Budget Challenges are Here to Stay

Recently, most Owosso property owners received news of a tax break when they opened their 2010 Notice of Assessment. The taxable value of homes in our City went down an average of about 6 percent. Upcoming tax bills from the City (which also reflect school and county taxes) will be going down for most homeowners, but the amount of the decrease varies. As individuals, this is welcome relief at a time when all of us face a difficult economic situation, too many residents struggle to find a good paying job, and record numbers of homeowners are trying to stave off foreclosure. Having our property taxes go down will be a help in these tough times.

However, when we look at the reduction in property taxes from a city-wide standpoint, we see both some immediate problems and some long-term challenges. Well over half of the City's General Fund revenues come from the local property tax. The drop in property values results in a reduction of about $230,000 in revenues this year. This follows a $110,000 drop last year. In fact, the recent reductions in property values take the City back to a revenue level they earned in 2004. The following table outlines the State Equalized Value (SEV) and the taxable value of property (in millions of dollars), the tax rate (millage) and property tax revenues (also in millions) for the last seven years. The taxable value of property lags the SEV because of Proposition A, which limits the rate at which property tax assessment can rise. The millage rate has declined slightly over time because of the Headlee amendment, which limits the rate at which city tax revenues can increase. In any case, the decline in tax assessments while offiering relief for property owners, puts a burden on the City of Owosso to cut expenses commensurate with the drop in revenues (click on the "budget" label to the right to see more background on how this comes at the same time as other financial challenges to the City).

Impact of Prop A on taxes and revenues. State ballot Proposition A, passed in 1994, overhauled and reduced property taxes in Michigan and changed the way we finance education in our state. However, its passage came during a period of relative economic health and steadily rising property values. One impetus for Prop A was the relief it offered from increases in property tax assesments that led to higher tax bills. Prop A contained a provision, reasonable at the time, that the taxable value on one's property should not increase faster than the rate of inflation, or 5 percent, whichever was less. Again, this was good news for existing homeowners, and while it limited the growth in tax revenues for local governments, their revenues still increased annually, and at a rate that could be estimated with some accuracy.

Also, Prop A required the taxable value of a home, upon sale, to be reset to reflect the news sales price (this is now called the pop-up tax ) and catch up on the lag between SEV and taxable value created by Prop A's limits on increased assessment. Again, while this was sometimes a surprise to new homeowners, it did help keep local government revenues increasing, albeit more slowly, over time.

In the last three years, Michigan changed in ways that the authors of, or voters for, Prop A probably never anticipated. First, property values stopped rising, and then dropped dramatically. While at first some people's assessments continued to rise despite the economic malaise, as the taxable value continued to make up the lag behind SEV, by 2010 most homeowners will now see an actual drop in their taxable value, thus the tax savings for individuals and the lost revenue for the City. At the same time that property tax revenues dropped, the housing finance crisis brought the sale of new homes to a virtual stop, and thus there were few new re-assessments from sales.

But the problem will be with us for years. . . Just like a family or business with less income, the reduction in property tax revenues has required the City to review priorities and make some painful cuts in spending. The budget process for the City of Owosso has officially started, and this year promises to be more difficult than last year. However, unlike a business anticipating an upturn in the economy, the City cannot look forward to a quick restoration in tax revenues if and when the economy recovers.

Remember the limitations on the increase in taxable value set by Prop A? They apply whether we are in a boom period or in a recovery period. Thus, if the economy turns around in 2011, home values stabilize and then begin to increase, the most our taxable value can increase is 5 percent; and given (thankfully) the era of low inflation we are in, the cap on increase in assessed value will probably be less. Thus, while it has taken only two years for property values to dive more than 20% it will take at least 4 years, and probably more, for taxable values to recover. The highwater mark for property tax revenues was 2008, it may be a decade until we return to that level.

Given the lasting impact of the recent downturn in property values, it will be necessary for the City to look at long-term reforms and reductions in public services. If there are short-term fixes available, they will only put off the necessity of making permanent cuts in city expenditures.

How much is water worth to you?

Every morning Owosso residents turn on the tap in their sink and fill up a glass of water, or mix up a pitcher of orange juice, or add water to their pancake mix, or just wash their face. We take it all for granted, but almost a billion people in the world do not have access to safe drinking water, and suffer disease as a result. In Owosso, the constant presence of safe, clean, and sufficient water in our homes seems as regular as rain in March. Of course, there is story behind the reliability of our public water system, and the City Council now needs to take action to ensure that this system continues to be a viable resource to our community.

Every day on average the City of Owosso pumps, treats, and delivers 1,600,000 gallons of water to the residents of Owosso, Corunna and parts of Caledonia and Owosso Charter Townships. This is accomplished through the maintenance of six wells, a recently upgraded water treatment plant, over 100 miles of pipes, and the 24 hour attention of a professional staff. The water is high quality, meeting or exceeding all the standards set by the US Environmental Protection Agency. And for this the average household in Owosso currently pays about $200 per year.

