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Flint’s Long History of Fiscal Distress: What Preceded the City’s Water Crisis

Renee B/ Google Images

Flint’s water crisis followed decades of chronic fiscal distress. Declining state and local revenues, steady spending levels, and revenue-raising restrictions created the conditions for the city’s water crisis.

Flint’s Water Crisis Follows Decades of Fiscal Decline

In 2014, the city of Flint, Michigan now infamously stopped purchasing water from the Detroit Water and Sewerage Department and began sourcing water from the nearby Flint River. Left untested and untreated, this water corroded the city’s aging pipes and contaminated the water supply with lead. Reportedly, after consuming the water, as many as 8,000 children may face detrimental effects on their intellectual and behavioral development.

The Flint water crisis continues to make national headlines as a symbol of deteriorating conditions in America’s struggling cities. This brief explains the city’s long fiscal decline – one of, if not the main factor, precipitating the crisis. In the decades preceding the water crisis, the city’s expenditure demands remained steady as revenue declined. Two periods of state-mandated emergency management (2002-2004 and 2011-2015) also failed to address the city’s long-standing fiscal challenges. Instead, Flint relied on its water fund to compensate for budget deficits, attempting to reduce costs by sourcing water from the Flint River.

Socio-Economic Decline Undermines the City’s Revenue Streams

In the last decade, Flint has faced declining revenues from all three of its primary sources: property tax, income tax, and state-shared revenue. (State-shared revenue comes from a statewide sales tax. The state government distributes that revenue to local governments.) Since 2006, property tax revenue has fallen by 62.4%, income tax revenue by 27.2%, and state-shared revenue by 27.9% (Figure 1). The Great Recession exacerbated Flint’s revenue loss. In particular, property tax revenues decreased by almost two-thirds between 2009 and 2015.

 

The following socio-economic trends contributed to Flint’s underlying revenue problem:

  • Population decline: Flint’s population in 2014 (99,002) was nearly half of what it was in 1970 (193,317), driving income tax revenues downward.
  • Housing occupancy: There were over three times as many vacant properties (10,849) in 2010 as there were in 1980 (3,328). Housing abandonment contributes to revenue loss as cities lose property tax revenue and face increased health and safety costs.
  • Employment and poverty: For decades, Flint has suffered job loss, particularly in the auto industry. General Motors jobs declined from 80,000 in 1978 to 8,000 in 2006 Concurrently, the proportion of people living below the poverty line grew from 12.4% in 1970 to 41.6% in 2015.

Meanwhile, rather than decline, expenditures remained steady, resulting in a budget crisis. Seemingly unable to control or reduce expenditure demands, city management ran a deficit for multiple consecutive years until the state placed them under emergency management again in 2011. 

Impact of Michigan’s Policies on Flint’s Fiscal Health: Revenue-Raising Restrictions and Emergency Management

In other states, cities with fiscal challenges similar to Flint’s have found new sources of revenue and/or benefited from state assistance. As we explain below, Michigan’s state policies limited Flint’s ability to do either.  

State Tax Restrictions: According to a Michigan State study, Michigan has some of strongest state-imposed tax restrictions in the country. The restrictions limit property tax rates and require local governments to secure voter approval for new taxes or rate increases. This made it difficult for the city to replace the revenue it had been losing.

Declining State Contributions: Since 2003, the Michigan Legislature, under two governors, has addressed state budget challenges by sharply reducing state contributions to local governments. The Michigan Municipal League estimated that in the absence of these cuts, Flint would have received an additional $55 million between 2003 and 2013. Researchers note that more collaborative state-local relations could have helped to mitigate Flint’s fiscal crisis.

Expenses and State Emergency Management Laws: Under Michigan law, if a municipality meets criteria demonstrating fiscal distress, the governor can declare a state of emergency and appoint an emergency manager to decrease financial obligations by cutting personnel, reducing pension benefits, and contracting out government services. Flint was under emergency management from 2002 to 2004. However, without the ability to address the underlying revenue challenge, the emergency manager could not create long-term fiscal sustainability. In addition to continued revenue challenges, Flint faced costly settlements with police and fire unions in 2007 and 2008, and again experienced a budget deficit by 2008.

Flint’s Reliance on Its Water Fund

In the absence of other ways to raise revenue, Flint relied on its water and sewer funds to help make up for general fund deficits. Each year between 2009 and 2015, Flint’s mayors and emergency managers transferred resources from the water and sewer funds to the general fund. This practice of interfund transfers continued even as the water fund’s assets fell from $38.6 million in 2008 to $18.4 million by 2011. Near constant rate hikes from Detroit’s water authority placed additional pressure on limited water fund resources.

To replenish the fund, city officials began to source water from the Flint River instead of purchasing from Detroit, expecting to save $19 million over eight years. At the same time, Flint raised its own water rates: by 25% in 2011 and by another 25% in 2013. Consequently, Flint’s water became some of the most expensive in the country. At the height of the water crisis, Flint residents (41.6% of whom live below the poverty line) paid an average of $864.32 a year, or twice the state average, for contaminated water.

