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The Headlee Amendment: A Study Report by the Michigan Law Revision Commission
Table of Contents
The Headlee Amendment: A Study Report by the Michigan Law Revision Commission (1)
In 1998, the Michigan Law Revision Commission undertook a study of the operation and impact of the Headlee Amendment. (2) This study report is a restatement of the law of the Headlee Amendment. It summarizes the Amendment's provisions, provides an overview of the statutes enacted by the Legislature since 1978 to implement it, and analyzes the growing body of case law interpreting the Amendment.
Twenty years ago at the general election held on November 7, 1978, Michigan voters ratified the initiative petition, Proposal E, to amend Article IX of the Michigan Constitution. This constitutional amendment, popularly known as the Headlee Amendment, was proposed as part of a nationwide "taxpayer revolt" in which taxpayers were attempting to limit legislative expansion of requirements placed on local government, to put a freeze on what they perceived was excessive government spending, and to lower their taxes both at the local and state level.
The Headlee Amendment has four core provisions:
Sections 26 through 34 of Article IX expand on Section 25's broad provisions.
First, Section 26 limits the amount of taxes the state may collect in any given fiscal year to 9.49 percent of personal income in Michigan during the preceding calendar year. Section 26 further provides that taxpayers are to receive a refund if revenues exceed the limit by 1 percent or more.
Second, in the event of a fiscal emergency, Section 27 permits a one-year suspension of the Section 26 revenue limit upon the Governor's request and the two-thirds concurrence of the Legislature.
Third, Section 28 prohibits deficit spending.
Fourth, Section 29 prohibits the state from circumventing the taxing and spending limits of Sections 26 and 28 in two respects. Section 29 prohibits the state from reducing the state financed proportion of necessary costs for mandated programs in effect when the Headlee Amendment was ratified. This provision is known as the maintenance-of-support provision. Section 29 further prohibits the state from requiring units of local government to perform new or increased activities since ratification of the Headlee Amendment without appropriating funds to cover the necessary increased costs.
Fifth, Section 30 is a corollary to Section 29. While Section 29 ensures that the proportion of state money paid to local government to cover necessary costs will not decrease from FY 1978-79 levels, Section 30 provides that the percentage of the total state budget earmarked for local government spending will not decline from the FY 1978-79 level.
Sixth, Section 31 has three main requirements: (a) voter approval is required for any new local tax or any increase in the rate of an existing local tax; (b) if the base upon which any existing local tax is expanded, then the rate must be reduced; and (c) if annual property valuations are greater than the annual rate of inflation, then the property tax rate in the local governmental unit must be reduced so that the increased tax levy on existing property is no greater than the rate of inflation.
Seventh, Section 32 gives taxpayers standing to challenge alleged violations of the Headlee Amendment and vests the Court of Appeals with original jurisdiction over such taxpayer suits.
Finally, Section 34 authorizes the Legislature to enact implementing legislation to bring the terms of the Headlee Amendment into effect in Michigan.
The following table summarizes the Headlee Amendment:
1. What constitutes a state mandate to local government?
The implementing legislation for Section 29 defines the term "state requirement" broadly to mean "a state law which requires a new activity or service or an increased level of activity or service beyond that required of a local unit of government by an existing law." The following cases illustrate the principles of Section 29:
2. What costs incurred by local government must the state fund?
Section 29 prohibits the State from reducing the state-financed proportion of the necessary costs of any existing activity or service required of units of local government under state law. The Legislature has defined the term "necessary cost" to mean "the net cost of an activity or service provided by a local unit of government. The net cost shall be the actual cost to the state if the state were to provide the activity or service mandated as a state requirement, unless otherwise determined by the legislature when making a state requirement." It should be noted that while Section 34 of the Headlee Amendment does authorize the Legislature to enact implementing legislation, the Legislature's definitions of constitutional terms are not binding on Michigan courts.
3. If the Legislature underfunds units of local government in violation of Section 29, what is the remedy?
The Michigan Supreme Court held in its 1997 Durant decision that the state is liable in damages if it violates Section 29, measured by the amount of underfunding of the state-mandated activities. The damage award must be distributed to the units of local government adversely affected by the underfunding. The units of local government in turn distribute the monies in a manner they deem appropriate, including distributing the funds to local taxpayers. An award of interest on the damage lies within the discretion of the courts. Successful taxpayers are also entitled to an award of attorneys' fees.
4. If the Legislature enacts a tax that benefits local government, is that a "local tax" under the Headlee Amendment?
The Michigan Supreme Court has held that a tax is a state tax if it is styled as a state tax, is structured as a state tax, serves a state purpose, was enacted by the Legislature, is collected by the state, and is distributed by the state. In contrast, the Court added, a tax is a local tax if it is collected by local government, is administered directly by that local entity, and is spent by the local government according to local fiscal policy.
The focus of the Court's analysis is on whether the monies collected are subject to a state appropriation. Less important to the Court is the fact that the beneficiary of the state appropriation is a specific unit of local government.
5. Are user fees and special assessments a "new tax" under the Headlee Amendment?
There is no legislation defining the terms "user fee" or "special assessment." In general, a fee is exchanged for a service rendered or a benefit conferred. A fee is distinguishable from a tax in that a fee provided there is some reasonable relationship between the amount of the fee and the value of the service or benefit.
Special assessments are distinguishable from general property taxes in at least three respects. First, general property taxes are levied on real and tangible personal property, whereas special assessments are levied only on real property. Second, general property taxes are levied across the board within the assessing jurisdiction to defray the costs of government in general, whereas special assessments are levied only within a special assessment district which is comprised of the land and improvements that are specially benefitted by the public improvements (e.g., streets, sewer line, dams to control lake levels). Third, in theory general property taxes are levied on an ad valorem basis, whereas special assessments are levied on the basis of frontage or land area.
6. If a unit of local government increases its millage rate without voter approval, does it violate the Headlee Amendment?
The Headlee Amendment does not prohibit millage increases without voter approval if the increase is within "the rate authorized by law" or "the maximum authorized rate." For example, if a unit of local government was authorized by the voters to assess 18 mills before adoption of the Headlee Amendment, but it had only levied 16 of the 18 mills so authorized, that unit is free to assess the remaining two mills without voter approval.
I. Introduction Twenty years ago at the general election held on November 7, 1978, Michigan voters ratified the initiative petition, Proposal E, to amend Article IX of the Michigan Constitution. According to the Michigan Supreme Court, the purpose of this constitutional amendment, popularly known as the Headlee Amendment, was the following:
II. Article IX, § 26: The State Revenue Limit.
Section 26 limits the amount of taxes the state may impose in any given fiscal year to 9.49 percent of personal income in Michigan during the preceding calendar year. Section 26 provides in full:
Section 33 of Article IX defines the terms "Total State Revenues" and "Personal Income of Michigan" as follows:
Pursuant to the authority granted under Section 34 of Article IX to enact appropriate implementing legislation, in 1988 the Legislature enacted definitions of "total state revenues" and "personal income of Michigan" that elaborate on the Section 33 definitions. It is important to note that while the Legislature is authorized to enact appropriate implementing legislation, the Legislature's statutory definitions of constitutional terms are not binding on the courts. In some instances, Michigan courts have accepted the Legislature's Headlee Amendment definitions. See, e.g., Durant v. Dep't of Education, 129 Mich. App. 517, 342 N.W.2d 591 (1983)(adopting Legislature's definition of "state law"). In other instances, the courts have rejected the Legislature's definitions. See, e.g., Durant v. State Bd. of Education, 424 Mich. 364, 381 N.W.2d 662 (1985)(rejecting the Legislature's exclusion from the term "necessary costs" costs recoverable from the federal government).
Before 1986, the revenue limit had not been officially calculated and there was no annual report of compliance with the revenue limit. Some evidence existed that the limit may have been exceeded in FY 1984-85. The upshot was an intensive review by the Governor's Office and the Legislature of the original methodology used to determine the tax limit. This review produced a limit of 9.49 percent, compared to the 10.1 percent limit that had been widely accepted before 1986. The 9.49 percent limit was approved by the Auditor General in 1986. (5) Following this interbranch review, the Legislature enacted a law that not only requires the Director of the Department of Management and Budget to submit a report that calculates the revenue limit on an annual basis, but also requires the Director and the State Treasurer to prepare an annual report that summarizes in detail the State's compliance with the revenue limit. (6) That report is in turn reviewed by the Auditor General who examines the past and present methodology of calculating revenues.
The second paragraph of Section 26 provides that taxpayers are to receive a refund if tax revenues exceed the limit by 1 percent or more. Legislation was enacted in 1988 that clarifies that refunds are predicated on revenues (not personal income) exceeding the revenue limit by 1 percent. M.C.L. § 18.1350d sets forth the revenue refund procedure:
A Headlee Amendment refund was authorized by the Legislature in 1995 in the form of a tax credit equal to 2 percent of the taxpayer's tax liability for the 1995 tax year. See M.C.L. § 206.252.
