Washtenaw County Board of Commissioners (Feb. 18, 2009): Commissioners got another cold blast of economic reality at their most recent board meeting, as county staff laid out revenue projections for 2010-11 and asked for feedback about how cautious they should be in planning for the future. Pretty darn cautious was the general consensus among commissioners, saying it would be easier to deal with the budget if their projections proved too pessimistic than if they planned for higher revenue that never materialized.
County administrator Bob Guenzel and his staff also presented various scenarios for increasing revenues, as points of discussion, not recommendations. Those included a couple of options to raise or reapportion taxes that would require voter approval and appeared to have little traction among commissioners at this point.
The discussion was part of an ongoing effort to deal with a budget crisis faced by the county and other local governments as the economy brutalizes this region and the nation. Two weeks ago, Guenzel gave commissioners a best case/worst case budget scenario that included potential deficits of up to $28 million for 2010-11, unless revenues increase or expenses are slashed.
At Wednesday’s meeting, Guenzel began by reminding commissioners that projections could change as the months progress. He described the 16 revenue sources that account for about 95% of all general fund revenues. They include property taxes (by far the largest source), fees collected by the registrar of deeds and drain commission, state revenue sharing dollars, state cigarette and liquor taxes, court fees, ordinance fees and interest income, among others.
The county’s treasurer, Catherine McClary, was on hand to discuss the interest income piece of the budget’s revenue. Two factors are at play, she said: Interest rates, and the amount of county funds available to invest. In both cases, the news isn’t good. Interest rates fell by half over the past year, from just over 5% to 2.5%. A three-month Treasury bill is under 1% now, she said. The county’s investments are still holding at about 2%, she said, thanks to prior investments. Her staff is working on interest income projections for the coming budget cycle.
A state-mandated change in the timing of local tax collection is also having an impact. Over the past few years, county tax collection has shifted from December to July. Today, all county taxes are collected in July. That’s causing cash-flow issues, as the county must spend money before its mid-year tax collection. To deal with that, the county borrows money from its state revenue-sharing reserve fund, transferring it into the general fund to cover expenses.
Foreclosures are also an issue. McClary told commissioners that earlier in the day, she’d had to file property tax foreclosures on 102 properties – a record number, despite her office’s efforts to work with homeowners to prevent that from happening. (The owners have until March 31 to redeem their property by paying their tax bills, so the final number will be lower, she said.) Last year, the treasurer’s office foreclosed on 26 properties, with 16 ultimately not redeemed.
McClary said the county is working under tremendous constraints right now, and to the extent commissioners can make budget decisions as early as possible, “the county will be in a much better position.”
Shifting The Fiscal Year – Or Not
Jennifer Watson, the county’s budget manager, presented two options related to shifting the county’s fiscal year, which is currently tied to a calendar year. She noted that the county doesn’t receive its equalization report – which tells them how much they’ll be collecting in taxes – until April. That means they’re already four months into the fiscal year before they have firm revenue numbers, and if the projected revenue turns out to be lower than expected, they’re forced to cut expenses to balance the budget. Guenzel said the options were in response to at least two commissioners who’d wondered whether shifting to a fiscal year that started in July or October would help with these issues.
Both options would result in financial challenges, however. Starting the fiscal year in July would mean that the first six months of the year would be unfunded initially. Starting in October means the county would go through seven months of its fiscal year before getting the April equalization report, which could then require significant adjustments.
Commissioner Mark Ouimet, a former banking executive, expressed concern about the county’s cash position. Shifting the fiscal year would mean that the county’s cash needs would be even greater. And noting that he’d made this point before, he said that focusing on the balance sheet – rather than on the county’s income statement – would be critical in the planning process.
Commissioner Kristin Judge, in a comment that garnered some laughs, asked if she’d missed something in the analysis of fiscal year options: “It sounded like one was bad and the other one was bad.”
Later in the meeting, McClary told commissioners she would not recommend shifting fiscal years, calling it a gimmick the state already used that’s resulted in cash-flow problems. McClary also pointed out that general fund revenues – about $104 million – accounted for only half of the county’s budget, though the other half consisted primarily of restricted funds. However, she said those non-general fund monies are being invested and used to help manage cash flow.
Several commissioners weighed in against making any changes to the fiscal year. “I don’t think we can take the risk,” Leah Gunn said.
Other Revenue Factors: CPI, Property Taxes
Guenzel said the county looks at several factors when trying to project property tax revenue. Among them are changes that occurred the previous year, housing values, building permits, median income and general economic indicators like unemployment and the stock market. They also project changes in the CPI (the consumer price index, an indicator of inflation), which they estimated to be 4.4% this year, though that shows signs of dropping. Later in the discussion, commissioner Conan Smith cited the importance of CPI, noting that a higher CPI results in more revenue for the county. However, annualizing the data based on the first part of this year, the CPI would come in at only 1.6% for 2009.