Summary

  • Flint’s water crisis follows several decades of economic and revenue declines, as the city’s expenditures rose or remained steady.
  • State policies restrict municipalities’ revenue-raising options. Recent cuts to state-shared revenue further exacerbated Flint’s challenges.
  • Flint came under emergency management from 2002 to 2004, but the period did not address the city’s underlying revenue challenge.
  • Instead, Flint’s mayors and emergency managers used water fund assets to supplement its falling revenues.
  • Ultimately, with water fund assets depleted by almost half, they sought to reduce water costs by sourcing water from the Flint River. The switch resulted in residents consuming lead-contaminated tap water.

Works Cited [+ Expand]

Bassett, Ellen M., John Schweitzer, and Sarah Panken. Lincoln Institute of Land Policy. “Understanding Housing Abandonment and Owner Decision-Making in Flint, Michigan: An Exploratory Analysis.” 2006. http://www.lincolninst.edu/pubs/1145_Understanding-Housing-Abandonment-and-Owner-Decision-Making-in- Flint–Michigan–An-Exploratory-Analysis 

 

Bosman, Julie, and Monica Davey. The New York Times. “Anger in Michigan Over Appointing Emergency Managers.” January 22, 2016. http://www.nytimes.com/2016/01/23/us/anger-in-michigan-over-appointing-emergency-managers.html

 

Bureau of Labor Statistics. “Databases, Tables & Calculators by Subject: Local Area Unemployment Statistics.” http://data.bls.gov/timeseries/LAUMT262242000000005?data_tool=XGtable

 

Centers for Disease Control and Prevention. “Childhood Lead Poisoning Data, Statistics, and Surveillance.” March 25, 2016. http://www.cdc.gov/nceh/lead/data/

 

Citizens Research Council of Michigan. “Outline of the Michigan Tax System.” May 2015. http://crcmich.org/tax-outline/

 

City of Flint, Michigan. Comprehensive Annual Financial Reports, Fiscal Years 2006-15. http://govrank.org/archive/city/flint-mi

 

Feldscher, Kyle. Washington Examiner. “How Bad Government Caused the Flint Water Crisis.” February 6, 2016. http://www.washingtonexaminer.com/how-bad-government-caused-the-flint-water-crisis/article/2582560

 

Goodnough, Abby. The New York Times. “Flint Weighs Scope of Harm to Children Caused by Lead in Water.” January 29, 2016. http://www.nytimes.com/2016/01/30/us/flint-weighs-scope-of-harm-to-children-caused-by-lead-in-water.html?_r=1

 

Ingraham, Christopher. The Washington Post. “Flint’s Poisoned Water Was Among the Most Expensive in the Country.” February 16, 2016. https://www.washingtonpost.com/news/wonk/wp/2016/02/16/flints-poisoned-water-was-the-most-expensive-in-the-country/

 

Lavelle, Martin. Chicago Fed Letter. “Understanding Trends in State Revenue Sharing With Local Governments in Michigan.” December 2014. https://www.chicagofed.org/publications/chicago-fed-letter/2014/december-329

 

MSU Today. “Flint Crisis Reveals Deeper Problem in Michigan’s Fiscal Policies.” January 26, 2016.

http://msutoday.msu.edu/news/2016/flint-crisis-reveals-deeper-problem-in-michigans-fiscal-policies/

 

Oosting, Jonathan. MLive. “How Michigan’s Revenue Sharing ‘Raid’ Cost Communities Billions for Local Services.” April 13, 2014. http://www.mlive.com/lansing-news/index.ssf/2014/03/michigan_revenue_sharing_strug.html

 

Sapotichne, Joshua, Erika Rosebrook, Eric A. Scorsone, Danielle Kaminski, Mary Doidge, and Traci Taylor. Michigan State University Extension. “Beyond State Takeovers: Reconsidering the Role of State Government in Local Financial Distress, With Important Lessons for Michigan and Its Embattled Cities.” August 31, 2015. http://msue.anr.msu.edu/resources/beyond_state_takeovers

 

Scorsone, Eric, and Nicolette Bateson. Michigan State University Extension. “Long-Term Crisis and Systemic Failure: Taking the Fiscal Stress of America’s Older Cities Seriously.” September 2011. https://www.cityofflint.com/wp-content/uploads/Reports/MSUE_FlintStudy2011.pdf

 

Snider, Annie. Politico. “Flint’s Other Water Crisis: Money.” March 7, 2016. http://www.politico.com/story/2016/03/flint-lead-water-contamination-money-220391

 

United States Census Bureau. “QuickFacts: Flint City, Michigan.” http://www.census.gov/quickfacts/table/PST045214/2629000

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