The second paragraph of Section 26 provides further that "[i]f the excess is less than 1%, this excess may be transferred to the State Budget Stabilization Fund [italics added]." Although M.C.L. § 18.1350e(4) requires the Governor to recommend that revenues that are less than 1 percent in excess of the limit be placed in the budget stabilization fund, there is no provision in the implementing legislation that requires the Legislature to accept the Governor's recommendation, nor is there any provision for an alternative disposition of such excesses in the event the Legislature does not accept his recommendation. Political pressure presumably would be brought to bear on the Legislature to either accept the Governor's recommendation and deposit the excess in the budget stabilization fund or, in the alternative, refund the excess to taxpayers.
The last paragraph of Section 26 provides for an adjustment of the revenue limit in the event that responsibility for funding a program is transferred from the local to the state level, or vice versa, pursuant to constitutional amendment. In addition, the last paragraph states that the total revenue collected after the change may not exceed the amount authorized before the transfer. (7)
According to the Attorney General, Sections 25 and 26 do not prevent the state from imposing new taxes, so long as the projected revenues therefrom, together with all other state revenues, do not exceed the revenue limit of Section 26. In an opinion issued in 1986, the Attorney General was asked whether the state excise taxes on hotel rooms and liquor (M.C.L. §§ 207.621, 436.141) that are credited to the convention facility development fund violate the Headlee Amendment. Based upon projections for FY 1986, all revenues collected, including those from the subject state excise taxes, would not exceed the Section 26 revenue limit. Therefore, the Attorney General concluded that the state excise taxes do not violate Section 26. (8)
III. Article IX, § 27: The Fiscal Emergency Exception.
Section 27 of Article IX is a safety valve in the event of a fiscal emergency. It permits a one-year suspension of the Section 26 revenue limit upon the Governor's request and the two-thirds concurrence of the Legislature. Section 27 provides in full:
No Section 27 emergency has been declared to date.
IV. Article IX, § 28: The State Expense Limit
Working hand-in-glove with the Section 26 revenue limit is the Section 28 expense limit. Section 28 prohibits deficit spending and provides in full:
The Legislature enacted the following implementing legislation for Section 28 entitled, limitation on expenditures of state government": (9)
Since 1978, the annual state budget has been under the Section 26 revenue limit. Consequently, Section 28 has not been the subject of litigation.
V. Article IX, § 29: The Maintenance-of-Support Clause
Having placed a limit on state spending under the terms of Sections 26 and 28, the Headlee Amendment prevents the state from circumventing these limits either by shifting the burden of administering state-mandated programs to units of local government without the requisite funds to carry them out, or by reducing the state's proportion of spending for mandated programs in effect when the Headlee Amendment was ratified. Section 29 of the Headlee Amendment closes these loopholes. (10)
Section 29 of the Headlee Amendment, also known generally as the maintenance-of-support clause, contains two prohibitions on the State. First, the State is prohibited from reducing the state-financed proportion of the necessary costs of any activity or service required under state law of local governmental units prior to the adoption of the Headlee Amendment. Second, the State is prohibited from requiring new activities or services or an increase in new activities or services of units of local government without a state appropriation and disbursement of funds to pay for the increased costs since the adoption of the Headlee Amendment. Section 29 provides:
Section 29 is thus intended to prevent a reduction below 1979 levels in the proportion of state funding for state-mandated activities and services, and to prevent unfunded state mandates for new or increased activities and services after 1979. A unit of local government that carries out a state-mandated program in 1998 is entitled to receive the same percentage of funding that the state provided for that program on a statewide basis in the base year 1978-79 (this is only applicable, of course, for state-mandated programs in effect in 1978-79). For example, assume that in the base year 1978-79 the statewide necessary costs to units of local government to carry out state-mandated Program A were $2 million, and that the State funded and disbursed a total of $1 million to units of local government in connection with Program A. The base-year percentage would be 50 percent. Next assume that in 1994-95 (the payout year), the statewide necessary costs to units of local government of Program A were $4 million, but that the State funded and disbursed a total of $1.75 million to units of local government for Program A. The payout-year percentage would be 43.75 percent. The State would have underpaid 6.25 percent (50-43.75), or $250,000 (6.25% x $4 million).
In Schmidt v. Department of Education, (11) the Supreme Court filled in one of the gaps in Section 29 of the Headlee Amendment, namely, what is the correct methodology for determining whether the state is meeting its obligation to maintain existing levels of funding to units of local government. The Court had the parties in Schmidt brief the three competing methods of determining the state's compliance with Section 29: (1) state-to-state, (2) state-to-local, and (3) local-to-local. As explained by two commentators:
The Court in Schmidt adopted the state-to-local approach, observing that the first sentence of Section 29 focuses on a single proportionate obligation by the state measured during the base year, while the second sentence refers to unit and governmental body in the singular. This suggested to the Court that the framers intended that the state's obligation ran to each unit of local government.
In one of Schmidt's progeny, Mayor of Detroit v. State of Michigan, (13) the Court of Appeals held that Act 374, abolishing Detroit Recorder's Court and merging it with the Wayne Circuit Court, does not violate Section 29 of the Headlee Amendment. The Court examined the method of funding state trial court operations in 1978 -- the Headlee base year -- with the method required under Act 374. The Court concluded that Act 374 neither mandates new activities for local units vis-a-vis the state in comparison with 1978, nor does it increase the level of activity required of local units. Despite the fact that a particular local unit (i.e., Wayne County) may now be financing activities previously financed by another local unit (i.e., the City of Detroit) does not result in a Headlee violation, according to the Court:
In the Court's view, Act 374 merely continues existing activities, as opposed to mandating new activities or increasing the level of existing activities. The only issue is whether Act 374 reduces the state-financed proportion of the necessary costs of trial court operations to the units at issue from that provided on a statewide basis in 1978. The Court found that in 1978 the only state contribution to trial court operations was financing a portion of judicial salaries, and that the state is still providing at least the same proportion of the total necessary costs of trial court operations to the units at issue as it provided on a statewide basis in 1978. (15)
Finally, in 1995, Wayne County brought an action in the Court of Claims against the State seeking money damages for an alleged violation of the unfunded state mandate provision of Section 29. In Wayne County Chief Executive v. Engler, 230 Mich. App. 258, 583 N.W.2d 512 (1998), the Court of Appeals held that (1) money damages are neither a necessary not proper remedy in a suit in which a violation of the second sentence of Section 29 is established; (2) the Court of Claims lacks subject-matter jurisdiction to hear Headlee Amendment claims because money damages are not a remedy available in a suit brought pursuant to the second sentence of Section 29; and (3) because money damages are not an available remedy in a suit brought pursuant to the second sentence of Section 29, neither the one-year limitations period governing Headlee taxpayer suits nor the three-year limitations period governing actions brought in the Court of Claims is applicable. (16)
The implementing legislation for Section 29 is at M.C.L. §§ 21.231-21.244. It contains the following four provisions.
First, in connection with disbursements of state funds to units of local government, the Department of Management and Budget (DMB) is responsible for administering the disbursement of state funds to units of local government. It publishes guidelines and forms for units of local government when submitting a claim for disbursement. (17) The implementing legislation requires an initial advance disbursement in accordance with a schedule of estimated payments that is adequate to meet state requirements as they fall due. The Governor is required to recommend to the Legislature those amounts which the Governor determines are required to be made to each unit of local government and the total amount of state disbursements required for all units of government. In the event a deficiency arises, the State Budget Director is to prorate the appropriated amounts among the eligible units of local government and is to recommend a supplemental appropriation to the Legislature sufficient to cover the deficiency. (18)
Second, regarding administrative rules promulgated by a state agency that either mandate new activities or services to be performed by units of local government or which increase the level of activity or service beyond that required by existing law, the state agency promulgating the administrative rule must submit a fiscal note to the Joint Committee on Administrative Rules and to the Director of DMB. The fiscal note must estimate the cost of the rule for the first three years of the rule's operation. The Department is to submit a request for an appropriation, if necessary, for all rules approved by JCAR. The Legislature is then to appropriate the amount required as stated in the Department's request. (19)
Third, the Legislature is required to promulgate joint rules that provide a method of identifying whether or not legislation creates a state mandate on units of local government, and that provide a method of estimating the revenue needed to reimburse units of local government. (20) The Legislature has never promulgated these joint rules. Instead, the Senate and House Fiscal Agencies make regular estimates for the Legislature of any costs that proposed legislation will impose on the state and units of local government. (21) In addition, the implementing legislation to Section 29 directs the DMB to submit an annual report to the Legislature that includes the following information: (22)
Fourth, in order to administratively resolve cases involving disputed facts, the Section 29 implementing legislation creates the Local Government Claims Review Board within DMB. (23) It consists of nine members appointed by the Governor with the advice and consent of the Senate. Each member is appointed for a three-year term. At least four members of the Board must be representatives of local government. The Board's function is set forth in Section 10(4) of the implementing legislation: (24)
If the Board approves a claim, a concurrent resolution of the Legislature must be adopted before the claim is paid. Appeals are limited to the following issues:
The statute directs the DMB to adopt Board procedures for receiving claims, including a procedure for a hearing on a claim if so requested by a local unit of government. (25) The DMB adopted such procedures in 1987 that can be found in the Michigan Administrative Code, Rules 21.101-21.401.
