Budget talk

Forget about cutting costs,
It's time to think taxes.
CITCOM and the Administration work hard on the budget year after year, and they have a budget ready for approval this year. But -- even if Commissioner Miller continues to find money for the general fund here and there -- trying to maintain city services and Royal Oak's much-touted Quality of Life by focusing primarily on cutting costs is an exercise in futility.

Concentrate on revenue. Don't diddle with user fees, or selling this or that tiny parcel of public land, but think taxes.
Not increased property taxes but either an income tax, a sales tax, or both. Realistically, that can't be done until 2011 at the earliest or in the 2012 general election. But serious, public, exploration should start immediately after the 2009-2010 budget is approved in June. The seeds need to be planted. The word "taxes" can no longer be banned from polite conversation among Royal Oakers.

I am known for proclaiming about government, "Don't do more with less. . . . Do less!" That still applies to state and federal government. It no longer applies to Royal Oak. The mantra "Don't sell public property. Don't increase taxes. Don't downsize [my favorite department]." still makes sense only to the unthinking.

Sitting Royal Oak officials and candidates for the November 2009 election have to stop hoping for a miracle and begin educating themselves and voters to overcome lethargic, gut-level antipathy to paying for city services. Even those commissioners who are certain the voters will reject any tax owe it to their constituents to participate in a tax dialogue. On their part, citizens should make it a point to look at Finance Director Don Johnson's work, on the City's Website. Unless you're an accountant, just glance at the spreadsheets, but study Johnson's textual comments about everything from departmental budgets to legacy costs. Click the Finance Department link to reach the budget information.

A look at past VersagiVoice coverage about all this will prove instructive, even occasionally humorous. Start with Budget talk, or click any of the budget-related links in the right-hand column on this page. -- FJV: May 2009

Choose, voters!
New taxes or not enough cops & firefighters
And, let's not hear that to say this is to be guilty of "scare tactics." Or that the voters, 2-to-1, said "no" a few years ago.

We need to know whether voters really are comfortable with the reductions in services so far and with the increased reduction in services contemplated in the recently approved 2008-2009 budget.

Face it, folks. There are no other choices. Ain't no way that Finance Director Don Johnson's best efforts can overcome the unavoidable millions of dollars in shortfalls coming our way. So, as soon as possible after the November 2008 election CITCOM should ask for simultaneous votes on two issues:

A large enough tax increase to cover the shortfalls and to at least maintain current city services.
An ordinance with which voters can approve specific lower staffing in the public safety departments.* (Either before or at the same time, seek repeal of the charter amendment which mandates Fire Department staffing levels. Under no circumstances propose an ordinance or charter amendment which earmarks either a dollar amount or a millage rate for Police or Fire.)

If this fails, do as school districts do: Change a word or two, juggle the dollar amounts a bit, and keep coming back to the ballot box until residents make their choices unmistakable..

* Don't leave the voters guessing. Seek approval to cut Police to "45 total staff" or some such.

There, I've given you the general idea. You guys take care of the details. --FJV: 11 Jun 08

Royal Oak Budget:
A Perfect Storm?
State finances are terrible.
And they're sure to get worse.
Oakland County is in pretty good shape.
Cities' finances within the county are a mixed bag.
Royal Oak is in pretty good shape . . . but probably not for long.
Today's fiscal problems present an opportunity for government, at all levels, to re-invent itself.

Do I have your attention?

Well, Oakland County Deputy County Executive Robert Daddow held the attention of 25 or 30 Royal Oak department heads and deputies during a 90-minute presentation he calls "A Perfect Storm."

Daddow could not avoid presenting those scores of numbers -- mostly dollar volumes and percentages -- which make a budget-focused talk what it is and which cause a layman's eyes to glaze over. To the degree that he used numbers, Daddow repeatedly insisted "these are actual numbers, not subject to debate." However, he also offered plain-language concepts and cause-and-effect explanations which enabled one to grasp his overall message. I walked away from Daddow's session with impressions such as the following, in no particular order.

The expected increase in Michigan's unemployment through 2009 means the Unemployment Trust Fund will go into deficit, and we should expect a payroll tax in the next year or two.