Guenzel also talked about property tax projections, noting that residential property taxes account for about 65% of the total property taxes collected. Here again, the news was not good. The county projects a 10% drop in residential SEV, or state equalized value – the amount at which a property is assessed. In addition, new residential construction has stalled – only 238 residential building permits were issued in Washtenaw County last year, down from a peak of 2,758 in 2004.
Also important is the gap between SEV and taxable value. For about 49% of properties in the county, SEV equals taxable value, Guenzel said. That means if a property owner’s assessment decreases, so will their taxes. For all other homeowners, even if their assessment goes down, their taxes could increase as much as the rate of inflation. [The Citizens Research Council of Michigan, an independent nonprofit, provides a decent primer on Michigan's tax system, including information on Proposal A, which places a cap on taxable value.]
The county’s commercial tax base is also a challenge. Top taxpayers in that category include Pfizer, General Motors and Ford/Visteon. Pfizer’s sale of its Ann Arbor research campus to the University of Michigan will take it off the tax roles completely.
Property Tax Assumptions
Guenzel presented a range of revenue projections, and asked commissioners for their feedback – i.e., what projections would commissioners like the staff to use when preparing their budget:
- CPI in a range of 3.5% to 0%
- Percentage of properties in which SEV equals taxable value. County staff estimates that the current 49% will increase each fiscal year as property values decline.
- Projected percentage changes in SEV for 2010 through 2012. For the total county SEV, the ranges are: -6.8% to -9% in 2010, -5% to -10% in 2011, and -3% to -8% in 2012.
- Estimated change in taxable value, which is the most important factor, Guenzel said: a range between -3.75% to -8% in 2010, -3% to -10% in 2011, -2% to -7% in 2012, and 0% to -3% in 2013.
Leah Gunn said the county should be “ultra, ultra conservative” in terms of its revenue projections, noting that if they aren’t, they’ll be making major budget adjustments as each year unfolds. “It’s easier to adjust up than to adjust down,” she said.
Barbara Levin Bergman agreed, saying that they need to prepare for the worst-case scenario. She also said she hoped that budget cuts would be applied surgically, rather than across the board.
Jessica Ping, one of only two Republicans on the 11-member board, joked that she was a bit surprised to hear Commissioner Gunn use the word “conservative.”
Mark Ouimet, the board’s other Republican commissioner, agreed that they should err on the side of caution. He added that if they select the lower revenue target, the result will be a fairly significant burn rate on capital. They need to plan for that soon, or they won’t have the capital to “ride this thing down.”
When Ouimet ended his comments by saying he was trying to come up with something positive to say, Conan Smith quipped: “You could go with, ‘See? The conservatives are right!’”
After commissioners Kristin Judge and Ken Schwartz said they agreed with setting cautious projections, Jeff Irwin voiced a slightly more moderate view. He said that although almost 50% of homes will have their taxes lowered, that means the other 50 percent still have the “Proposal A spread” and will see a tax increase, which translates to more revenue for the county. He said that taking the worst-case scenario might lead to shortchanging departments and services, when the county doesn’t need to go that far. And some indicators, he noted, aren’t as horrific as others.
Smith asked if anyone wanted to estimate the impact that the federal stimulus package will have on CPI, to which Wes Prater replied, “Not as much as you’d think.” Smith added that he thought the CPI will be strong enough to pull the county’s revenues into the middle-low target area.
Bergman asked Guenzel to comment on the 2009 budget, wondering whether they should start looking at cuts now. “I’m no longer sanguine that we’re ok in ’09 when we’re so not ok in the future,” she said.
“We may not be ok for ’09,” Guenzel replied. They won’t know the county’s property tax revenue for the year until April, he said, and might have to make adjustments based on those numbers. He said he didn’t think the board could wait until Jan. 1, 2010 to take action.
Rolland Sizemore Jr., the board chair, had the last word in this discussion, saying that he promised that they’d look at cuts from the top levels of the administration to the bottom. He said they needed to start talking about those decisions now.
Options for Revenue Reforms
Guenzel asked the county’s corporate counsel, Curtis Hedger, to go over some possible longer-term changes that could help on the revenue side.
Headlee Override: Hedger began with a bit of history, noting that the county’s 5.5 millage rate was set in 1964. But since the Headlee Amendment passed in 1978, that rate by law has been gradually rolled back to offset property assessment increases. The current rate is 4.5493 mills.
An override, which would need to be approved by voters, could reset the millage up to its original rate of 5.5 mills. To do that, the county would have to specify what those funds would be used for. But as soon as the rate was reset, it would again be subject to the gradual Headlee rollbacks. And it’s unclear whether voters would give their approval.
Millage Reapportionment: Countywide, there’s a limit of 18 mills in total that can be levied by all taxing entities, including the county, townships and others. In 1964, Hedger said, a county tax allocation board was formed to determine how to allocate the 18 mills – of that total, the county’s rate was set at 5.5 mills. Commissioners could reconstitute that board, Hedger said, to allocate new rates. The risk, of course, is that the allocation board could set the county’s rate at a new, lower level.
