Budget Round 4: Lights, Streets, Grass

On March 8, the Ann Arbor city council held its fourth meeting since the start of the calendar year devoted to deliberations on the budget for FY 2011, which begins July 1, 2010. The council will make its final budget decision in mid-May after receiving a budget proposal from city administrator Roger Fraser in mid-April.

On Monday, Sue McCormick, public services area administrator, was front and center, describing for council how the public services budget “lives within the general fund.” The basis for the discussion was budget impact sheets prepared for the public services area, which she distributed.

Councilmembers had several questions for her about a possible special assessment district (SAD) to fund streetlighting, with much of the discussion centered around what it means for an area to be “overlit.” A streetlighting SAD would require property owners to pay for streetlights.

Also generating a fair amount of discussion among councilmembers was the $100,000 annual cost for traffic control on University of Michigan football game days and the city’s plan to reduce that cost through judicious rescheduling of personnel to avoid overtime expenses.

McCormick also pitched to the council the idea of relaxing the constraints of the “box” defining how the parks maintenance and capital improvements millage is administered. The proposal would have the council rescind the part of a previous resolution that requires millage funding for natural area preservation to increase by 3% every year. That savings, McCormick said, could be put towards hand-trimming of grass in the parks. Reduction of hand-trimming, she said, would have a negative visual impact on the parks – they’ll look “fuzzy.”

Also related to yard-waste type issues, McCormick briefed the council on the idea of eliminating collection of loose leaves in the fall, and moving to an approach requiring leaves to be put into containers. She also told them about  a proposal that would be coming before them in the next 30 days to transition the city’s composting facility to a merchant operation, similar to the city’s materials recovery facility (MRF) for recyclables. That proposal was met with strong criticism from Stephen Kunselman (Ward 3).

Councilmembers also heard from McCormick that residents will face a 3.88% increase in water rates, unless council directs that more budget cuts be made.

Towards the end of the meeting, city administrator Roger Fraser warned that accounting services manager Karen Lancaster and chief financial officer Tom Crawford would put them to sleep with an explication of how the city’s municipal service charge (MSC) works. However, Lancaster and Crawford were unable to make good on Fraser’s threat.

Streetlights and Parking

Sue McCormick, the city’s public services area administrator, began by establishing that the main challenge in the field operations area was coming up with a way to replace anticipated revenues from  parking meters – which were to have been installed over the last year in neighborhoods near downtown. Their installation had been part of the FY 2010-11 budget plan (the current year), but was met with opposition from residents in those neighborhoods.

Parking Meters

After adoption of the FY 2010 budget in the spring of 2009, Sandi Smith (Ward 1) convinced her council colleagues to establish a moratorium on the parking meter installation. With support from Sabra Briere (Ward 1), Carsten Hohnke (Ward 5), and Mike Anglin (Ward 5), Smith worked to find additional revenues to offset the losses that would result from not installing meters as planned near certain neighborhoods downtown. A timeline overview:

• June 15, 2009: The city council approves a moratorium until Oct. 5, 2009 on installation of some parking meters in neighborhoods near downtown. The meter installation was planned as a part of the FY 2010 budget. The council also approves raising the rates at the 415 W. Washington parking lot, with all net proceeds to be directed to the city’s general fund, not split with the Downtown Development Authority. [link]
• July 1, 2009: The DDA board approves a rate increase and the redirection of 415 W. Washington parking revenues to the city. [link]
• Oct. 5, 2009: The city council extends the moratorium on installation of parking meters until Dec. 21, 2009. [link]
• Dec. 21, 2009: The city council passes a resolution suspending plans to install its own city meters in connection with a request from the DDA for a report on parking strategies. Part of the resolution is approval to redirect net revenues from the Fifth & William parking lot (aka the old Y lot) to the city. [link]
• Jan. 6, 2010: The DDA board approves redirection of the net revenues from the Fifth & William lot to the city, with the provision that it be a minimum of $100,000. [link]

On Monday, McCormick painted a grim parking picture for the council. A 7.5% targeted reduction in the $1,327,102 field operations budget – a percentage every service unit was asked to achieve by the city administrator  –  translated to $99,533. Without the $551,733 in revenue that had been planned, based on parking meter installation, field operations was starting with a $651,266 deficit it needed to make up.