Michigan's peak employment was in 2000. It's unlikely we'll see that peak again until 2020.
Michigan, and Royal Oak, have lived "in the shadow of the Big 3," but everything from mandated mileage goals to the price of oil indicates that the Big 3 can't exist any more.
Attempts to change the area's employment mix from manufacturing-based to high-tech and professional will be faced with the fact that even such skills as engineering, accounting, and legal can be obtained overseas.
Instead of taking substantive corrective action, Lansing is issuing Executive Orders about "using both sides of paper."
The School Aid Fund is spending money from other funds, which means that the duties supported by those funds suffer -- like road building.
The shifting of accounts and one-time actuarial moves leads Daddow to say, "My sympathies to school districts and school boards."
OPEB (Other Post Employment Benefits) are the cause of long-term financial problems for the private sector as well as for governmental units. One reason that Oakland Count is in pretty good shape is that more than a decade ago it moved toward defined contribution for new hires and to some degree with existing employees.
Foreclosures are one of the factors leading to "too few people buying the increasing stock of houses for sale."

Daddow's notion that this Perfect Storm offers cities the opportunity to "re-invent" government took the simplistic path of "doing more with less." He interpreted less as meaning cutting staff, since payroll costs are the overwhelming majority of local expenses. And Daddow urged localities to share services and to look seriously at regionalization.

This informational gathering began with a memo from City Manager Tom Hoover: "I am asking all department heads and deputies to attend this session." Hoover arranged for the presentation to be held in the Commission Chamber so it could be filmed, thus made available for viewing on WROK and on the city's website. (I observed Hoover taking attendance by marking the names on his invitational memo. I've been told that the invitation came at the suggestion of Finance Director Don Johnson, who has used some of Daddow's data to provide context for his presentations to CITCOM.)

Two or three of the audience asked questions; the questions were too technical to be meaningful to me, and Daddow's replies were just as technical and too long. After the session ended, a handful of people gathered around the deputy county executive.

Over the next few days, conversations with more than a handful of attendees revealed a common thread of disappointment holding together a range of positive and negative opinions about the usefulness of the 90-minute presentation.

Paraphrasing:
"We assume that Hoover and Johnson wanted to make sure we understand how bad the situation is." "What a bleak meeting." "He spit out numbers at such a pace that even following his Power Point handout, it was impossible to keep up." "My eyes glazed over." "Isn't it interesting that he blasted the State and told us cities that we have to do more with less, and bragged how wonderful Oakland County government is performing, but offered no specifics about how the county can do more with less." "Laying the groundwork for increasing the millage?" "Trying to make future layoffs acceptable and more understandable."

And, despite Daddow's insistence that the numbers he cited are "not subject to debate," two sources do question this or that datum.

The mixed reaction of the troops does not dilute the wisdom of the decision to record the session for viewing by concerned budget-watchers. -- 28 Mar 08

Budget issues seem likely to be a dominant concern as election talk picks up. Already, CPA-types other than Commissioner Miller -- ignoring the apparently personality-driven fallout from CITCOM -- are confusing laymen with talk of the impact of "net present value" and "hurdle rates" if the million dollars isn't transferred immediately from the Court Facilities Fund to the city's General Fund. And reaction to those candidates who have already indicated they will "never" sell city assets has been mixed, not overwhelmingly one-sided. -- 05 Sep 07

Finance Director Don Johnson comments on last week's news item, boxed below.
You seem to have totally misunderstood the Court Facilities Fund issue.

The vote was not about taking $1.075 million back or not. It was about taking it back in a manner that was agreed to by the judges or taking it back in another manner. Either way, the money is coming back to the general fund.

As my grand pappy used to say, "It's six of one or a half dozen of the other." -- 29 Aug 07

Say it isn't so
Bad vibes re the budget
City Hall observers talk among themselves, of course. And, knowingly or not, they talk to each other's family, friends, colleagues, and acquaintances. So it is disappointing to hear street talk that CITCOM's 2-5 decision not to transfer 1.075 million dollars immediately to the city's General Fund was based on a desire that Commissioner Stephen Miller not get the credit for the financial windfall. Worse, the idea is floating out there that the 1-plus million dollars will be transferred to the General Fund before the year is out.