The most significant jurisdictional limitation of the Local Government Claims Review Board is that it has no power to hear cases brought by taxpayers challenging violations of the Headlee Amendment. As explained below, Section 32 of Article IX makes the Court of Appeals a court of original jurisdiction to which taxpayers may bring Headlee Amendment challenges.
The Headlee Commission noted in late 1994 that the Local Government Claims Review Board has been underutilized. The Commission's Report observed:
It seems safe to conclude that the Local Government Claims Review Board has not yet realized its full potential.
The term "de minimis cost" is defined as "a net cost to a local unit of government resulting from a state requirement which does not exceed $300.00 per claim." (28)
In Durant v. State Board of Education (Durant II), (29) the Michigan Supreme Court addressed the issue of what constitutes a "necessary cost" within the meaning of the maintenance-of-support provision of Article IX, § 29. (The term "necessary costs" and "necessary increased costs" are both found in Section 29, the latter term being used in the context of post-Headlee state mandates. Presumably, the courts would interpret both terms in the same manner.) The plaintiffs in Durant II argued that the term "necessary costs" means "useful or beneficial," citing in support McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819), the seminal U.S. Supreme Court decision interpreting the "necessary and proper" clause of Article I, § 8, cl. 18 of the U.S. Constitution. The defendants in Durant II argued that "necessary" was synonymous with "essential or indispensable." The state defendants urged the Court to adopt the Legislature's definition of "necessary costs" found in the implementing legislation quoted above. The Court accepted the defendants' argument and concluded that the more limited definition of the term "essential or indispensable" was in keeping with the voters' intent. (30) The Court approved the Legislature's definition of "necessary costs" found in the first part of the implementing legislation. The Court agreed that the Legislature's use of the actual cost to the State if it provided the service is a legitimate benchmark, adding that the actual market cost would also be a reliable measure. (31)
The Court of Appeals has cautioned that the "actual costs" a unit of local government incurs is not necessarily to be equated with "necessary costs." (32) At the same time, however, "incremental costs" of providing a state-mandated program (e.g., special education) do not necessarily equate with "necessary costs" because of the existing infrastructure provided by a regular education program that would have to be furnished to special education students in the absence of a regular education program. (33) In one of the last phases of the Durant litigation, the Court of Appeals held that once it is established that an activity or service is required by state law (discussed below), the plaintiff has the burden of showing what the actual cost to all units of local government was of carrying out the state-mandated activity or service. Once a prima facie case is established, the burden then shifts to the State to show that these "actual costs" were not "necessary costs." (34) In an earlier phase of the Durant litigation, the Court of Appeals held that "necessary costs" would be the least expensive among alternative methods by which a unit of local government could satisfy the state-mandated activity or service. (35)
In Durant II, The Michigan Supreme Court invalidated the Legislature's exclusion in M.C.L. § 21.233(6)(d) from necessary costs "a cost on a local unit of government that is recoverable from a federal or state categorical aid program, or other external financial aid." The Court stated that as long as the activity is state-mandated, even if federally-funded in part, to the extent the State uses that section of the implementing legislation to reduce the amount of categorical school aid and to require units of local government to make up the difference through the use of outside funding, the statute violates the Headlee Amendment's prohibition on reductions in the proportion of state aid below 1978-79 levels for specific requirements imposed by statute or state agency rule. (36)
What is the meaning of the phrase "required . . . by state law," found in Article IX, § 29? In the implementing legislation for Section 29, the Legislature has conflated the terms "required" and "state law" into the single term "state requirement." It defines "state requirement" as follows: (37)
The Legislature has excluded from its definition of "state requirement" the following:
The terms "court requirement," "due process requirement," "federal requirement," and "impled federal requirement" are defined at M.C.L. §§ 21.232(3), 21.232(7), 21.233(2), and 21.233(3), respectively. (38)
In Durant II, the Michigan Supreme Court addressed the issue of whether state constitutional provisions are within the scope of the term "state law" as used in Article IX, § 29. The specific issue was whether the constitutional mandate of Article VIII, § 2 for a free public education is a "state law" for purposes of Section 29. The Supreme Court answered this question in the negative, holding that it was not the intent of the voters to include in Section 29 any obligations that may be imposed upon local governmental units by Article VIII, § 2 of the Constitution (and, by a parity of reasoning, by any other provision of the State Constitution), with the expressly stated exception of Article VI, § 18. (39) Reading the first and second sentences of Section 29 as being in pari materia, the Court concluded that the term "state law" found in the first sentence of Section 29 refers to state statutes and state agency rules, given that the phrase "required by the legislature or any state agency" is used in the second sentence of Section 29. (40) The Court added that a restrictive view of the term "state law" is warranted because ballot proposals are carefully scrutinized in Michigan to eliminate any possibility of confusion. (41)
Section 29's freeze on the proportion of state money paid to units of local government to defray their necessary costs applies only to activities or services that are required by state law and that are funded, in whole or in part, by the State. The courts have held that the State is not obligated to reimburse units of local government for increased or expanded activities or services if the initial activity or service is optional. Michigan courts have been asked to determine whether certain activities and services performed by units of local government are "required" by state law, as that term is used in Article IX, § 29. The following cases are illustrative.
In Durant II, the Supreme Court concluded that free public education, being required under the State Constitution, is thus not required under state law as that term is used in Section 29, notwithstanding M.C.L. § 380.1284 that requires 180 days of school. Federally-mandated educational programs administered by the State also are not within the ambit of Section 29. (42) However, if the activity or service is also mandated under state law, such as special education programs, then it is within the ambit of Section 29. (43)
The State is not required to reimburse a municipality for fire protection for state-owned buildings because municipalities are not required by state law to provide fire protection services. (44) Similarly, because municipalities are not required to provide fire protection under state law, state-mandated overtime compensation to firefighters is outside the scope of Section 29. (45)
Because a county is not required to operate a solid waste disposal site, the State is not required to reimburse the county for upgrading a landfill in order to comply with a state environmental law. (46) Similarly, the costs associated with implementing state requirements regarding sewage disposal systems operated by municipalities are not within the scope of Section 29 because sewage disposal is an optional, not a mandatory, activity under state law. (47)
The Attorney General has issued an opinion that M.C.L. § 339.2011, requiring units of local government engaged in public works projects to use licensed architects, engineers, and land surveyors where project costs are $15,000 or more, is not within the scope of Section 29 because units of local government are under no state-mandated obligation to engage in public works projects. (48)
The Attorney General has issued an opinion that state law requiring county prosecutors to assist the accused in locating and serving witnesses is within the scope of Section 29, as is services to crime victims to be provided by county prosecutors pursuant to the Crime Victim's Rights Act, M.C.L. §§ 780.751 et seq. (49)
If a unit of local government is mandated by state law to perform a new activity or service, must the Legislature enact a new appropriation that specifically identifies and provides the necessary funds, or may the Executive Branch reimburse the unit of local government from the existing budget? In Mahaffey v. Att'y General, (50) plaintiffs brought a federal and state constitutional challenge of 1993 legislation that required physicians to provide information to female patients contemplating an abortion. In the context of the Headlee Amendment, the Attorney General conceded that the informed consent law requires new activities or services to be performed by local public health departments. The funding for this new activity or service was to come from the Department of Health's existing budget. The plaintiffs argued that any funding had to come from a specific appropriation from the Legislature earmarked for that purpose. The Court of Appeals agreed with the Attorney General's position that the Headlee Amendment does not require the Legislature to enact a new appropriation specifically identifying and providing funds for new services required of units of local government. The Court stated that Article IX, § 29 requires only that a state appropriation be made to pay the local governmental unit for any increased costs. In accord with the voters' call for responsible and cost-efficient government reflected in the Headlee Amendment, the executive branch may fund a new activity or service required of units of local government by the Legislature from an existing appropriation. (51)
VI. Article IX, § 30: Prohibition Against Reducing the Proportion of Total State Funds Paid to Local Government
Section 30 of the Headlee Amendment is a corollary to Section 29. While Section 29 ensures that the proportion of state money paid to local government to cover necessary costs will not drop below FY 1978-79 levels, Section 30 provides that the percentage of the total state budget earmarked for local government spending will not decline from the FY 1978-79 level. Section 30 provides:
The DMB has determined that the FY 1978-79 proportion of state pending for local government is 41.61 percent. The DMB used three criteria to determine whether state spending was paid to a unit of local government: (1) the unit must be a governmental entity; (2) the unit must receive payment from the State; and (3) the source of the payment must be from state-raised revenues rather than from federal funds or private or local funds that might flow through the state treasury. (52) According to the DMB, the state has failed to meet that percentage in only two years, FY 1981-82 when the percentage of state spending on units of local government was 41.34 percent, and FY 1982-83 when the percentage of state spending on units of local government was 41.25 percent.