Sandi Smith (Ward 1) zeroed in on the fact that the additional revenue from the two parking lots – 415 W. Washington and Fifth & William – did not seem to be included in the calculation. [It's about $170,00 per year for the two lots combined.] McCormick deferred the question, but CFO Tom Crawford would later clarify that the revenue from the two lots was not yet incorporated into the budget – it would be, he assured Smith.

Smith also wondered where the offset for the procurement costs of parking equipment was recorded. McCormick told Smith that it was included in this year’s FY 2010 budget, not FY 2011.

Smith noted that residential parking permit fees were slated to increase by $5 – to $55. That does not cover the cost of administering the program, which is over $100 per permit. Smith noted that the going rate for a parking spot behind someone’s house is $75 a month, so she felt that there was some untapped value in the residential parking permits. Smith allowed that a residential permit for street parking did not provide a specific space for a driver’s use, but she felt there was more value than what the city was charging.

On residential permits, McCormick explained that she’d worked with three councilmembers to arrive at a $105 cost, a longer-term goal for the rate, which would be achieved through incremental adjustments.

With respect to some new loading zone permits – which are listed in the budget impact statement as projected to increase revenue by $20,000 – Stephen Kunselman (Ward 3) wondered if meters might be more effective. McCormick said she was working with the DDA on that question – one of the challenges is the variable size of the vehicles, which could take up anywhere from one to three spaces.

Streetlights: Background

As it turns out, the added $170,000 of revenue to the city from the 415 W. Washington and Fifth & William parking lots would just about cover the field operations deficit to its reduction target ($158,286) – after implementing a streetlighting assessment district (SAD) that targeted just those areas of the city that are “overlit.”

The idea of implementing a SAD for streetlights was floated at the council’s December 2009 budget retreat, and McCormick’s discussion on Monday was a follow-up to that. But it’s not a new idea.

As recently as 2007, the idea of a street lighting special assessment district has been proposed. On that occasion, the Ann Arbor DDA paid the city about $630,000 to delay and reduce a street light tax that would have been assessed on downtown property owners. That tax would have generated around $170,000 annually. The DDA money was used to begin an LED retrofit program for downtown streetlights.

From the June 6, 2007 DDA resolution:

…
Whereas, DDA approval of this Committee recommendation would provide the necessary funds so that a downtown special assessment would not be necessary; RESOLVED, The DDA approves a grant to the City’s Energy Fund in the amount of $630,000 to the City of Ann Arbor to be used to retrofit all downtown globe streetlights with more energy efficient LED fixtures.
RESOLVED, In providing this grant the DDA respectfully asks City Council to consider dissolving the downtown lighting assessment district given the energy cost reduction the City will see from this retrofit project.

Sandi Smith (Ward 1) alluded to that episode on Monday when mayor John Hieftje reported that some of the more sophisticated energy-savings technologies available with the LED bulbs – like dimming them to 50% or 20% – did not actually result in cost-savings to the city. DTE bills the city based on the wattage of the bulbs – it’s based on estimated usage, because the lights are not metered. “[Bulb dimming] works just fine, but we wouldn’t get credit for it,” said Hieftje.

Smith, who serves on the DDA board currently and who served on it when the LED conversion funding was approved, called the inability of the city to translate the full energy-savings capability of the LED bulbs into cost savings as “unfortunate.” The rationale behind the DDA funding was to avoid the establishment of a SAD, she noted. She asked McCormick if there would be additional pressure applied at the state level through the Michigan Public Service Commission to push for reform. McCormick assured Smith that there would be additional pressure applied.

According to Michigan Public Service Commission spokeswoman Judy Palnau, the MPSC issued an order on Jan. 11, 2010 that required DTE to file an application with MPSC seeking approval of rates on un-metered streetlights that would accommodate newer lighting technologies. The deadline for submission was Feb. 10, 2010. However, the issue of these LED rates is still pending at the MPSC.

Some savings is realized through LED retrofits, due to the reduced frequency of bulb replacement – 7-8 years compared to every 3 years.

