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

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."