Commissioner Mike Andrzejak, who has supported Miller's ongoing budget initiatives, has said of Miller that he needs to develop people skills. To the degree that current street talk reflects reality, others on the commission would seem to need to reinforce their ability to separate issues from personalities.

A look back
From the 1983-84 "Financial Picture"
"What has been done to cut costs?
"25% of full time positions have been eliminated over the past four yeas (115 jobs). Departments have been combined to reduce administrative costs. Work has been contracted out -- for example, refuse collection, saving about $700,000 per year and janitorial services, saving about $80,000 annually."

Barbara Hallman was mayor. Commissioners were Ken Culling, Phil Natke, Pat Paruch, Dave Richards, Linda Shadrick, Robert Stocker.

Comment. 115 jobs! Governmental bodies hate being compared to businesses, but doesn't this 23-year-old picture remind you of those companies which can't resist growing fat in good times, then having to cut back when the economy slows? -- August 2007

Bond-rating companies rate Royal Oak
In spite of the Michigan economy and the state's fiscal problems, Royal Oak maintained it's AA- bond rating from Fitch Ratings. The city also maintained a AA- rating from Standard and Poor's. "We are allowing the underwriter who wins the bidding for this issue the option of purchasing insurance. If this is done, and it probably will be, the bonds will be rated AAA," says Finance Director Don Johnson.

The description of Royal Oak in Fitch's accompanying press release includes such language as:

The 'AA-' rating reflects the city's growing tax base, above-average wealth levels, sound financial position, and modest debt burden. . . increased commercial expansion . . . steady residential growth . . . vibrant downtown.

Mature suburb . . . 2000 population of 60,062, reflecting a 0.8% annual decline since 1990 due to a demographic shift toward smaller households.

A well-educated and affluent workforce . . . Unemployment in the city has historically been 1%-2% lower than Oakland County and 2%-4% lower than the Detroit area and the state. In August 2007, unemployment averaged 3.9% in Royal Oak and 7% in the state.

"As the city has attracted more affluent residents, its per capital income rose to 140% of the state's and 144% of the nation's in 2000, from 128% and 125% in 1990.

The strong economy and increased investment activity generated a 5.5% annual growth rate in the city's property tax base since 1996.

Management's sound budgetary practices and the expanding economy allowed the city to sustain a sold financial position.

Increased pension and retiree health cares costs have "produced a shortfall of $1.3 million. Nonetheless, reserves remain healthy, equal to $6.7 million or 20% of spending. Fiscal 2007 results are expected to break-even."

Whom do we blame for this mess? -- 07 Nov 07

Other Cities in a Budget-Bind

Introduction
The City of Pontiac's financial problems are severe, and The Oakland Press has month-after-month reported and editorialized about those problems. The magnitude of Pontiac's budget shortfalls and deficits is greater than Royal Oak's, but there are similarities in the causes. A January 21 article in the OakPress surveys how state-appointed emergency managers have addressed the financial difficulties in several cities. Not all of the evaluations and suggestions coming from the state-appointed managers apply to Royal Oak, but enough of them do to make the newspaper's article helpful. The piece was written by Carol Hopkins.

To begin
There are no magic bullets, but there are actions which work, over several years, when they are mandated. Among them:

Close/privatize/outsource selected departments.
Sell surplus property.
Dissolve Downtown Development Authority
Reduce the pay of elected officials
Replace elected officials with an emergency manager
Really renegotiate labor agreements. (Apply them to current employees, not just to new hires.)

For Pontiac, an emergency financial manager who worked with Ecorse and Hamtramck, recommends: Close the Department of Public Works, sell all surplus property, close down all tax increment financing districts, and pay off the bonds. About those TIFA districts, Louis Schimmel is quoted as saying, "There are millions going to these authorities. They're swimming in money. That money should go to the general fund and I'd have enough to pay for police and fire."

