CHICAGO - Two property tax cut measures that will appear on Michigan's Nov. 3 ballot have raised concerns on the part of rating agency officials and opposition among local governments.

Localities fear a direct or indirect drain on revenues, while credit officials say the proposed constitutional amendments could impair both state and local financial flexibility.

One of the measures, which was championed by Gov. John Engler in a petition drive, would cut school operating property taxes by 30% over five years and limit property asssesment growth to 3% or the rate of inflation, whichever is less.

The second measure, which was placed on the ballot by the Legislature last year, would limit annual property tax assessment increases to 5% or the rate of inflation, whichever is less.

Last week, Moody's Investors Service released a report that says the proposals would "further restrict financial flexibility" of local governments that already operate under revenue-raising constraints.

"The effect on credit quality and bond ratings will depend upon a community's particular circumstances," Moody's wrote, adding that it did not expect "any immediate rating changes on local government debt since the effects of the restrictions may take some time to emerge."

Moody's pointed out that while the measures would not restrict a government's ability to levy taxes for debt service on unlimited tax debt, the proposals could affect a government's limited tax debt, which is supported solely by its existing revenues.

"Limited tax debt has always had to compete with other service demands for resources," explained Charles Kishpaugh, an assistant vice president at Moody's, adding that either measure if passed would increase that competition.

Under Engler's "Cut and Cap" proposal, the state would reimburse school districts for money lost through the phased-in 30% property tax cut. According to Nick Khouri, chief deputy state treasurer, the plan would cost the state an estimated $448 million in fiscal 1994, which begins Oct. 1, 1993, and increase to 1.7 billion by fiscal 1998.

The Republican governor's plan, aimed at lowering the local property tax burden to attract and retain economic development and jobs, is to reimburse schools with half of the 5% annual growth in revenues the state has averaged over the last 10 years.

Questions about the state's ability to come up with the money for schools have set off alarm bells with local governments, which are fighting both proposals and have amassed a $1 million war chest to. keep the public from voting in favor of them. The governments point to the fact that, with the recession, the state has not achieved 5% revenue growth over the last two years.

"If the money is not there, where will [the state] get it?" asked Tom White, director of government relations for the Michigan Association of School Boards. "They may take the money out of their left pocket and put it in their right pocket."

Bill Mathewson, a staff attorney with the Michigan Municipal League, confirmed that local governments do indeed fear that the state may reduce revenue sharing to the governments, or may count reimbursements to the schools as part of the state's constitutional mandate to send 41.6% of its expenditures to local governments.

Pointing to state budget concerns, however, Khouri warned that if needed revenue growth does not materialize, the state would have to downsize its government in order to pay the schools and balance its budget.

"I can't say how the pie will be distributed, but the total pie will be smaller than before," he said.

Claire G. Cohen, executive managing director at Fitch Investors Service Inc., said the real risk in the Cut and Cap proposal is that the state may not be able to come up with the money to repay the schools. "How far down will Michigan be able to downsize government?" she asked.

Joe O'Keefe, a director at Standard & Poor's Corp., said the agency will wait for the election results and see how the state implements the winning proposal before it comes to any conclusions.

The agency has a negative outlook on Michigan's AA general obligation deft rating, partially owing to the impact the reimbursement portion of Cut and Cap might have on state revenues. The state's GO debt is rated A1 by Moody's and AA by Fitch.

Recent polls in the Detroit newspapers show voters split on the Cut and Cap proposal while giving the 5% assessment cut measure a slightly higher degree of support.

Chris Thomas, the director of elections for the secretary of state's office, said the state constitution provides that in the case of conflicting amendments on the same ballot, the proposed amendment receiving the most votes would prevail.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.