The current version of the Section 30 implementing legislation was first enacted in 1984, with substantial amendments in 1988. First, M.C.L. § 18.1349 provides:
Second, M.C.L. § 18.1350 addresses the accounting methodology for certain aspects of state spending. It provides:
Third, the Legislature has enacted definitions of the terms "state spending paid to units of local government," "total state spending," "total state spending from state sources," and "unit of local government." (53)
Fourth, the Legislature has directed the State Budget Director to make an annual report to the Legislature of Section 30 funding. (54) It has also adopted a procedure for making up deficiencies in Section 30 funding that requires that deficiencies be made up in the fiscal year following the fiscal year in which the deficiency in payments was identified and reported to the Legislature. (55)
Finally, the Legislature has established a local government payment fund when additional state funding to units of local government is required under Section 30. (56)
The Section 30 case law is sparse. The Supreme Court has rejected the argument that Section 30 means that state funds paid to individual units of local government (e.g., school districts) must remain in the same proportion as it was in FY 1978-79. In Durant II, the Court dismissed this contention, noting:
Likewise, the Court of Appeals has held that Section 30 does not require the State to allocate a fixed percentage of its budget to a specific purpose or unit of local government (e.g., to public education or to school districts). (58) At the same time, however, in satisfying its Section 30 obligation, the State may not categorize as state spending to units of local government payments made to reimburse a local governmental unit for providing a service that was the state's obligation to provide in 1978. (59) Thus, even when state funds are paid to a unit of local government, for purposes of Section 30 such funds cannot be counted as "state spending paid to all units of local government" when the local governmental unit is merely discharging the state's obligation. (60) If a contrary interpretation of Section 30 was adopted, then in times of shrinking state budgets, adding state payments for such programs to the category of state spending on units of local government could dilute the amount of state money paid to programs originally included in the 41.61-percent base-year level.
VII. Article IX, § 31: Prohibition Against New or Increased
While the focus of Article IX, §§ 26-30 is on state government revenue and spending limits, the focus of Article IX, § 31 is on limiting the power of local government to tax. Article IX, § 31 provides:
The first two sentences of Section 31 have three main features. First, voter approval is required for any new local tax or any increase in the rate of an existing tax.
Second, if the base upon which any existing tax is expanded, then the rate must be reduced. For example, assume the state law establishing the base of the general property tax was amended to eliminate one or more of the current exemptions, with the result that the state equalized value of all property (the tax base) is increased. In that event, the maximum authorized property tax rate in each unit of local government would have to be reduced so that the total property tax levy of each local governmental unit would not increase as a result of the change in the base. This part of Section 31 prevents an increase in the total revenue yield that results from changes in the tax base.
Third, the tax rate that is limited by Section 31 is "the rate authorized by law" or "the maximum authorized rate." This tax rate limitation ties into Article IX, § 6 which requires voter approval for any millage increase.
The third sentence of Section 31 is arguably the most well-known part of the Headlee Amendment, at least for property owners in the State. It creates a mechanism for reducing property taxes when assessments increase faster than the rate of inflation. This sentence of Section 31 provides for what is popularly known as "Headlee rollbacks." The provision undergirds the first two sentences of Section 31 that require voter approval for new or increased local taxes and that require a proportional reduction in the rate of any existing local tax when the base is broadened. A millage that is allocated from the basic 15 mills or the separate 18 mill tax limitation established under Article IX, § 6 is subject to Headlee rollbacks. As observed by the Attorney General:
To illustrate, if the state equalized value of property in a unit of local government is $10 million and rises to $11 million in the following year, exclusive of new construction, there would be a 10-percent increase in the state equalized value. If the Consumer Price Index increases by only 6 percent, Section 31 requires that the property tax rate in the local governmental unit be reduced so that the tax levy on existing property increases by no more than 6 percent. Thus, if the total tax levy of the local governmental unit had been $200,000 in Year 1 (i.e., 20 mills x $10 million), in Year 2 the total tax levy on existing property may not exceed $212,000 ($200,000 x 1.06). Because the new state equalized value of existing property is now $11 million and the maximum authorized rate of taxation is $212,000, the millage must be reduced to 19.273 mills ($212,000 maximum tax levy ÷ $11 million state equalized value). Any new construction added to the tax rolls will be taxed at the rolled-back millage rate of 19.273 mills. The Legislature has enacted an implementing statute for the Headlee rollback provision. It also enacted legislation in 1993 providing for Headlee "rollups." The implementing legislation is discussed below in Section D of this Part.
The last sentence of Section 31 excludes preexisting debt service taxes and ties into Article IX, § 6, the latter provision authorizing the repayment of general obligation bonds with unlimited taxes. After the Headlee Amendment, voter approval is now required before new general obligation bonds can be issued that are to be repaid with unlimited taxes. General obligation bonds are to be distinguished from limited tax general obligation (LTGO) bonds. A unit of local government may issue LTGO bonds without voter approval because they are paid from taxes the issuing unit of government is authorized to impose by law and other non-tax revenues the issuer may receive. The use of LTGO bonds has been criticized by the Headlee Commission as a subversion of the restrictions imposed on units of local government by the Headlee Amendment because they tie the hands of successor governments and erode the voting power of the people. (63)
The plain language of Article IX, § 31 prohibits local governmental units from levying any new taxes or increasing any existing tax beyond the maximum authorized rate after December 23, 1978, unless local voters approve the levy. What if the Legislature enacts a new tax that directly benefits certain localities? Examples of such taxes include the city utility users tax that benefits Detroit, M.C.L. § 141.801; (64) the airport parking excise tax that largely benefits Wayne County, M.C.L. § 207.371; the convention and tourism marketing taxes, M.C.L. §§ 141.871, 141.881, 141.891; and the Tiger Stadium tax, M.C.L. § 207.751, which authorizes an excise tax to be levied on hotel and motel accommodations.
The basic focus in answering the question of what is a "local tax" under Section 31 is on the entity responsible for levying the tax. If the entity responsible for levying the tax is the Legislature, then the tax is a state tax for purposes of Section 31, even if the tax benefits localities. (However, such a state tax would then be subject to the limits of Article IX, § 26.) The leading case on this issue is Airlines Parking, Inc. v. Wayne County. (65) There, the Michigan Supreme Court held that the airport parking tax that is levied on parking facilities within 5 miles of Metropolitan Airport (66) is a state excise tax, not a "local" tax. The Court noted that "because it is at least theoretically possible that the state could levy a tax that was local in character, the entity imposing the tax in question may not conclusively resolve the Headlee question." (67) Notwithstanding that some local governmental units directly benefit from the tax (tax receipts are distributed to Wayne County monthly), the Court nevertheless found that the tax is a state tax because it is styled as a state tax, is structured as a state tax, serves a state purpose, was enacted by the Legislature, is collected by the state, and is distributed by the state. In contrast, the Court added, local taxes are collected by local government, are administered directly by that local entity, and are spent by the local government according to local fiscal policy.
If a local tax increase becomes necessary in order to satisfy a court judgment, is that tax increase outside the scope of Section 31's prohibitions? The Revised Judicature Act authorizes a court to order the levy of ad valorem (i.e., by value) property taxes to satisfy a money judgment entered against enumerated types of local governmental units. (68) The RJA also provides generally that if a judgment is rendered against any municipality, the legislative body of that municipality may issue certificates of indebtedness or bonds of that municipality for the purpose of raising funds to pay the judgment. (69) That section was enacted before the effective date of the Headlee Amendment. Because the Headlee Amendment does not prevent the imposition of a tax or tax increase that was authorized prior to its effective date, a tax increase necessitated by a court judgment entered pursuant to M.C.L. § 600.6093 arguably does not come within the restrictions of Section 31. (70) Moreover, because a court is not a unit of local government (as the latter term is defined in Article IX, § 33), one federal court has concluded that there would be no violation of Section 31 if local taxes were increased to pay a court judgment. (71)
On the other hand, the Michigan Court of Appeals has stated that while a unit of local government may issue LTGO bonds to pay a judgment levy without violating the last sentence of Section 31, it may not do so if the bonds would cause the local governmental unit to exceed its authorized rate of taxation without voter approval. (72)
The Headlee Commission suggested that the Revised Judicature Act be amended to provide that a judgment levy be paid out of regular property tax levies or by issuing LTGO bonds (which are paid from existing tax revenues), but that in either case the judgment would at least be satisfied from funds that come from voter-approved taxing authority. (73) In this way, local governmental units will be forced to make the politically difficult budgetary choices that they may have been avoiding, which may have been the catalyst for the litigation that resulted in the judgment levy in the first place.
