Michigan municipalities will now turn their sights to Gov. Gretchen Whitmer and state lawmakers to fix a “broken” funding system for local governments and schools after losing a court battle over the subject.
The Michigan Supreme Court in a July 28 opinion mostly sided with the state in a funding dispute over whether the state was abiding by the 1978 Headlee Amendment in Taxpayers for Michigan Constitutional Government v. Michigan.
The state dodged a potentially costly bullet.
“This ruling is a win for the people of this state,” Attorney General Dana Nessel said in a statement. “Public school funding is about 25% of the state’s annual budget, representing approximately $12-$13 billion of state dollars each year. A significant portion of that annual funding was in question in this case — and could have resulted in higher taxes and/or fewer state-level services for Michigan’s residents if the Court had determined the state was not providing enough money to local governments.”
Backers of change will continue their fight as they believe the current system short-changes local governments.
“The Michigan Municipal League is extremely disappointed by today’s Michigan Supreme Court decision but remains committed as ever to reforming Michigan’s broken municipal funding system,” Michigan Municipal League President William Wild, who is also mayor of Westland, said in a statement. “We must reform the way our state funds our communities, and this includes how Proposal A and the Headlee Amendment interact.”
“As we see the permanent closure of businesses and reduced occupancy for retail and commercial office space due largely to the COVID-19 pandemic, we run the risk that these unintended interactions between Proposal A and Headlee will be exacerbated again if accompanying declines in property value occur as expected,” Wild said.
Fourteen local Michigan governments participated in the lawsuit, which was filed in September 2016 on their behalf by the not-for-profit advocacy group and accused the state of miscalculating state aid formulas.
The dispute stems from what monies should be included in calculating total state spending paid to all units of local governments. The group behind the lawsuit argued the state shortchanged local units by improperly inflating that figure by counting so-called “Proposal A” payments that go to school districts along with state money earmarked to cover stand-mandated local spending.
Proposal A was established in 1994 to replace local property taxes as the direct source of school funding and instead replaced it with a new state education tax.
The group scored a partial victory in the Michigan Court of Appeals in 2019, although the win fell short of its goal to see increased funding flowing from the state. The Court of Appeals on July 30 agreed in part with the municipal group that state payments to help fund new mandates and regulations don’t count toward the required revenue-sharing payments.
The case then headed to the Michigan Supreme Court where the majority upheld some pieces of the appellate decision but reversed others in an opinion that ultimately means backers of change must look elsewhere to achieve their goals.
“We disagree” with the appellate court, the majority opinion read. “Both are properly counted as part of total state spending paid to units of local government for purposes of the Headlee Amendment,” it read.
On the subject of whether funding for mandates counts toward the formula the opinion read: “State funding to a unit of local government is state funding to a unit of local government, whether that funding is tied to a state mandate or is unrestricted aid for discretionary spending.”
The Taxpayers for Michigan Constitutional Government had argued the state has improperly counted spending on traditional public schools, charter schools and funding for local governments to comply with state mandates toward its minimum local government spending requirement under the Headlee Amendment.
The shortage amounts to more than $1 billion and local governments say that funding is crucial to balancing their budgets and funding needed for basic community services.
That amendment, passed in 1978, “was born out of a nationwide taxpayers revolt and was meant to limit legislative expansion of requirements placed on local governments, put a freeze on what had been perceived as excessive government spending, and lower taxes at both the local and state levels,” reads the opinion.
The amendment prohibits the state from shifting the tax burden to local governments and from reducing the total of state spending paid to all units of local government, taken as a group, below that proportion in effect in fiscal year 1978-1979.
At the heart of the lawsuit is the requirement that the state pay a minimum of 48.97% of monies raised through state taxes to local governments. The amendment further stipulates what funding can and cannot be included in the calculation of the minimum percentage payment.
The Headlee Amendment says monies raised through tax shifts, monies paid to local governments to perform obligations of the state and monies paid to agencies that are not political subdivisions of the state cannot be included in the calculation of the minimum percentage payment.
The litigation argued the state improperly classified funds paid to school districts pursuant to Proposal A as state spending paid to units of local government, that the state improperly classified monies paid to charter schools, known as Public School Academies, as state spending to units of local government, and that funds directed to units of local government for state mandates should not count toward the required percentage by Headlee.
The appeals court unanimously agreed with the group on the argument that the state should not count spending it provides local governments to comply with new state mandates toward its Headlee requirement.
In the appellate ruling, the group lost on the argument that the state incorrectly counted funding it gave K-12 public schools under 1994’s Proposal A toward its local government spending minimum under Headlee, calling it a “tax shift” that has created a burden on local taxpayers through higher property taxes or cuts to services.
The measure created a statewide property tax to fund schools, capped the rate at which revenue from the tax can increase, and prevents local school districts from asking voters for additional operations support through a property tax levy. It also increased the state sales tax by 2%, with revenue to go to the state’s school aid funds. The judges unanimously disagreed with the plaintiffs, however, on their Proposal A claims, writing that the constitution doesn’t support the group’s argument.
A majority of Michigan Supreme Court justices concluded that state payments from Proposal A revenues paid to public schools count toward the Headlee calculation as state aid to local governments. The court did find that state payments to Public School Academies are not payments to local units of government, although some charter schools may still qualify as local units of government and so remanded that question back to the court of appeals for further review. State payments to local units of government to cover state mandates required by Headlee Section 29 also must be counted under Headlee Section 30.
The MML warned of the detrimental effects should the state not fix what it believes is an improper accounting practice.
“If this issue goes unaddressed, it will impede Michigan’s economic recovery and future success,” Wild said. “If we expect to be economically competitive and grow Michigan’s population going forward, the fiscal health and ability for communities to provide high-quality services will be a key factor.”
The MML will pursue a state fix laid out in a proposal SaveMICity.org that addresses the interaction between Proposal A and Headlee. “We look forward to working with the state legislature and administration to address these important issues.”