Streetlights: How a SAD Would Be Implemented

McCormick mentioned more than once at Monday’s meeting that a SAD would require four council resolutions to be implemented. The Chronicle has identified three resolutions in the city’s ordinances, plus one in the city charter:

• Code Chapter 13 1:286 “By resolution the city council shall approve the plans and specifications for the improvement; determine that the cost shall be paid by special assessment upon the property especially benefited; designate the district or land and tax parcels upon which special assessments shall be levied; and direct the Assessor to prepare a special assessment roll in accordance with the city council’s determination.”
• Code Chapter 13 1:288 “… Upon receipt of a special assessment roll the City Council shall order it and the information presented to the City Council by the City Administrator pursuant to Section 1:284 filed in the office of the City Assessor for public examination; shall fix the time and place when it will meet and review the roll.”
• Code Chapter 13 1:191 “After the hearing and review, the council may confirm the special assessment roll with the corrections as it may have made, if any, …”
• Charter SECTION 10.3 “No control or expenditure … shall be made for any public improvement, the cost of which is to be paid by special assessment upon the property especially benefited thereby, until the Council has passed a resolution determining to proceed with such public improvement.”

Streetlights: What Kind of SAD?

McCormick briefed the council on five different options for creating a special assessment district for streetlights. Based on the budget impact statements, which mention only two of the five options, one that appears unlikely to be implemented is to purchase streetlights from DTE and install LED bulbs. DTE owns around 5,200 of the 7,200 streetlights in the city. DTE has told the city that they would need to be paid to develop estimates for the work of selling and removing lights from their system.

Also not included in the budget impact statement is a SAD targeting just the city-owned streetlights. The third option not included in the statement is one that would not create a SAD, but would rather  “de-energize” DTE-owned streetlights – which would entail turning off power to the light. DTE bills those de-energized lights at a rate equal to 60% of the standard rate. De-energizing half of the 3,000 DTE-owned streetlights outside of downtown would save $120,000 annually.

The two options included on the budget impact statements for field operations are: (Option I) a SAD targeting areas in the city that are “overlit” – this would generate $370,000 annually; (Option II) a SAD for all streetlight expenses – it would generate $1.7 million at an average cost per parcel of $52 annually.

Streetlights: Overlighting

The notion of “overlighting” prompted a great deal of discussion among councilmembers. Part of the confusion resulted from the term itself, which is suggestive that “too much” lighting is being provided – on analogy with scores of other words like overbill, overreact, overeducate, overemphasize, overgeneralize or … overanalyze.

Based on that understanding, Margie Teall (Ward 4) and Marcia Higgins (Ward 4) questioned why more lighting was currently being added in an area that was already “overlit,” namely, the Stadium Boulevard corridor between Pauline and 7th streets. The 24 cobra-head lights in that corridor, which a map provided by McCormick indicated was currently “overlit,” is being supplemented by 67 LED lampposts.

McCormick explained that this was driven by input from the community – the neighbors had opted for more lighting at public forums on the Stadium Boulevard re-surfacing project. Higgins responded by saying that she’d attended those meetings and that no one had asked for 67 additional light fixtures. She pointed out that the issue was somewhat urgent, given that the corridor is under construction.

McCormick characterized the issue of “overlighting” as a good policy question that the council needed to contemplate: Should the city “overlight” in any area where it was requested, or rather only in those areas where a SAD was established?

Carsten Hohnke (Ward 5) elicited from Cresson Slotten, who’s a senior project manager with the city, the fact that the “Orange Book” with the city’s lighting specifications has been in place for 23 years, and was developed by the city. That is, it’s not a set of state or national standards. Hohnke stated that it would  be useful to look at comparable standards in other communities to get a clearer idea of what “overlighting” means.

City administrator Roger Fraser then tackled the question of what “overlighting” means. He cautioned councilmembers that just because the amount of lighting in an area was over the minimum Orange Book standard did not mean that the amount of lighting was “excessive.” An area might be lit so that it becomes a comfortable place to be and a place that people are attracted to. Even if an area is “overlit,” he said, it still might be smart to light it that way. The notion of “overlighting,” Fraser said, should be interpreted in the context of the minimum standard specified in the Orange Book.