About selling all surplus assets, Schimmel says, "[City officials] shouldn't worry about the sale price. Sell to private parties you can tax and make your money that way."

In Ecorse, Schimmel was given authority to replace the elected mayor and council members. He privatized the Department of Public Works, sold its building and equipment, negotiated with the department's 25 employees to terminate their services in exchange for a negotiated finance settlement. Public Works employees retired, were bought out or dismissed.

In Hamtramck, he renegotiated labor agreements, sold the public works building to a private charter school, took over the downtown development authority, and "flat out ran the town," according to Hopkins's article.

Another emergency manager was involved in Flint, and city officials recall massive reorganization and layoffs and "spending cuts on everything." The city shut down rec enters and "any nonessential services were greatly reduced or eliminated." Fees were increased and Council members pay was reduced. The emergency manger, Ed Kurtz, converted the golf course to an enterprise fund.

In Highland Park, emergency finance manager Ramona Henderson Pearson instituted a hiring freeze and suspected elected officials' salaries and benefits. She laid off all police and contracted with the Wayne County Sheriff's Department. In July 2007, the police department was reinstituted, according to the OakPress article.

Fund Equity from a School District’s Perspective

INTRODUCTION
Voters often wonder why, when "it's sprinkling", tax-funded entities don't use their "rainy day fund," reserves, fund balance, whatever. The concept of an apparently unspendable savings account for cities or school districts puzzles citizens. John Schwartz, Executive Director of Business & Personnel Services, Royal Oak Schools, describes how it works for a school district. (Boldfacing by VersagiVoice.)

The importance of a school district maintaining an adequate fund equity should not be understated.

Fund equity, commonly referred to as a “rainy day fund”, is a school district’s savings account which is similar to an individual’s bank account set aside to handle unexpected expenses. Most financial planners suggest that individuals maintain a savings account for emergency situations that will cover at least six months of living expenses. A school district’s fund equity also has a recommended level. Most experts suggest that a school district should maintain a fund equity of at least 15% to 20% of operating expenditures.

An appropriate level of fund equity is necessary for a variety of reasons. It provides sufficient cash resources during times when available cash is at a low level, typically at the end and the beginning of a fiscal year. A sufficient fund equity gives a school district the ability to meet its expenditures until cash is received from property taxes and State Aid. Despite the fiscal year beginning on July 1^st, the first State Aid payment is not received from the State of Michigan until October 20^th. In addition, a sufficient fund equity eliminates the need to borrow.

Many school districts, including Royal Oak, must borrow to meet operating expenditures and payroll obligations. A borrowing district incurs interest costs, an expenditure that could be avoided with an adequate fund equity. Districts are not immune from encountering unforeseen emergencies. These may include a failed boiler or a sudden mid-year loss in State Aid. A sufficient fund equity allows a district to handle these unforeseen emergencies without having to implement mid-year budget reductions. Furthermore, as a savings account, fund equity allows a district to invest idle funds and earn interest revenue.

It should always be remembered that fund equity is “one-time money” and should never be used for on-going expenditures. Once it’s spent, it’s gone. As a result, fund equity should never be used to “balance” a district’s budget shortfall. As mentioned earlier, once it’s spent, it’s gone . . . . . but the budget shortfall will remain.

In these difficult economic times, fund equity is in decline for most districts in the State of Michigan, Royal Oak included. In a few more years, despite being a necessity, fund equity for school districts will be a luxury. -- 07 Jul 2009

On to 2010

Rainy Day Funds

Other cities in a bind

2008-09 Budget

2007_08_Budget

2005-2006 Budget Dialogue

About Normandy Oaks

Where did that $6.4 million deficit go?

Bond-rating companies rate Royal Oak

Advice for 43rd City Commission

Versagi 4-year Budget Plan

Headlee Override

Versagi as Pretend-Candidate

DDA & Restructuring

Do Not Dissolve the DDA - Sandy Johnson's paper

The "Perfect Storm budget scenario

Much of what was said in 2004-05 about the city budget pertains today.

Normandy Oaks challenge won't go away

Choose, Voters