This graph shows the increase in mortgage foreclosure deeds executed by the Oakland County Sheriff’s Office since 1998. Municipal governments, which get property tax revenue, will have to adjust their spending as that revenue decreases due to home foreclosures, higher unemployment and fewer home sales.
Source: Robert Daddow, Oakland County deputy executive
County deputy executive, I often speak with state and local officials. Most of
them realize that with the auto industry in crisis and the nation in recession,
they face rough weather ahead. What they often don't recognize is that they're
In fact, Michigan governments face a perfect
storm — a convergence of economic trends that will depress government revenues
for years to come. Accounting gimmicks and "revenue enhancements" will fail,
forcing policymakers to transform the delivery of public services to remain
How bad is it? Let's
start with the obvious: the auto industry meltdown. As of March 10, the total
market capitalization of General Motors, Ford, Chrysler and several other major
auto suppliers in Michigan was just over $6 billion. With GM and Chrysler
in bankruptcy, Ford has rebounded to a capitalization of $16 billion, but
to realize how small these numbers are, remember that Yahoo! recently rejected
Microsoft's purchase offer of $47.5 billion. Toyota, the world's largest
auto manufacturer, had a market capitalization of $120 billion in April, and
its profit of $13.9 billion in 2008 alone equals almost the entire market
capitalization of the Big Three.
Worse, the Big Three now
face the double-whammy of a declining market share in a shrinking market. In
the United States, about 16 million cars, vans, pickups and SUVs were sold in
2007, but the number will probably be about 10 million in 2009. Of these
vehicles, the Big Three will be lucky to sell 4.6 million — just
60 percent of the 7.6 million they sold in 1981-1982, their worst
year until now.
Other Michigan business
sectors are in trouble too. Figures from the University of Michigan show that
from 2002 to 2007, some 419 Michigan industrial sectors grew or remained stable,
but another 641 declined. These 641 sectors shed 404,000 jobs, with an average
income of $50,000 per year, while the growing or stable industries produced
just 205,000 jobs, with an average income of only $36,000 per year.
These economic trends
are hitting state government with lower revenues not just from income and
business taxes, but from property tax revenues as well, since businesses and
workers have less money to spend on real estate. In fact, because of state
property tax laws and the sagging real estate market, it will be well into the
2020s before state and local governments collect the same property tax revenues
they did in 2008.
Hence the storm: State
government will lose revenue on three fronts, while local governments, which
depend on property taxes and state revenue-sharing, will get less of both.
Simultaneously, demands on government will grow. The state's 15.1 percent
unemployment rate could go as high as 20 percent. The state unemployment
trust fund, which has already borrowed $2.2 billion from the federal
government, is sinking $200 million further into debt each month. This
debt will force up unemployment payroll taxes on Michigan businesses.
Yet it won't make sense
for state and local policymakers to raise the overall tax burden on businesses
and residents. They are already struggling and underemployed.
officials must focus intensely on restructuring their operations. This begins
first with long-range planning: They should grapple right now with budgets for
the next three years, not just this one. It's harder to deceive yourself when
you're forced to look at a trend, rather than a single year's budget.
Second, employee pension and retiree health
care benefits must be critically reviewed — the cost is too great to ignore.
Many government units underfund these benefits or finance them on a
pay-as-you-go basis. This just postpones the liabilities to future generations
and makes them worse. Moving current public employees into plans with defined
contributions, instead of defined benefits, can improve government balance
sheets and give employees portable retirement benefits.
officials need to define their core services and consider ways to shed the
rest, perhaps by getting out of certain areas altogether or by contracting with
private firms to provide public services on a competitive basis. After all, if
a government activity isn't strictly necessary and it's putting taxpayers in
debt, it's not really a public service.
A perfect storm is easier
to weather when your ship is trim. The key is to act now. Public officials who
do that will face tough choices, but they will also be part of the solution —
not part of a problem that residents pay them to solve.
Robert Daddow is deputy
county executive for Oakland County and an adjunct scholar at the Mackinac
Center for Public Policy.