As noted, in the absence of voter approval, Section 31 prohibits units of local government from levying any new tax or from increasing the rate of an existing tax above the rate authorized by law or charter when Section 31 was ratified. A vexing issue is what constitutes a "new tax" as opposed to a "user fee" or "special assessment" under Section 31. Section 31 requires that a "new tax" receive voter approval. A "user fee" and a "special assessment," on the other hand, if not a "tax," are not subject to the same constitutional constraint. The Headlee Amendment does not define the term "tax," nor has the Legislature done so in implementing legislation. (74)
In Bolt v. City of Lansing, (75) the Court of Appeals considered a Section 31 challenge to a charge imposed by the City of Lansing on landowners for the cost of separating storm water runoff from raw sewage and treating the runoff. The plaintiffs claimed that the charge was a new tax that had not been approved by the voters and thus violated Article IX, § 31. The City of Lansing maintained that the charge was a "user fee" and not subject to voter approval under Section 31. The Court agreed with the City of Lansing, offering the following definition of "fee":
The Court conceded that a charge for sewage disposal and treatment falls somewhere between two ends of a spectrum, with one end being an ad valorem property tax, and the other being a charge for a city snow removal service that a landowner voluntarily uses. Relying on a 1954 Supreme Court decision that classified a charge for sewage treatment as a user fee, (77) where the Supreme Court analogized charges for sewage disposal to a fee for furnishing water to city residents, the Court of Appeals concluded that the Lansing storm water runoff charge is a user fee, not a new tax.
The Michigan Supreme Court granted leave to appeal in the Bolt case and reversed the Court of Appeals. (78) The Court held that the Lansing storm water service charge is a tax for purposes of Article IX, § 31 of the Headlee Amendment, for which approval is required by a vote of the people. The Court conceded that there is no bright-line test for distinguishing a valid user fee and a tax that violates the Headlee Amendment. The Court noted that a user fee generally (1) serves a regulatory rather than a revenue-raising purpose, (2) is proportionate to the necessary costs of the service, and (3) is voluntary. (79) The lack of correspondence between the charges and the benefit conferred demonstrated to the Court that the City of Lansing had failed to differentiate any particularized benefits to property owners, upon whom the tax was imposed) from the general benefits conferred on the public. (80)
In addition to the question of the status of "user fees" under Section 31, are "special assessments" a tax under Section 31? Special assessments are widely used by local governmental units to defray the costs of a variety of local improvement projects. Special assessments rather than general property taxes are used to finance such public improvements because such improvements do not benefit the general population within the unit of local government. Accordingly, it is appropriate that the direct beneficiaries of such improvements pay for them. (81)
Special assessments are distinguishable from general property taxes in at least three respects. First, general property taxes are levied on real and tangible personal property, whereas special assessments are levied only on real property. Also, real property otherwise exempt from general property taxes are not ipso facto exempt from special assessments unless specifically exempted under the legislation authorizing the special assessment.
Second, general property taxes are levied across the board within the assessing jurisdiction to defray the costs of government in general, whereas special assessments are levied only within a special assessment district which is comprised of the land and improvements that are specially benefitted by the public improvements (e.g., streets, sewer line, dams to control lake levels). However, the Legislature has authorized the creation of special assessment districts that arguably benefit the general public, such as, for example, ambulance service. (82)
Third, in theory general property taxes are levied on an ad valorem basis, whereas special assessments are levied on the basis of frontage or land area. For example, a lakefront owner with a 100-foot frontage would pay twice as much for a dam installation to control the lake level as would a lakefront owner on the same lake with 50 feet of frontage.
The Michigan Supreme Court has defined a "special assessment" as "an imposition or levy upon property for the payment of the costs of public improvements which confer a corresponding and special benefit upon the property assessed." (83) In Blake v. Metropolitan Chain Stores, (84) the Supreme Court distinguished "special assessments" from "taxes":
A Supreme Court opinion that has approached the question with arguably the greatest precision and candor is St. Joseph Township v. Municipal Finance Committee. (86) There, the Court stated:
The Attorney General's Office has issued two opinions regarding the status of "special assessments" under Section 31. The first opinion addressed the status of special assessments, apportioned on an ad valorem basis, for police and fire protection, garbage collection, and street lighting. Citing Blake v. Metropolitan Chain Stores, the Attorney General concluded that if the charge is imposed only on those property owners who are benefitted by the charge, then it is a special assessment and not a tax. (88) The second opinion addressed the status of a special assessment district established to defray the cost of ambulance service provided by a city. (89) The Attorney General concluded that since a municipality's ambulance service must benefit all its residents, and since the property specially assessed does not receive a corresponding special benefit not provided the general public, such a "special assessment" would be a "tax" for purposes of Article IX, § 31. The Headlee Commission recommended that the Legislature define the terms "special assessment" and "user fee" as follows:
As noted in the Headlee Commission Report, local governmental units have increasingly resorted to imposing mandatory user fees since ratification of the Headlee Amendment, including fees for mandatory recycling programs and fees for emergency telephone service. (90)
In order to implement Headlee rollbacks, a millage reduction fraction has to be determined. Pursuant to Article IX, § 31, if the aggregate values of property as determined by the assessing units of any county are more or less than 50% of true cash value, the State Tax Commission "equalizes" the county assessment by using a multiplier to add to or subtract from the aggregate assessed valuation of the county's taxable and real personal property. That process yields the state equalized value. The purpose of equalization is to adjust for differences in the modes of assessment among assessing units of government with the goal of achieving uniformity of property tax assessment at both the intra-county and intercounty levels. (91)
There are six classes of real property and five classes of personal property. (92) The State Tax Commission equalizes the value of taxable property in each of the classifications. The assessed valuation of property as finally equalized for the separate classes is added together, and that sum is used in determining a "millage reduction fraction." This fraction is multiplied by the maximum millage rate authorized by the unit of local government in determining the tax rate for the local government. M.C.L. § 211.34d(7) states the method by which the millage reduction fraction is calculated:
In O'Reilly v. Wayne County, (93) the Court of Appeals considered a challenge to the millage reduction fraction methodology. The Court concluded that separate millage reduction fractions need not be calculated for each class of property specified in M.C.L. § 211.34c. The Court rejected the plaintiff's argument that the phrase in Section 31, "assessed valuation of property as finally equalized," must be interpreted to mean the assessed valuation of each separate class of property as finally equalized. The Court found nothing in the language of Section 31 to suggest an intent to prohibit an increase of taxes within a class of property when such an increase results from equalization of assessments of that class with other classes at the same percentage of true cash value.
The third sentence of Article IX, § 31 requires that property tax millage rates be rolled back when assessed values, excluding new construction, exceed the rate of inflation. The implementing legislation provides a methodology and procedures for implementing Headlee rollbacks. It is attached hereto as Appendix B.
What if the rate of inflation exceeds the increase in property valuations? Can local taxing authorities reach back to prior years when property values exceeded inflation and "recapture" a portion of the increase in property values? A 1993 amendment to the implementing legislation prohibits Headlee "rollups" that would have allowed an increase in property taxes up to the "maximum authorized rate" if the rate of inflation exceeded the growth rate in property valuations. The 1993 amendment prohibits rollups without voter approval, thereby permanently reducing property taxes. M.C.L. § 211.34d(16) provides:
The Headlee Commission has concluded that the implementing legislation, although "extremely complex and difficult to understand," (94) nevertheless limits the increase in property tax revenue to the rate of inflation plus new construction.
VIII. Article IX, § 32: Taxpayer Suits
Section 32 of the Headlee Amendment gives taxpayers standing to challenge alleged violations of the Headlee Amendment and vests the Court of Appeals with original jurisdiction over such taxpayer suits. Section 32 provides:
The apparent purpose of vesting the Court of Appeals with original jurisdiction over taxpayer suits was to expedite the judicial review process by eliminating the circuit court step. If this was the drafters' intent, it was misguided. As the experience from the 17-year long Durant litigation amply demonstrates, because the Court of Appeals is not a factfinding body, all disputed questions of fact are referred to a special master (i.e., a circuit court judge (95)), who makes findings of fact and recommendations to the Court of Appeals. (96) Other than the applicable standard of appellate review, the only differences between this process and the normal circuit court adjudicatory process followed by an appeal to the Court of Appeals seem to be matters of form rather than substance.
The implementing legislation for Section 32 provides:
Although the implementing legislation vests the circuit court and the Court of Appeals with concurrent jurisdiction over taxpayer suits, there are no reported cases in which a taxpayer initiated a Headlee Amendment challenge in circuit court. (97) However, taxpayer lawsuits alleging not only Headlee Amendment violations but also other violations of state law must be filed in circuit court. (98)
All taxpayer suits must be brought within one year after the cause of action accrues. The Supreme Court has upheld the statutory one-year limitations period as a reasonable restriction designed to protect the fiscal integrity of government units that might otherwise face the prospect of losing several years' worth of tax revenues. (100)
In connection with a challenge to the issuance of bonds, the Court of Appeals has held that if the taxpayer's challenge goes to the legality of a bond issue under the Headlee Amendment, that challenge is barred if brought after the bonds are issued, even if the taxpayer suit is filed within one year of the bond issuance. (101) Known as the Bigger rule (after Bigger v. City of Pontiac, 390 Mich. 1, 210 N.W.2d 1 (1973)), the rule protects the vested interests of third-party bondholders. In this connection, the Legislature has protected the interests of taxpayers by requiring publication of a notice of intent to bond, thereby giving taxpayers adequate notice and an opportunity to bring a Headlee challenge in the Court of Appeals. (102)
Section 32 provides for the recovery of "costs" by a successful taxpayer in a Section 32 lawsuit. The Supreme Court has held that the term "costs" used in Section 32 includes reasonable attorney fees. In Macomb County Taxpayers Ass'n v. L'Anse Creuse Public Schools, (103) the Court concluded that the term "costs" was to be given a common meaning rather than be treated as legal term of art. The Court adopted the reasoning of the Court of Appeals in Durant v. Board of Education, (104) that the term "costs" include attorney fees:
The Supreme Court also consulted the drafters' notes which, although not authoritative, weigh in favor of a conclusion that "costs" includes attorney fees. The drafters' notes state that by costs is meant all expenses incurred in maintaining a taxpayer's lawsuit, including filing, service, witness, and attorney fees. However, only individual taxpayers are entitled to recover their Section 32 costs; associations and governmental units are ineligible.