To get an idea of how an overlighting-based SAD would work, Sabra Briere (Ward 1) asked McCormick if the following would be a fair summary: If people in an area wanted additional lighting above the minimum standard, the city will say “It’ll cost more,” and that area will be a SAD. McCormick confirmed that this would be roughly how it would work. She cautioned, however, that it would not be like ordering out of a catalog.

Stephen Rapundalo (Ward 2) noted that many overlit areas were close to schools, and that “it should be that way.” He said a SAD was a way of “demanding payment,” which he quickly revised to “requesting payment.”

McCormick stated that the cost of operating streetlights – around $1.7 million – was significant enough that the city needed to “do something.”

Fraser characterized it as a matter of some parts of the community getting a higher benefit from lighting than others. The issue of whether the city should change to a SAD strategy to reflect that different benefit was a policy question. He noted that part of the consideration was how to deal with a situation that was in part simply “inherited.”

Reflecting out loud on the fact that the term “overlighting” was somewhat of a misnomer and that streetlighting is a public benefit that is somewhat flexible – there are various interests with respect to more or less lighting – Christopher Taylor (Ward 3) wondered if it were an option to make the assessment based on “what exists.” That was essentially the first option outlined in the cover memo, McCormick told him. [Note that Option I in the budget impact statement is the overlighting-based SAD. The cover memo's first option shows up as Option II in the budget impact statement.]

Streets

Public services includes not just streetlighting, but also the streets themselves.

The city divides streets into categories of major and local streets. That’s consistent with the way that money in the Michigan Transportation Fund (MTF) is distributed to municipalities. The MTF was established by Act 51, and its monies are collected as motor fuel taxes and vehicle registration fees. The city’s major street fund [Fund 0021] and local streets fund [Fund 0022] are projected in FY 2011 to have budgets of $7 million and $1.75 million, respectively.

The MTF money is used for snow plowing, pothole repair, crack sealing and the like. Actual reconstruction of streets is paid for out of the city’s street repair and reconstruction millage.

With respect to activity in these funds, results of a recent unscientific online survey administered by Sabra Briere (Ward 1) showed that around 55% of the more than 700 respondents felt a reduction in snow plowing was “not at all unacceptable not at all acceptable.” [.pdf file of survey summary results]

Streets: Non-Motorized Transportation

Act 51 requires that 1% of MTF funds distributed to municipalities be invested in non-motorized facilities. On May 19, 2003, in approving the city’s FY 2004 budget, the Ann Arbor city council passed an amendment that bumped Ann Arbor’s expenditures of Act 51 money on non-motorized facilities from 1% to 5% every year, targeting an increase in the number of bicycle lanes, focusing particularly on areas near the University of Michigan campus. Any of the 5% not spent in a given year was to be deposited in an alternative transportation fund.

In deliberations on that budget amendment, which addressed not just that fiscal year’s budget, but all future years, then-councilmember Mike Reid offered an amendment that specified the 5% allocation would extend just for 10 years. The amendment received support only from Marcia Higgins (Ward 4). Reid was then the lone dissenter on that amendment to the budget.

The timeframe was likely a moot point – budget resolutions must be approved every year, so there is a “baked in” opportunity for the council to reassess the 5%. If anything, the 2003 budget amendment was a direction to the city administrator to prepare budgets incorporating the 5% allocation to non-motorized facilities. Whether the council approves that aspect of the budget in any given year is not constrained by the council’s own prior budget resolution for FY 2004.

If a budget were presented without that 5% allocation, the council could choose to approve it, contrary to the expressed intent of the FY 2004 budget resolution.

Based on the budget impact statements for next year, FY 2011, that seems to be what happened for FY 2010. The impact sheets indicate a reduction from 5% to 2.5% in the Act 51 allocation to alternative transportation for FY 2010, with the same 2.5% reduction planned for FY 2011.

Stephen Rapundalo (Ward 2) raised the issue of reducing the Act 51 allocation to alternative transportation at the council’s December 2009 budget retreat. However, when the council met in late February for its third meeting of the year focused just on budget issues, when mayor John Hieftje read the item off the list, the topic had no takers.

With the Act 51 line item laid out in front of them on the budget impact statements provided at Monday’s meeting, councilmembers did not discuss the issue.

