In 2007, the City was enjoying several years of modest growth, a healthy national economy spread some new investment our way, and rising property values translated into increasing revenues for the City. In 2007, the long-time City Manager Gregg Guestschow was forced to resign, and changes were made in how City Hall was run. In 2008, the economy was strong and a large new grant was secured to help make improvements in downtown. Things were still looking good until the stock market collapsed on September 20.
The ensuing economic downturn in 2009 has persisted to the present day, and while the national economy is recovering, and employment and incomes are up, property values--the primary driver of City revenues--have continued to fall. In addition, state revenue sharing has suffered significant cuts and government grants have dried up. The City responded in three ways: 1) aggressive cuts in City spending, primarily by reducing the number of employees and the benefits of remaining workers; 2) a modest 1 mil increase in taxes to pay for City-provided services; and 3) renewed efforts at economic development and neighborhood improvement in an attempt to increase, or at least maintain, property values. The table below paints the picture.
The most difficult number is the first one, the SEV, or State Equalized Value, or the collective worth of all property values in Owosso: it has declined 30% in the last five years. Not surprisingly, the tax revenues the City receives have also dropped, by $200,000 in the same five years and another projected $100,000 this budget cycle. The drop would have been even greater but for the fact that the City Council in 2010 approved a tax rate hike from 13.7 mils (tax dollars per $1,000 assessed value) to 14.7 mils (the decimal changes in the table reflect small changes up, and down, due to bond and other obligations).
Retirement Funding. One significant cost not shown in the above table is the increasing cost of meeting the City's obligations to its retirees. In 2005, the City Council approved changes in the retirement benefits it offers to employees. Now, more recent employees have access to a defined contribution plan (as opposed to a defined benefit plan) that shifts responsibility and risk for retirement planning to employees; it is also easier to make a budget around. However, for public safety workers, the many long-term employees of the City, and those who have already retired, the City has an ongoing financial responsibility.
It has been difficult to get accurate, long-term figures for retirement costs, but they are significant. In the current year, an estimated $829,038 contribution is being made to the City's retirement plan; in the next year, the budget estimates costs will increase almost $100,000. By some measures, these costs have doubled in the last five years. It becomes difficult to manage, much less plan, for these large expenditures, which vary based on changing actuarial estimates and the rise and fall of the investments that underpin the retirement fund. The City has a legal--as well as moral--obligation to support its retirees, but attention needs to be paid to the fiscal management of retirement funds and how it impacts the City's budget.
Budget Cutting has been the primary pre-occupation in City Hall for the last five years. The number of employees has dropped from over 100 to around 80 now, with some difficult lay-offs and early retirements part of the solution. As well, staff have seen their benefits reduced and they have stepped up to higher contributions to their health care. The management team has also negotiated cost-saving contract renewals with our represented employees. Overall, close to $900,000 in spending was cut from the budget.
Making these cuts without drastic reductions in services is to the great credit of talented administration and hard-working employees. There was not a lot of fat available to cut. Prior to 2007, City Councils and City Manager Guetschow had been very careful spenders, keeping the lid on employment costs, not indulging in any big park improvements, and always seeking limited and efficient delivery of services. Fortunately, they also left the City with a healthy Fund Reserve and very little debt.
Are Taxes Going Up? While the decline in property values has hit the City's budget hard, it has provided some relief to taxpayers in Owosso. The average tax bill paid by a homeowner has declined from $506 in 2007 to $473 last year, and this occurred despite the 1.0 mil increase in City property taxes adopted in 2010. For the coming fiscal year, the City Manager has proposed a small increase in the tax rate of about 0.2 mils to support economic development activities and promotion of the City's three historic structures (Curwood Castle, Comstock Cabin, and the Gould House). Even with this increase in the tax rate, the actual tax paid by most homeowners will actually decline because of the continuing slide of property values.
What to Do? The City faces both an immediate short-term budget crisis and a long-term challenge in ensuring sufficient revenues to operate the City and maintain its infrastructure. For the coming budget year (which begins July 1) the City has only a few options, or combination of these options to address the short-term budget issues:
- reduce labor costs through cuts in services: management and labor have probably squeezed as much efficiency and made as many sacrifices as possible; to reduce the cost of government further, cuts in services are probably necessary (i.e. fewer police and fire employees, less maintenance of roads or parks, etc.).
- delay further equipment purchases: the City has postponed for five years the purchase of new trucks, a streetsweeper, a new ambulance, fire station upgrades, and audio-visual equipment for the City Council chambers. There can be a delay in the purchase of these and other items, but at some point the cost of maintaining old equipment becomes prohibitive.
- increase fees and the property tax rate: neither of these revenue-generating options is desirable, nor will they offer that much help in balancing the budget, but the political pain probably exceeds the economic pain.
- tap into the City's reserve funds: through prudent management and a wise policy to not use reserve funds to balance the budget, the City's fiscal health is sound. This makes it possible to borrow money more easily and cheaply; tapping into reserves may set a dangerous precedent.
None of these choices are pleasant, and the Council has been seeking alternatives, professional advice, and public input on how to balance the 2013-14 budget. Several workshops, public hearings, and difficult conversations have moved along the budget process.
Whatever happens with this year's budget, the challenges will likely persist in future years. Even if the real estate market recovers in the coming year and property values rebound, property tax revenues will not rise quickly because the provisions of the 1994 Proposition A limit the rise in assessed values to the rate of inflation with a cap of 5 percent (see my earlier post "Budget Challenges Are Here to Stay"). As we are experiencing almost no inflation, even if property values rise 10 percent in 203-14, the City's revenues are likely to rise only 1 or 2 percent. Meanwhile, deferred maintenance in equipment and our infrastructure (roads, sewers, parks) will catch up with the City and increase the cost of operations. As well, the City's retirement fund, which will likely have fewer employees making contributions, may also require additional public investment.
Options to address the long-term budget challenge include the following:
Options to address the long-term budget challenge include the following:
- restructuring of local government to either further scale back services or implement more radical cost-efficiencies like contracting out public services, combining delivery of services with surrounding jurisdictions, or fee-for-service provisions.
- asking non-profit entities which are exempt from property taxes like healthcare providers and private educational institutions to make payments in lieu of taxes
- increasing revenues through new taxes on cable television, local businesses, or residents; or having voters approve new property taxes for specific services and public investment like roads, parks, or public safety
- have the State of Michigan provide some relief or assistance to local governments through revenue-sharing, increased grants, or revisions to the provisions of Proposition A
- spur economic development and new investment in commercial and residential properties that will increase the tax base of the City.
None of the first three choices are desirbable, the fourth option is politically difficult, and the fifth requires persistence, wisdom, and commitment over time.
What advice do you have for your elected representatives?