M.C.L. § 600.6093.
(1) Whenever judgment is recovered against any township, village, or city, or against the trustees or common council, or officers thereof, in any action prosecuted by or against them in their name of office, the clerk of the court shall, on the application of the party in whose favor judgment is rendered, his attorney, executor, administrator, or assigns, make and deliver to the party so applying a certified transcript of the judgment, showing the amount and date thereof, with the rate of interest thereon, and of the costs as taxed under the seal of the court, if in a court having a seal. The party obtaining the certified transcript may file it with the supervisor of the township, if the judgment is against the township, or with the assessing officer or officers of the city or village, if the judgment is against a city or village. The supervisor or assessing officer receiving the certified transcript or transcripts of judgment shall proceed to assess the amount thereof with the costs and interests from the date of rendition of judgment to the time when the warrant for the collection thereof will expire upon the taxable property of the township, city, or village upon the then next tax roll of such township, city, or village, without any other or further certificate than the certified transcript as a part of the township, city, or village tax, adding the total amount of the judgment to the other township, city, or village taxes and assessing it in the same column with the general township, city, or village tax. The supervisor or assessing officer shall set forth in the warrant attached to the tax roll each judgment separately, stating the amount thereof and to whom payable, and it shall be collected and returned in the same manner as other taxes. The supervisor or assessing officer, at the time when he delivers the tax roll to the treasurer or collecting officer of any township, city, or village, shall deliver to the township clerk or to the clerk or recording officer of the city or village, a statement in writing under his hand, setting forth in detail and separately the judgment stating the amount with costs and interest as herein provided, and to whom payable. The treasurer or collecting officer of the township, city, or village, shall collect and pay the judgment to the owner thereof or his attorney, on or before the date when the tax roll and warrant shall be returnable. In case any supervisor, treasurer, or other assessing or collecting officer neglects or refuses to comply with any of the provisions of this section he shall be guilty of a misdemeanor, and on conviction thereof, shall be punished by a fine of not more than $1,000.00 and costs of prosecution, or imprisonment in the county jail for a period not exceeding 3 months, or by both fine and imprisonment in the discretion of the court. Nothing herein contained shall be construed to exclude other remedies given by law for the enforcement of the judgment.
(2) In any case where a judgment is recovered against a village which, by reason of holding no municipal elections, or for any other reason has no available assessing officer within the jurisdiction of the court wherein the judgment is rendered, the owner of the judgment or any person knowing the facts, acting on behalf of the owner, may make an affidavit showing that the village against which a judgment is pending and unsatisfied, has no available assessing officer within the jurisdiction, and file it with the clerk of the court wherein the judgment is written. The officer who makes the certified transcript shall attach thereto a copy of the affidavit, the correctness of which copy shall also be certified to in the certificate. Any party receiving the certified transcript of judgment and affidavit may file it with the supervisor of the township in which the village, having no assessing officer is located. The supervisor shall assess the amount of the judgment with costs and interest, upon the taxable property of the village, which is without an assessing officer, and thereafter the same steps and proceedings shall be had in the premises as though it were a judgment against the township within which the village is located, except that it shall be assessed against the property within the corporate limits of the village only.
(3) When judgment is recovered against any county or the board of supervisors or any county officer in an action prosecuted by or against him in his name of office, the judgment unless reversed shall be levied and collected as other county charges, and when collected shall be paid by the county treasurer to the person to whom the judgment has been adjudged upon the delivery of a proper voucher therefor.
M.C.L. § 600.6097. Municipal judgment bonds
(1) If a judgment of a court or administrative agency is rendered against any municipality, the legislative body of that municipality, unless otherwise provided, may issue certificates of indebtedness or bonds of that municipality for the purpose of raising money to pay the judgment, in an amount not exceeding the sum of the judgment, the costs and interest on the judgment, and all cost in connection with issuing the certificates of indebtedness or bonds, which certificates of indebtedness or bonds may be made payable at such time and place, and such rate of interest not exceeding the maximum rate of interest permitted by the municipal finance act, Act No. 202 of the Public Acts of 1943, being sections 131.1 to 139.3 of the Michigan Compiled Laws. The certificates of indebtedness or bonds shall be sold and issued in accordance with the municipal finance act, except that they may be issued for a period of up to 15 years.
(2) The authorization, issuance, and selling of the bonds are not subject to section 5(g) of Act No. 279 of the Public Acts of 1909, as amended, being section 117.5 of the Michigan Compiled Laws.
(3) As used in this section, "municipality" means a county, township, city, village, school district, intermediate school district, community college district, metropolitan district, port district, drainage district established under the drain code of 1956, Act No. 40 of the Public Acts of 1956, being sections 280.1 to 280.630 of the Michigan Compiled Laws, or another governmental authority or agency in this state which has the power to levy ad valorem property taxes.
M.C.L. § 211.34d. Millage reduction; definitions, tabulation of tentative taxable value, computations of taxable values, calculation of millage reduction fractions, computation of tax rate, compounded millage reduction fraction, tax rates in excess of limit, bonds or other evidence of indebtedness, summer tax bills, incorrect fractions, change in taxable values
Sec. 34d. (1) As used in this section or section 27a, [FN1] or section 3 or 31 of Article IX of the state constitution of 1963:
[FN1] Section 211.27a. [FN2] Section 211.154. [FN3] Section 211.27. [FN4] Section 211.7u. [FN5] Section 211.7k. 1. This report was prepared by Professor Kevin Kennedy, Executive Secretary, Michigan Law Revision Commission. 2. Article IX, §§ 25-34 of the Michigan Constitution. 3. Durant v. State Bd. of Educ., 424 Mich. 364, 378, 381 N.W.2d 662 (1985). 4. Section 25 provides: Property taxes and other local taxes and state taxation and spending may not be increased above the limitations specified herein without direct voter approval. The state is prohibited from requiring any new or expanded activities by local governments without full state financing, from reducing the proportion of state spending in the form of aid to local governments, or from shifting the tax burden to local government. A provision for emergency conditions is established and the repayment of voter approved bonded indebtedness is guaranteed. Implementation of this section is specified in Sections 26 through 34, inclusive, of this Article. The Michigan Supreme Court has stated that Section 25 "is merely an introduction to the provisions contained in §§ 26-34 and is not an independent statement of rights and duties." Durant v. State Bd. of Educ., 424 Mich. 364, 376 n. 4, 381 N.W.2d 662, 666 n.4 (1986). 5. See Headlee Blue Ribbon Commission, Report to Governor John Engler, at 9 (1994)[hereinafter Headlee Commission Report]. 6. M.C.L. §§ 18.1350b(3), 18.1350e, 205.30b. The State Budget Director also is required to submit monthly financial reports to the Legislature that state, inter alia, the amount of monthly revenue collection by the state. M.C.L. § 18.1386 provides: (1) The state budget director shall prepare monthly financial reports. (2) Within 30 days after the end of each month, the state budget director shall transmit copies of the monthly financial report to all the appropriations committee members and the fiscal agencies. The monthly financial report due by November 30 shall be the first monthly financial report to include statements concerning the fiscal year which began on October 1. (3) Each monthly financial report shall contain the following information: (a) A statement of actual monthly and year-to-date revenue collections for each operating fund; the general fund/general purpose revenues, school aid fund revenues, and the tax collections dedicated to the transportation funds; including a comparison with prior year amounts, statutory estimates, and the most recent estimates from the executive branch. (b) A statement of estimated year-end appropriations lapses and overexpenditures for the state general fund by principal department. (c) A statement projecting the ending state general fund balance for the fiscal year in progress. (d) A summary of current economic events relevant to the Michigan economy, and a discussion of any economic forecast or current knowledge of revenue collections or expenditure patterns that is the basis for a change in any revenue estimate or expenditure projection. (e) A statement of estimated and actual total state revenues compared to the revenue limit provided for in section 26 of Article IX of the state constitution of 1963. (f) A statement of the estimated fiscal year-end balance of state payments to units of local government pursuant to section 30 of Article IX of the state constitution of 1963. (g) Any other information considered necessary by the state budget director or jointly requested by the chairpersons of the appropriations committees. 