Streets: Traffic Control for UM Football

An item on the budget impact sheets that did receive a great deal of discussion on Monday was a $101,043 cost savings that could be achieved by eliminating traffic control for University of Michigan football games. Part of that game-day operation involves converting Sout Main Street to one-way leading out of town and providing manual control of traffic signals to accommodate pedestrian build-ups. The signals are also manually controlled to prevent vehicles at the I-94 off-ramp at Ann Arbor-Saline road from backing up onto the interstate.

McCormick noted that simply not implementing the traffic controls would make chief of police Barnett Jones “pull his hair out.” The alternative to that, she said, was to use a strategy to avoid overtime pay for the nine people required to handle the signs and signals on a football Saturday. The idea would be to schedule only two of them on the Monday before, leaving the rest with a Tues.-Sat. work week with no overtime.

The scheduling shift, said McCormick, would save around $45,000. Craig Hupy, head of systems planning for the city, clarified for Marcia Higgins (Ward 4), that the signals could, in fact, be controlled from a remote location by one person, but that tactic would not give the needed ability to change the signals based on the needs of the dynamically changing situation. Sandi Smith (Ward 1) asked for confirmation from Hupy that failure to implement traffic controls would mean “a real mess.” Hupy replied by saying that if the council gave that direction, then he had some vacation days he would like to use.

Stephen Rapundalo (Ward 2) inquired about the possibility that the University of Michigan would foot the bill for traffic controls: Had they been asked? Hupy said that UM had said no. Higgins suggested that if the city did not implement the controls, UM would hear from its alumni about that. McCormick said that the university’s rationale was that the benefits to the community that derive from the event compensate for the cost.

Christopher Taylor (Ward 3) asked how much of it was an issue of convenience versus public safety.  Chief of police Barnett Jones stated that it was all safety-related. Without the combination of cars, barricades and signals, he said, “it would be a major malfunction.”

Although it was not discussed at the work session, a recent (unscientific) survey administered online by Sabra Briere (Ward 1) included one football Saturday-related item: Of the more than 700 respondents, 90% found a reduction of investigation in underage drinking on football Saturdays to be either “completely acceptable” or “somewhat acceptable.” [.pdf file of survey summary results]

Parks Maintenance

The parks maintenance and capital improvements millage was authorized in November 2006. It combined what had previously been two separate millages. Sue McCormick described the various constraints built into the administration of the millage as a “box.” She ticked through the sides of the box in a way that was consistent with previous Chronicle coverage ["Budget Round 2: What's the Big Idea"]:

Before November 2006, the city levied two separate millages at 0.5 mill each – one for parks maintenance and the other for capital improvements. Within the combined millage, taxes are collected at a rate of 1.0 mill, but money is allocated to maintenance or capital improvements on a more flexible basis than the previous 50-50 split that was legally enforced by the specialized purpose of each millage.

However, there’s not complete flexibility to allocate money to maintenance or capital improvements within the unified millage. Percentage allocation is guided by a city council resolution passed in October 2006. The resolution specifies a range of 60% to 80% for maintenance, with the remainder going to capital improvements.

But there are some “hold harmless” clauses in the resolution as well. The resolution also calls for any reduction in the overall general fund to be reflected no more severely in parks programs supported by the general fund than in other general fund activities. For example, if the general fund were to suffer a 7.5% reduction, then parks programs supported by the general fund would suffer no greater a reduction than 7.5%.

Subsequent to the passage of the millage, in preparation of the FY 2007 budget, the city initially calculated the baseline for general fund parks activity without the Leslie Science and Nature Center – which had been spun off by the city as an independent nonprofit. The reasoning was that the item itself was no longer in the general fund, so it was not a matter of the general fund being reduced. However, in response to public criticism, funding was put back into parks programs to bring funding to the level it would have been with the Leslie Science and Nature Center as a part of the calculation.

Another “hold harmless” clause in the resolution on the administration of the parks maintenance and capital improvements millage affects the city’s natural area preservation program (NAP).

3. The Natural Area Preservation Program budget be established at a minimum of $700,000 for first year of the millage budget and that it receive a minimum 3% annual increase for each of the subsequent five years of the millage to enhance the stewardship of increased acreage of natural park areas;

It’s likely that the clause was intended to ensure that funding for NAP kept pace with funding increases to other areas, as millage revenues increased due to increased property values. But the effect of the clause now, as millage revenues decline, is to hold NAP harmless – and even to increase NAP’s budget.

