Pandemic Fallout
Less economic activity means lower state sales taxes collected to be redistributed to local governments for essential services
The start of the coronavirus pandemic nearly a year ago created havoc with state economic activity and added uncertainty to local government projections for the money needed to provide essential services.
Second only to local property taxes for many communities is the cut of money local governments receive from state sales tax collections.
Called state revenue sharing or state shared revenue, that pot of money is used by local governments to help pay for services such as police protection, fire service, roads, water and sewer service, and garbage collection.
But revenue sharing is based on sales taxes collected, and sales took a hit in many industries from the pandemic-driven economic slowdown that forced many businesses to close or restrict activity. As a result, revenue sharing payments to cities, villages and townships are projected to decline in the next fiscal year, according to Feb. 11 estimates by the Michigan treasury.
Bolstered by online shopping and its taxable sales, the good news is that revenue sharing payments won’t fall as much as originally projected.
Waterford Township is projected to see a 2.5% decrease in its state revenue share for fiscal year 2022 from $6.9 million to $6.7 million, a $172,399 overall decrease. These payments are around 12% of the township’s $56 million general fund budget.
Township Supervisor Gary Wall said the decrease is not a “deal breaker,” but that it’s still a negative number. Last spring, he said state revenue sharing estimates were “kind up in the air” as the pandemic began, with a conservative estimate that townships could see a 50% decrease in payments due to the anticipated decrease in retail sales.
As time went on, he said the “astronomical” jump in online sales helped lessen the blow.
“We have to compensate for that because state revenue sharing is our secondbiggest source of revenue outside of property taxes,” he said. “So, anytime you take a hit on that you have to make up for that in your budget somewhere. We always budget conservatively from the projected estimates in revenue just in case it’s more or less than projected. We bank on the conservative side and so far it has worked.”
Revenue sharing
State revenue share payments are made to every county, city, village, and township in Michigan.
The payments are a percentage of the 6% state sales tax revenue. Distribution of state shared revenue is based on population, relative tax efforts, valuation and state operating and reporting mandates.
Each community is allocated a dollar amount, one from the City, Village, and Township Revenue Sharing (CVTRS) program portion, if eligible, and one from the constitutional revenue sharing portion.
The CVTRS portion is based on relative tax efforts, valuation and state operating and reporting mandates while the constitutional portion is based on population.
Kurt Weiss, spokesperson for the State Budget Office, said Gov. Gretchen Whitmer’s recommended fiscal year 2022 budget includes a 2% increase in the CVTRS portion. The decreases in state revenue payments will be on the constitutional
side, the largest part of revenue sharing
Here’s a breakdown in revenue sharing totals for Oakland County:
• Constitutional FY2021: $108.7 million
• Constitutional FY2022: $105.7 million ($3.2 million decrease)
• CVTRS FY2021: $14.8 million
• CVTRS FY2022: $15.1 million ($297,917 increase)
• FY2021 Total: $123.6 million
• FY2022 Total: $120.9 million ($2.7 million decrease, 2.2% decrease)
In Fiscal Year 2022, which begins in October, the state treasury department is projecting $1.13 billion in state revenue sharing payments to cities, villages, and townships, a 2% decrease from the current fiscal year.
In Oakland County, communities are expected to receive $120 million in state revenue share payments, a 2.2% decrease. The decrease is due to a projected decline in projected sales tax revenues during the period of July 2021 – June 2022 – a consequence of the coronavirus pandemic and reduced economic activity.
According to the House Fiscal Agency, the state collected around $8.2 billion sales tax revenue in fiscal year 2019, $8.68 billion in fiscal year 2020 and $8.4 billion in fiscal year 2021. In Fiscal Year 2022, sales tax revenue is projected at $8.4 billion.
Budget optimism
Local government officials are disappointed in the projected decrease in state shared revenue payments for fiscal year 2022, their second-largest source of revenue, but remain optimistic that their conservative budgeting will help lessen the impact.
Bryan Barnett, Rochester Hills mayor, said the state revenue sharing payments are the city’s second-largest source of revenue after property taxes. The dollars are put in the city’s general fund budget and used primarily for government operations.
Rochester Hills is projected to see an overall 2.6% decrease in its revenue share payment from $6,679,471 to $6,505,565. That makes up around 26% of the city’s $25 million general fund budget.