7. Although implementing legislation has not been enacted for this paragraph, it has been suggested that implementing legislation be enacted that would eliminate the taxing authority of the transferor agency or unit of government upon a transfer of funding responsibilities via constitutional amendment. See Headlee Commission Report, supra note 4, at 12. 8. See 1985-86 Mich. Op. Att'y Gen. 203, 1985-86 Mich. OAG No. 6332 (1986). 9. M.C.L. § 18.1350c. 10. As of 1996, 17 states have enacted unfunded state mandate legislation or ratified constitutional amendments prohibiting unfunded state mandates. See Robert M.M. Shaffer, Unfunded State Mandates and Local Governments, 64 U. Cin. L. Rev. 1057 (1996). 11. 441 Mich. 236, 490 N.W.2d 584 (1992). 12. Michael C. Fayz & Clara G. DeQuick, Annual Survey of Michigan Law: Constitutional Law, 40 Wayne L. Rev. 533, 546-47 (1994). 13. 228 Mich. App. 386, 579 N.W.2d 378, aff'd on other grounds sub nom. Judicial Attorneys Ass'n v. State of Michigan, ___ Mich. ___, ___ N.W.2d ___, 1998 WL 901772 (Dec. 28, 1998). 14. 228 Mich. App. at 405-06, 579 N.W.2d at 386. 15. Id. at 407, 579 N.W.2d at 387. 16. Wayne County Chief Executive v. Engler, 583 Mich. App. 512, 514, 583 N.W.2d 512, 514 (1998). 17. M.C.L. § 21.235(5). Procedures that the Department is to follow when disbursing state funds to units of local government, and that units of local government are to follow when making a claim for disbursements, are set out in M.C.L. § 21.238. 18. M.C.L. § 21.235(1)-(4). 19. M.C.L. § 21.236. As of 1992, 28 states had adopted fiscal note requirements in an effort to raise legislators' awareness of the mandate problem and curb the passage of unfunded mandates. See Robert M.M. Shaffer, Unfunded State Mandates and Local Governments, 64 U. Cin. L. Rev. 1057, 1066 (1996). 20. M.C.L. § 21.237. 21. The Senate and House Fiscal Agencies are nonpartisan agencies whose primary mission is the provision of expert assistance to the Michigan Senate and House, respectively, regarding state fiscal issues. Both agencies also provide their respective Houses with detailed projections of estimated state revenues and expenditures. Governing Boards of the Senate and House oversee the operation and procedures of their respective Fiscal Agency. Reports of the Senate and House Fiscal Agencies are available from their websites, <http://www.state.mi.us/sfa> and <http://www.state.mi.us/hfa>. 22. M.C.L. § 21.241. 23. M.C.L. § 21.240. 24. M.C.L. § 21.240(4). 25. M.C.L. § 21.244. 26. Headlee Commission Report, supra note 4, at 16. 27. M.C.L. § 21.233(6). 28. M.C.L. § 21.232(4). 29. 424 Mich. 364, 381 N.W.2d 662 (1985). 30. See Durant v. State Bd. of Educ., 424 Mich. at 391, 381 N.W.2d at 673. 31. Id. 32. See Durant v. Dep't of Educ., 203 Mich. App. 507, 514-15, 513 N.W.2d 195, 198-99 (1994). 33. Id. at 519, 513 N.W.2d at 201. 34. See Durant v. Dep't of Education, 213 Mich. App. 500, 541 N.W.2d 278 (1995). 35. See Durant v. Dep't of Education, 186 Mich. App. 83, 463 N.W.2d 461 (1990). 36. Id. at 392, 381 N.W.2d at 673-74. 37. M.C.L. § 21.234(5). 38. These terms are defined as follows: "Court requirement" means a new activity or service or an increase in the level of activity or service beyond that required by existing law which is required of a local unit of government in order to comply with a final state or federal court order arising from the interpretation of the constitution of the United States, the state constitution of 1963, an existing law, or a federal statute, rule, or regulation. Court requirement includes a state law whose enactment is required by a final state or federal court order. M.C.L. § 21.232(3). "Due process requirement" means a statute or rule which involves the administration of justice, notification and conduct of public hearings, procedures for administrative and judicial review of action taken by a local unit of government or the protection of the public from malfeasance, misfeasance, or nonfeasance by an official of a local unit of government, and which involves the provision of due process as it is defined by state and federal courts when interpreting the federal constitution or the state constitution of 1963. M.C.L. § 21.232(7). "Federal requirement" means a federal law, rule, regulation, executive order, guideline, standard, or other federal action which has the force and effect of law and which requires the state to take action affecting local units of government. M.C.L. § 21.233(2). "Implied federal requirement" means a federal law, rule, regulation, executive order, guideline, standard, or other federal action which has the force and effect of law and which does not directly require the state to take action affecting units of local government, but will, according to federal law, result in a loss of federal funds or federal tax credits if state action is not taken to comply with the federal action. M.C.L. § 21.233(3). 39. See Durant II, 424 Mich. at 378, 381 N.W.2d at 667. 40. Id. at 380, 381 N.W.2d at 668. 41. Id. The Court refused to place any reliance on the Drafters' Notes to the Headlee Amendment, inasmuch as they were published after the Amendment was passed and were, in any event, internally inconsistent on this issue. Id. at 381 n.12, 381 N.W.2d at 669 n.12. 42. See Kramer v. City of Dearborn Heights, 197 Mich. App. 723, 496 N.W.2d 301 (1992). 43. See Durant v. Michigan, 456 Mich. 175, 198-99, 566 N.W.2d 272, 282 (1997); Schmidt v. Dep't of Educ., 441 Mich. 236, 490 N.W.2d 584 (1992). 44. See City of Ann Arbor v. Michigan, 132 Mich. App. 132, N.W.2d (1984). 45. See Saginaw Firefighters Ass'n, Local 422 v. City of Saginaw, 137 Mich. App. 625, 357 N.W.2d 908 (1984). 46. See Livingston County v. Dep't of Management & Budget, 430 Mich. 635, 425 N.W.2d 65 (1988). 47. See Kramer v. City of Dearborn Heights, 197 Mich. App. 723, 496 N.W.2d 301 (1992). 48. See Mich. Att'y Gen. Op. No. 6237 (1984). 49. See Mich. Att'y Gen. Op. No. 6576A (1989). 50. 222 Mich. App. 325, 564 N.W.2d 104 (1997). 51. See Mahaffey, 222 Mich. App. at 342, 564 N.W.2d at 112. 52. See Oakland County v. Dep't of Mental Health, 178 Mich. App. 48, 55, 443 N.W.2d 805, 808 (1989), appeal dismissed, 437 Mich. 1047, 471 N.W.2d 619 (1991). 53. Those terms are defined as follows: "State spending paid to units of local government" means the sum of total state spending from state sources paid to a unit of local government. State spending paid to a unit of local government does not include a payment made pursuant to a contract or agreement entered into or made for the provision of a service for the state or to state property, and loans made by the state to a unit of local government. M.C.L. § 18.1304(3). "Total state spending" means the sum of state operating fund expenditures, not including transfers for financing between funds. M.C.L. § 18.1305(1). "Total state spending from state sources" means the sum of state operating fund expenditures not including transfers for financing between funds, federal aid, and restricted local and private sources of financing. M.C.L. § 18.1305(2). "Unit of local government" means a political subdivision of this state, including school districts, community college districts, intermediate school districts, cities, villages, townships, counties, and authorities, if the political subdivision has as its primary purpose the providing of local governmental service for citizens in a geographically limited area of the state and has the power to act primarily on behalf of that area. M.C.L. § 18.1115(6). Article IX, § 33 defines the term "Local Government" as follows: "Local Government" means any political subdivision of the state, including, but not restricted to, school districts, cities, villages, townships, charter townships, counties, charter counties, authorities created by the state, and authorities created by other units of local government. 54. M.C.L. § 18.1497(1) provides: The director shall transmit to the auditor general for review and comment, not later than May 31 of each year, an itemized statement of the state spending paid to units of local government and total state spending from state sources for the fiscal year in which this act takes effect, and each fiscal year thereafter, including a calculation of the proportion of state spending paid to units of local government to total state spending from state sources. The report shall be published by submission to the legislature not later than June 30 of each year. 55. M.C.L. § 18.1497(2)-(3) provides: (2) If the proportion calculated pursuant to subsection (1) [M.C.L. § 18.1497(1), quoted in footnote 28] is less than required by section 349 [M.C.L. § 18.1349], the statements required by this section shall report the amount of additional payments to units of local government which would have been necessary to meet the requirements of section 349. This amount shall be payable to units of local government not later than in the fiscal year following the fiscal year in which the deficiency in payments to units of local government was ascertained and reported to the legislature. (3) Any appropriations to the fund which are intended to make up a shortfall in payments to units of local government for a prior fiscal year shall not be considered as state spending from state resources or as state payments to units of local government in the fiscal year in which the amounts are appropriated. 