    At the current pace, there likely won’t be a single city in Michigan with health financials. Given the lag time in property tax valuations and revenues, the increasing enterprise funding costs (which no one likes to mention), and the clearly unrealistic costs to employe someone as a government employee (40-50% greater than in the private sector), and you have a recipe for long term suffering. Municipal leaders should step up to the plate and explore all options for cost reductions regardless of the political fallout or pressure from the unions. Time has run out to continue the same course of action and provide lip service. Do the right thing and make the tough decisions.

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