Not only does the water system provide us clean water to drink and wash with (and flush our toilets!), but it is an economic development asset. Several industries have located in the mid-county area because we provide high quality water in sufficient volume and at a reasonable price. In an era where parts of the country face serious questions about the continued availability and security of their water, our plentiful water supply in the Great Lakes state is a competitive advantage. Finally, as we as a community wrestle with public safety questions, we cannot forget that a well maintained water system is also a major tool in firefighting and other disaster responses.

As a City Council representative, I had the opportunity to tour our water treatment plant and I came away impressed and thankful for the previous work of my predecessors in office, and the past and current staff of the City of Owosso, most notably Gary Burk, the utilities director. Our community is fortunate that people had the foresight to build and maintain this most basic and necessary municipal infrastructure. We would not easily be able to build or afford it today.

Although we enjoy the benefits of a sturdy water system built up over 100 years, there are costs to providing water. The City operates six wells, and pumping the water up from an aquifer 100 feet underground takes energy, the cost of which keeps rising. Although the water that comes out of the ground is safe to drink, the City chlorinates it and adds fluoride to protect and promote the health of the community. Our groundwater contains a high concentration of iron and other minerals (as my friends in the townships will tell you). The City softens the water from 509 to 172 parts per million and in the process generates waste lime that is recycled as an agricultural product. Still, handling this material, which softens the water without sodium chloride like home systems, costs about $100,000 annually.

It costs a little over $1.5 million a year to provide and treat our water, maintain the pipes, and provide for billing and administration. Paying people to operate and keep up our water system accounts for about 40 percent of the cost. For instance, the City is required to have an operator present at the water treatment plant at all times. Last year, the revenues of the water system, which includes charges to both residential and industrial users as well as a wholesale rate to the City of Corunna, amounted to $1.4 million. Looking just at operations alone, the finances are not sustainable.

Of course, current operations are only part of the story. The great value of the water system is in its infrastructure that delivers water to the tap in our homes. To have a safe and continuous water supply the City must continue to reinvest in this system. Much of the pipe network is at least 50 years old and some of the pipes predate record keeping. Although the City has limited itself to only the most necessary replacements, an aging system requires constant attention. Earlier this decade, the city replaced and upgraded its water treatment plant and took on debt to make these repairs. To keep up the system, the City has been drawing down a water reserve fund (wisely established and built up in earlier times), but this too is an unsustainable practice.

Owosso’s water system suffers from the same decline our tax base does. There are fewer residents in Owosso than in the post-World War II decades when the system was expanded. And there are fewer industries and commercial users. And everyone has become more frugal and efficient in the use of water for technological, economic, and environmental reasons. The end result is a decline in water usage from 594 million gallons in 2001 to 510 million gallons in 2009. Revenues have decreased proportionately, and the basic costs of maintaining the system must be shared by fewer users.

The first response was to eke out efficiencies in staffing and operations, as well as deferring maintenance. Staffing is now down to a single operator at most times, the minimum required by law. As well, the billing cycle was changed from monthly to quarterly to reduce the administrative costs of collection; this change alone saves the average customer about eight dollars per year. It is hard to find a leaner way to run things.

The responsibility we have as the current stakeholders is to not only pay our own way for the water we use, but to make the necessary investments in the system that will ensure that the next generation of residents have the infrastructure in place to support the community’s health, safety, and economic well-being. This does not mean any major upgrades in equipment, but it does require that aging pipes be replaced and the system maintained in working order.

The City Council is looking at fee increases for this year and next. While we would all prefer not to take this step in the current economic climate, water rates have not been raised in five years. Currently, the typical residential customer pays about $50 per quarter. In addition, typical sewer fees for this user are about $63 (our wastewater treatment system is another important infrastructure in need of attention and will be the subject of an upcoming discussion).

The Council will have before it a proposal that will increase quarterly water fees for a typical user to about $64; the associated sewer costs will go up to somewhere around $68. These are average estimates, and because water charges depending on usage and size of service there are great variations in individual bills. Still, the increases in fees will keep our charges below that of other municipalities with water systems similar to ours. For instance, residents in Adrian, which has a few more users than our systems, pay $74 for water and $98 for sewer. The typical Durand resident pay $113 for water and $146 for sewer. More complete data on charges in other communities and the details of the water costs and revenues of our system are available from some very thorough reports put together by engineer Gary Burk. Let me know if you would like to receive the data.

In the end, I feel a responsibility both to the current and future users of the water system to ensure that we both pay for the water we are using as well as set aside funds. The prudent financial move is to ensure an adequate reserve fund for our water system, in case of an emergency. Five years ago the fund stood at close to $2 million, if we continue to deplete the reserve fund it will dip below a million dollars this year. While this sounds like a lot of money, much more could be needed to make repairs in the event of a disaster or massive equipment failure.

Importantly, I feel a responsibility to the future of our community to take care of the water system built up over past decades. Modest rate increases now will enable us to maintain the system, replace pipes, and invest in other needed upgrades. One of the great assets in our community is its infrastructure, and we are derelict in our duty if we only take advantage of that infrastructure without ensuring that it is there for the next generation.
The water rate increases will be undertaken with an eye to minimizing the impact on users but also with a sense of stewardship to the infrastructure. I welcome your thoughts and input.