56. M.C.L. § 18.1498 provides: (1) The local government payment fund is hereby created. Money appropriated to the fund by the legislature shall be reserved for use in a fiscal year when additional state payments to units of local government are necessary to meet the requirements of section 349. (2) The amounts recommended by the governor or appropriated by the legislature into the fund described in subsection (1) shall be considered, for purposes of fulfilling the requirements of section 349, as state spending to be paid to units of local government. 57. Durant II, 424 Mich. at 393, 381 N.W.2d at 674 (citations omitted). 58. See Waterford School District v. State Board of Education, 130 Mich. App. 614, 344 N.W.2d 19 (1983), aff'd sub nom. Durant v. State Board of Education, 424 Mich. 364, 381 N.W.2d 662 (1986). 59. See Oakland County v. Dep't of Mental Health, 178 Mich. App. 48, 443 N.W.2d 805 (1989)(the provision of mental health care services is a state obligation), appeal dismissed, 437 Mich. 1047, 471 N.W.2d 619 (1991). 60. See Oakland County, 178 Mich. App. at 60, 443 N.W.2d at 811. 61. Article IX, § 33 defines the term "General Price Level" as "the Consumer Price Index for the United States as defined and officially reported by the United States Department of Labor or its successor agency." 62. See 1979-1980 Mich. OAG Op. No. 5562, 1979 WL 36,893 (1979). 63. See Headlee Commission Report, supra note 4, at 54; Sessa v. County of Macomb, 220 Mich. App. 279, 290-95, 559 N.W.2d 70, 74-76 (1997)(Markman, J., concurring). 64. The City Utility Users Tax was first enacted in 1972, thus predating the Headlee Amendment. It expired, but was reenacted in 1988. The revised version of this Act was successfully defended against a Section 31 challenge. See Taxpayers United for Michigan Constitution, Inc. v. City of Detroit, 450 Mich. 119, 537 N.W.2d 596 (1995). The Court concluded that because the Act was in effect at the time the Headlee Amendment was ratified, there could be no Section 31 violation. The Legislature responded to the litigation with following statute enacted in 1990: Sec. 8. This act is intended to eliminate the confusion surrounding the legal status of Act No. 198 of the Public Acts of 1970 resulting from an opinion of the attorney general regarding the validity of enactment of various public acts, OAG, 1987-1988, No 6438, p 80 (May 21, 1987) and a circuit court decision in the matter of Ace Tex Corp v Detroit rendered on February 2, 1990 (Wayne County Circuit Court Case No. 88-807858-CZ), as to which an appeal is pending, and to resolve legislatively the issues raised by the appeal. Before that circuit court decision, the legislature had been advised by the attorney general's office in May 1987 that legislative action was not necessary to authorize the collection of the city utility users tax after July 1, 1988 under Act No. 198 of the Public Acts of 1970. In light of the circuit court decision of February 2, 1990, which is presently on appeal, it appears that legislative action is advisable to clarify the authorization for and to ratify the collection of the tax from July 1, 1988, to authorize the continued collection of the tax, and to resolve legislatively the issues raised by appeal. The legislature by enactment of this act intends to validate, ratify, and revive effective from July 1, 1988 a city utility users tax. This act is remedial and curative and is intended to revive and assure an uninterrupted continuation of the authority to collect a city utility users tax. The legislature finds the city utility users tax was authorized by law on the date when section 31 of Article IX of the state constitution of 1963 was ratified. M.C.L. § 141.1158 (footnotes omitted). 65. 452 Mich. 527, 550 N.W.2d 490 (1996). 66. Metro is the only airport that fits the statutory definition of "a regional airport facility," i.e., "an airport that services 4,000,000 or more emplacements annually." M.C.L. § 207.372(h). 67. Airport Parking, Inc., 452 Mich. at 534, 550 N.W.2d at 493. 68. M.C.L. § 600.6093. It is reproduced in Appendix A. 69. M.C.L. § 600.6097(1). It is reproduced in Appendix A. 70. See City of Detroit v. City of Highland Park, 878 F. Supp. 87 (E.D. Mich. 1995). 71. See id. 72. See Sessa v. Macomb County, 220 Mich. App. 279, 284, 559 N.W.2d 70, 72 (1997). 73. See Headlee Commission Report, supra note 4, at 37. 74. Missouri's Hancock Amendment, which is modelled after the Headlee Amendment, uses the phrase "tax, license or fees." One commentator has concluded that "[t]he decisions defining the phrase 'tax, license or fees' have created a hodgepodge of results with no clear guiding standard." Joanne L. Graham, Toward a Workable Definition of "Tax, License, or Fees": Local Governments in Missouri and the Hancock Amendment, 62 U. Mo.-Kansas L. Rev. 821, 824 (1994). 75. 221 Mich. App. 79, 561 N.W.2d 423 (1997). 76. Bolt, 221 Mich. App. at 86, 561 N.W.2d at 427. 77. The case relied on is Ripperger v. City of Grand Rapids, 338 Mich. 682, 62 N.W.2d 585 (1954). 78. Bolt v. City of Lansing, ___ Mich. ___, ___ N.W.2d ___, 1998 WL 898865 (dec. 28, 1998). 79. Id. at 4. 80. Id. at 6. Compare County of Saginaw v. John Sexton Corp. of Michigan, ___ Mich. App. ___, ___ N.W.2d ___, 1998 WL 723881 (Oct. 16, 1998)(landfill surcharge qualifies as a regulatory fee for purposes of Section 31 of the Headlee Amendment because it is reasonably related to the costs involved in managing the county's disposal of solid waste). 81. See generally George Marti, Special Assessments, in 2 Michigan Municipal Law §§ 11.01-11.27 (1980). 82. See M.C.L. § 333.20346, M.S.A. § 14.15 (20346). 83. Fluckey v. City of Plymouth, 358 Mich. 447, 100 N.W.2d 486 (1960). 84. 247 Mich. 73, 225 N.W. 587 (1939). 85. Blake, 247 Mich. at 76, 225 N.W. at 588. 86. 351 Mich. 524, 88 N.W.2d 543 (1958). 87. St. Joseph Township, 351 Mich. at 532-33, 88 N.W.2d at 547-48 (emphasis added). 88. See 1979-1980 Mich. OAG Op. No. 5562, 1979 WL 36,893 (1979). 89. See 1979-1980 Mich. OAG Op. No. 5706, 1980 WL 113,860 (1980). 90. See Headlee Commission Report, supra note 4, at 26-29. 91. See Allied Supermarkets, Inc. v. City of Detroit, 391 Mich. 460, 216 N.W.2d 755 (1974). The Truth in Assessing Act, enacted in 1981, see M.C.L. § 211.34, requires that if the state equalized valuation of a city or township exceeds its assessed valuation, then the city or township must reduce its maximum authorized millage rate so that the amount of taxes collected does not exceed the amount that would have been collected had the city or township levied upon its assessed valuation. The Truth in Taxation Act, enacted in 1982, see M.C.L. § 211.24e, provides that a local unit of government shall not benefit from an increase in state equalized valuation unless the unit's governing body holds a public hearing designed to acquaint the public with the fact that the total tax dollars collected from existing authorized millage rate will be increased due to increases in the state equalized value of taxable property. Units of local government that levy one mill or less are exempted. See generally Richard D. Reed, Property Taxation, in 2 Michigan Municipal Law §§ 10.01-10.24 (1980). 92. See M.C.L. § 211.34c. The classes of real property are agricultural, commercial, developmental, industrial, residential, and timber cutover. The classes of taxable personal property are agricultural, commercial, industrial, residential, and utility. Id. 93. 116 Mich. App. 582, 323 N.W.2d 493 (1982). 94. Headlee Commission Report, supra note 4, at 34. 95. For example, in the Durant litigation, the Court of Appeals appointed special masters on two occasions, both of whom were circuit court judges. 96. See M.C.L. § 600.308a(5); M.C.R. 7.206(D)(3). 97. Because local governmental units are not "taxpayers," the provisions of Section 32 are inapplicable to them. Claims by units of local government brought under the Headlee Amendment may be filed with the Local Government Claims Review Board, and from there to the circuit court. The Local Government Claims Review Board is discussed above in Part V. 98. See, e.g., Macomb County Taxpayers Ass'n v. L'Anse Creuse Public Schools, (99) 99. 455 Mich. 1, 564 N.W.2d 457 (1997). ' § 100. See Taxpayers Allied for Constitutional Taxation v. County of Wayne, 450 Mich. 119, 537 N.W.2d 596 (1995). In that case, plaintiffs brought an action nearly ten years after the tax increase went into effect. 101. See Sessa v. County of Macomb, 220 Mich. App. 279, 286-87, 559 N.W.2d 70, 73 (1997). 102. See M.C.L. § 123.958b(3). 103. 455 Mich. 1, 564 N.W.2d 457 (1997). 104. 186 Mich. App. 83, 463 N.W.2d 461 (1990). 105. Durant, 186 Mich. App. at 118.
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