“State shared revenue and gas tax revenue were in massive flux as we headed into the pandemic and we weren’t exactly sure where things were going to end up,” he said. “Fortunately, they don’t look like they are going to be the drastic cuts that we thought or at least planned for back in April 2020 when we thought both of them might drop as much as 25 or 30%, which really would have been devastating for local municipalities.”
Pontiac Mayor Deirdre Waterman said the city will experience a $47,216 decrease in revenue share over the previous year. The city is projected to receive $10.3 million in revenue sharing payments in fiscal year 2022, that’s about 24% of its $42 million general fund budget.
“We consider the ($47,216 decrease) substantial,” she said. “It’s enough of a percentage of our general fund that any amount is something that will cause an impact on our ability to provide services unless we find a way to make that up in other ways.”
Although the city is seeing decreases in revenue, she’s hoping that new jobs being created within the city will help to offset losses from the past year.
The governor’s recommended fiscal year 2022 budget includes $70 million in City Income Tax COVID Loss Relief for the 24 Michigan communities that have city incomes taxes, a revenue source that was significantly hit by the pandemic.
Waterman said city income tax revenue is down about $1.1 million compared to the previous fiscal year at $14.2 million. As part of the governor’s budget, Pontiac would receive $2.3 million in city income tax relief.
Local governments say brick and mortar retail sales were significantly down due to the pandemic, but that online shoppers and the sales tax they pay on web purchases helped to offset that decrease, which has helped to steady the state’s sales tax revenue over the past year. That’s good news for local governments looking to the state for their second-largest source of revenue.
According to the Michigan Retailers Association, retailers reported an increase in January sales over December, now reporting two months of positive growth since sales were down in November. Forty-one percent of Michigan retailers reported an increase in sales over December while 74% of retailers predict their sales will continue to rise through April.
Bill Hallan, president and CEO of Michigan Retailers Association, said that back-to-back months of strong sales is a great sign that Michigan’s economy continues to move in the right direction.
“Retailers have proven their strength and determination this past year and Michiganders continue to demonstrate their support for neighborhood stores,” he said. “We hope to see this relationship between store owners and consumers continue to blossom throughout the spring.”
Troy Mayor Ethan Baker said the 2.5% decrease in state revenue share payments, from $7.7 million to $7.5 million, will “effectively have no impact on city operations.”
“Troy has done a superb job of squirreling away money since the Great Recession to have our unassigned general fund balance be able to handle these kinds of reductions from the state or any other potential revenue decrease. On the flip side, every dollar we don’t get from the state that we count on for budgeting purposes has to come from somewhere else.”
Baker said the state revenue sharing trend for cities, villages, and townships “doesn’t look good, especially Troy.”
“State revenue sharing is at a level, especially adjusted for inflation, that is lower than what it was in the early 2000’s,” he said. “It’s never gotten back there. That means we are more dependent on the property taxes we collect in the city and more creative in how we fund things.”
In South Lyon, state revenue sharing payments make up about 16% of its $6.6 million general fund budget. The city is projected to see a 2.5% decrease in payments from $1,083,814 to $1,056,430 in fiscal year 2022.
Paul Zelenak, city manager, said the city has budgeted for the decrease so that it won’t affect city operations.
“We just have to allocate our funds more wisely based upon the cut in revenue,” he said. “Just like in prior years, we had cuts in revenue sharing and had to adjust our expenditures accordingly. It does take away our ability to potentially do more projects within the city.”
He said the city doesn’t want to see any decreases in state revenue sharing, but that the forecast is “not as dire” as once projected when the pandemic began last spring.
The total amount of estimated state payments to local units of government for fiscal year 2022 is expected to increase over fiscal year 2021 from $19.9 billion to $20.7 billion, according to the Senate Fiscal Agency. This include all payments, not just state revenue share.
Federal rescue
President Biden’s American Rescue Plan Act of 2021, which is expected to be voted on over the next several weeks, includes billions in direct assistance for local governments of all sizes. To date, direct federal pandemic assistance has only been received by the largest counties, including Oakland, and the City of Detroit.
According to the bill text, which was released Feb. 19, the Coronavirus Local Fiscal Recovery Fund includes $130.2 billion in direct pandemic assistance for local governments and counties. ($45.57 billion for communities with over 50,000 residents, $19.53 billion for communities with under 50,000 residents, and $65.1 billion for counties).
Allocations will be based on a formula under the Housing and Community Development (HCD) Act of 1974 and population. These federal dollars can be used to respond to the COVID-19 pandemic, cover costs incurred as a result of the pandemic, and replace revenue that was lost, delayed, or decreased as a result of the pandemic.