In addition to the two longer-term options described by Hedger, Guenzel said that other revenue-generating options include a new millage dedicated to operating costs, and, more broadly, sustained economic growth. County departments could also consider increasing fees, increasing their rate of collections, and adding programming. Outside funding opportunities include anticipated funding from the federal stimulus package, federal and state earmarks and grants, among others.
Guenzel also said that staff was looking at generating revenue from within the county’s infrastructure, such as selling buildings, renting out unused county-owned space, and decreasing or eliminating its leased spaces. “We’re seriously looking at our space issues,” Guenzel said, noting that the building on Zeeb Road was only half full, and that the 15th District Court will vacate the county courthouse sometime in 2010, and would be available for use in 2011.
Selling property might be helpful, he said, but it’s not a structural savings. However, he added, reducing the county’s building footprint would save on operating expenses. Guenzel said he’d asked some local brokers, on a pro bono basis, to look at what county properties might sell.
Sizemore said he wanted to see a plan related to property sales sooner rather than later. Ouimet said they’d probably hear from brokers that it’s not the right time to sell because of the market, but he said it’s a good time to assess the county’s future space needs, while getting rid of excess real estate.
Ping wanted to know what county-owned space is being used by other organizations at no charge, and to see what they could ask in rent instead.
At the end of their discussion, Guenzel said his staff would bring back a plan for revenue projections based on what they’d heard from commissioners, noting that it was always subject to revision based on changing conditions.
Smith said that this was the only substantive discussion the board had planned related to the revenue side of the budget. Ping, who chairs the board’s working sessions, said they could always discuss budget issues at that venue, if needed.
Sizemore asked Washtenaw County sheriff Jerry Clayton, who was in the audience, whether he could give commissioners an update on how the county’s criminal justice system would be affected by Gov. Jennifer Granholm’s proposal to cut the state’s Department of Corrections. Clayton said he expected it would have some impact locally, but that the proposal would undoubtedly be changed as the budget moved through the state legislature, so it was too soon to tell. He said his department would plan some kind of strategic response, whatever those final numbers are.
Sizemore said he’d like to hear from other elected officials too, including county prosecutor Brian Mackie, treasurer Catherine McClary and water resources commissioner Janis Bobrin. Smith reported that Guenzel was already setting up those meetings.
Bergman said she felt she must fire a shot across the bow, stating that it wasn’t right that the commission – before it even dealt with the 2010 budget – had already approved a rate for what the county charges the townships for police services. She said she used to read her children a book about a lion and an alligator in a swamp. The lion said to the alligator: “There is an old saying, I know that it’s true, you can’t have your friends and eat them all too.”
Gunn cited several examples of nonprofits that are struggling to keep up with demand for their services. “It’s getting tough out there,” she said, later adding, “we are the government of last resort.”
The only person to comment during the times set aside for public comment was Tyrone Bridges, who runs a program in Ypsilanti that teaches at-risk youth how to build computers. He said he’d recently tried to apply for a $6,500 community development block grant, and was told that he wasn’t eligible because his group hadn’t been audited. “I’m asking someone to help me,” he said, saying he was tired of having doors slammed in his face as he was trying to help kids who might otherwise get into trouble.
Several commissioners expressed sympathy and support for Bridges and his program, and said they’d do what they could but that they couldn’t promise him money. Commissioner Ronnie Peterson, whose district represents Ypsilanti, said that perhaps it was time to review this policy of requiring an audit. Saying that Gunn had whispered into his ear, Peterson informed Bridges that the two of them would pay for an audit, and that he’d provide a referral to an accountant. Referring to the other commissioners, Peterson quipped, “We’ll give tonight – we’ll ask them next time.”
At the end of their meeting, the board went into a closed session to discuss the settlement strategy for its police services litigation with Augusta, Salem and Ypsilanti townships. The county has not publicly announced how it will respond following a legal victory in the case. The state Court of Appeals ordered a lower court to calculate how much the townships owe the county for unpaid services, plus interest – an amount could top $2 million, not including legal fees. However, the townships have the option of appealing to the state Supreme Court. The board emerged from its executive session with no announcement about the case.
Present: Barbara Levin Bergman, Leah Gunn, Jeff Irwin, Kristin Judge, Mark Ouimet, Ronnie Peterson, Jessica Ping, Wes Prater, Ken Schwartz, Rolland Sizemore Jr., Conan Smith
Next board meeting: Wednesday, March 4 at 6:30 p.m. at the County Administration Building, 220 N. Main St. The Ways & Means Committee meets first, followed immediately by the regular board meeting. [confirm date] (Though the agenda states that the regular board meeting begins at 6:45 p.m., it usually starts much later – times vary depending on what’s on the agenda.) Public comment sessions are held at the beginning and end of each meeting.