Fiscal Storm Clouds Gathering: State Has Solved Little

Geographic boundaries for government entities frequently overlap with one another. These entities, however, are public corporations having rights and responsibilities, one of which is to operate in a fiscally responsible manner. For those government entities whose boundaries overlap, each entity is fiscally interdependent with one another. While a county may be fiscally strong and have weak cities within its borders, it can not long survive if subordinate governmental entities are weak and continue to become weaker. The same is true with governmental neighbors. This is why the state needs to worry about Detroit.

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The same relationship and fiscal responsibilities exist with state government and its subordinate governmental units (municipalities, counties, schools, etc.). The Legislature is struggling to balance the fiscal 2010 operating budget, which is requiring nearly $1.3 billion in program reductions and/or new revenues after using non-recurring federal stimulus funds. State reforms, which were promised in the 2007 budget battle but have not even been seriously discussed in 2009, would require a significant amount of time to implement.

Even as the Legislature balances the 2010 operating budget, potentially $1 billion in program cuts, new revenues and/or reforms will be required for the fiscal 2011 budget in order to replace the federal stimulus funds relied upon for the 2010 budget. When the stimulus funds run out some time in late fiscal 2010, Michigan's liquidity could be seriously challenged by a decade-long use of equity to fund actual operations. The equity for the General Fund and School Aid Fund (sans reliance on the federal stimulus money) is not backed by liquid assets. Simply put, there is no savings to fall back on and future declines in revenues must involve actual new revenues, program reductions or real reforms.

Even as the state's structural operations are unresolved and are getting fiscally weaker by the year, so are many school districts and other governmental entities. Approximately 58 percent of the revenues collected from Michigan taxpayers are distributed to subordinate governmental units to operate programs. Two of the larger entities, the city of Detroit and Detroit Public Schools, have been wracked by delays in resolving their separate fiscal issues, public corruption charges and unresolved operating shortfalls.

Both entities now have strong executive managements actively targeting fiscal issues that should have been resolved years ago. However, both have referenced 'bankruptcy' as a possible action to resolve past fiscal problems, which could complicate securing of short- and long-term debt. Absent either short- or long-term cash infusions from the state or federal government, both entities are facing the inability to cover payrolls and vendor obligations before their fiscal 2010 years conclude.

The general economic decline for the state's revenues and subordinate governmental units occurred faster than most could have predicted. The state has never had a coherent plan to ensure that its subordinate governmental entities are fiscally healthy, or even stable.

The substantial fiscal and liquidity issues facing the city of Detroit and DPS are large enough to create substantial fiscal problems for the state should the Legislature feel the need to assist in resolving these issues - either on a temporary or permanent basis. Compound this matter with dozens of other subordinate governmental entities with fiscal distress and the impending state budget reductions for 2010, and Michigan's fiscal health becomes even more precarious because of fiscal interdependencies.

Governmental officials must begin a methodical, long-term planning effort that properly addresses fiscal issues in a responsible manner. The time when the state or federal governments bailed out troubled governmental entities has long since lapsed. Each governmental unit is now largely on their own to solve its fiscal issues and yet, is interdependent with one another for fiscal success or failure. Either the state and its subordinate governmental entities hang together as a team, or they will certainly hang individually as separate legal entities.


Robert Daddow is the deputy executive for Oakland County and an adjunct scholar with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.