Rural County Budgeting During a Pandemic
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Marquette County is a rural county in the Upper Peninsula of Michigan, located adjacent to beautiful Lake Superior. Its rich history is built around iron mining and timber extraction. Marquette ranks as Michigan’s largest geographic county, with over 1,800 square miles and 69,600 residents according to the July 2019 US Census estimate
Prior to the COVID-19 pandemic, Marquette County was heading in the right direction. Home of Lifepoint Hospital Systems, Northern Michigan University, Cleveland-Cliffs, Inc., Lundin Mining, growing medical and technology companies, as well as new entrepreneurs moving to the region for improved quality of life, Marquette County was experiencing positive economic growth, including a billion dollars of investment just a few years ago.
While most Michigan counties experienced significant loss in property taxes during the Great Recession, Marquette was one of just a handful that were largely unaffected. Even so, the County’s fiscal challenges remained.
Why? Was it poor leadership? Did the County fail to identify and adjust to future challenges?
Without question, the answer is “no” to both questions. County leadership anticipated challenges, adjusted course, and positioned the County for success. Had that not occurred, the impact of the COVID-19 pandemic on Marquette County would be even more problematic.
To fully appreciate the fiscal challenges presented by COVID-19, one must first recognize the fiscal challenges already facing Michigan counties.
In Michigan, county government is an administrative arm of the state. Counties are mandated to perform certain services such as enforcement of state criminal laws via the Prosecuting Attorney, election administration and maintenance of vital records by the County Clerk, maintenance and safekeeping of property records by the Register of Deeds, and maintenance of a county jail by the Sheriff’s Office.
To assist in carrying out these duties, the State is required to provide a set level of funding to each county. Unfortunately, the State has and continues to underfund its portion of mandated services.
To put this in perspective, in 2001, Marquette County received just over $3.5 million in state and federal revenues. In 2019, that number dropped to approximately $2.7 million–a 21% reduction in revenue. Adjusted for inflation, that reduction more than doubles to approximately 47%.
And yet, counties continue to be asked to do more with less.
For example, increased costs due to (1) changes to correctional sentencing and incarceration policies place more offenders in local jails, and (2) the creation and adoption of new unfunded mandates such as the veteran’s exemption are magnified by the state legislature’s unwillingness to adopt statutory reforms to head off the Dark Store tax loophole while failing to fully fund state revenue sharing.
In Marquette County, the idling of one of the local mines and overall reduction in mining tax capture has also had a negative impact. In 2013, the County received approximately $3 million in tax revenue from Cleveland Cliffs, Inc. The 2020 budget anticipates receiving less than $1 million, a reduction of over two-thirds.
Unlike a commercial business that may adjust pricing to meet increased costs, counties have limited options for generating revenue. Given that taxes are the largest source of funding, new commercial and residential development must occur to generate additional funding. Special millages may be sought for programs, but not all local leaders are keen on going back to the public without first looking at current operations and budget.
Approximately, 63% of Marquette County’s revenues come from taxes and penalties, 11% from State and Federal sources, and the remaining from fines, miscellaneous charges, license, and permits. In 2001, the County received approximately $16 million dollars in total revenues. In 2019, total revenues were just shy of $26 million; an increase of nearly $10 million or about 58%.
When adjusted for inflation, that number drops to a 6% increase over eighteen years. Given that the cost of providing services increased by more than 1% annually over this same time frame, the annual increases were insufficient without adjustments.
To address these challenges without increasing taxes, most counties have reduced staff, services, and employee benefits. Marquette County is no exception. Since 2002, the County has reduced its workforce by over 20% to include elimination of the County’s Youth Home, which operated for over 40 years.
The County no longer provides retiree health care for new employees. In addition, as of January 1, 2000, the County eliminated its defined benefit pension plan for new employees. This change was driven by actuarial projections showing that the County’s annual costs would begin decreasing in 2017. Unfortunately, no savings were realized and annual costs continue to increase rapidly.
Despite these measures, adoption of the County’s 2020 budget included a one-time use of $400,000 from reserves to balance the budget.
And then came the COVID-19 pandemic, resulting in further reductions in revenue and new unfunded mandates. Ever-changing executive orders and guidance on workplace safety coupled with federal laws requiring emergency paid sick leave and paid FMLA leave for COVID-19 qualifying reasons have created unforeseen administrative and fiscal burdens.
While Marquette County has adjusted course in response to the pandemic, the State’s forewarning of further reductions in funding and cost sharing is sobering. Short term, the County initiated temporary layoffs of non-essential personnel and delayed capital projects. Vacant positions remain unfilled and departments are being asked to be creative.
The County has begun its 2021 budget process and is advising all department heads and elected officials to be conservative with requests given the anticipated, yet largely unknown, reductions in state funding. Internally, all options are being weighed in anticipation of significant revenue shortfalls.
While COVID-19 is novel, one thing is certain: the biggest threat facing Michigan counties right now is the financial fallout yet to come–particularly when local governments are at the mercy of a legislature that does not appreciate the fiscal challenges they face.