The distribution of funds to various park-related tasks – which is specified in Attachment A accompanying the resolution – includes the stipulation that mowing and snow removal for parks be funded exclusively out of the general fund. The millage fund, then, is “held harmless” against mowing and snow removal costs.

At Monday’s meeting, McCormick stated that staff had pushed the allowed ratio to its maximum allocation for maintenance – 80%. The 20% designated for capital improvements, McCormick said, was focused exclusively on rehabbing existing facilities, not building anything new – refurbishing paths, for example.

Asked by Stephen Rapundalo (Ward 2) what the bill for mowing and snow removal was for parks, McCormick gave figures of $1.25 million and $355,000, respectively.

The part of the “box” McCormick recommended that the council consider was the requirement that NAP’s allocation be increased every year by 3%. The specific recommendation was to reduce NAP’s budget by $81,000.

McCormick explained that the $81,000 could be put towards hand-trimming of grass in the parks. The rationale she offered involved the planned reduction in frequency for mowing in the parks. This spring the average frequency will drop from once every 14 days to once every 19 days, she said. And with the start of the fiscal year on July 1, 2010, that would drop again to once every 23 days. “The public will visually notice the difference,” McCormick said.

It’s the reduction in hand-trimming that becomes apparent most quickly, she said. “Things get fuzzy.”  So the $81,000 of NAP money would restore some of the hand-trimming.

Results of a recent unscientific online survey administered by Sabra Briere (Ward 1) showed that around 20% of more than 700 respondents would find reduction in park maintenance to be “completely acceptable” and an additional 55% would find it to be “somewhat acceptable” [.pdf file of survey summary results]

Grass and Leaves

Trimming of grass and the generation of other yard waste was a topic that arose also in a residential context.

McCormick began by noting that the solid waste millage sees the same kind of reduction in revenues that other property taxes are now showing, due to the overall reduction in property values associated with the down economy. McCormick said that the reduction in the solid waste budget would be around $450,000.

The solid waste millage can be enacted by the city council under state enabling legislation – it appears as “CITY REFUSE” on Ann Arbor property tax bills.

Leaf Collection

Among the ideas recorded on the budget impact statements is the elimination of the collection of loose leaves in the fall. The current leaf collection program organized by the city entails notifying residents of the day their neighborhood is scheduled for pickup and asking them to rake leaves into the street the day before they’re scheduled for pickup.

The budget impact sheets indicate a $104,000 savings would come from eliminating the loose leaf collection program in favor of collecting them as part of the city’s containerized yard waste collection program. Residents can either put their yard waste in paper bags or use a city-issued brown cart, which can be emptied via an automatic arm operated by a driver from inside the collection truck.

The amount of savings that would come from requiring containers for leaves, said McCormick, assumes that residents would put out the same volume of leaves as they do with the loose leaf collection program. But she expected that the actual volume would decrease – for some residents it would be somewhat easier to compost and mulch on site than to put their leaves in containers for pickup.

Christmas Trees

McCormick also indicated that eliminating the curbside Christmas tree pickup would save $28,500. Results of a recent unscientific online survey administered by Sabra Briere (Ward 1) showed that around 85% of more than 700 respondents would find the elimination of that service to be “completely acceptable” or “somewhat acceptable.”

At Monday’s meeting, Briere asked where residents could take their holiday trees for pickup. McCormick said they could talk about that. The city has a drop-off station, and another possibility was to establish locations in parks, where the trees could then be chipped right in the park.

Conversion to Merchant Composting Operations

McCormick’s budget impact statement for solid waste also indicates a net gain of $150,000 for the possible transfer of the city’s composting facility to a merchant operation. That gain was due to a one-time capital recovery for the sale of equipment to the successful bidder on the request for proposals (RFP). The city’s RFP for the composting operations indicates that the equipment would include items like front-end loaders, light-duty trucks, and tub grinders.

Tony Derezinski (Ward 2) inquired about any implications for the city’s labor agreement. McCormick told him there were two full-time positions at the city that would be lost – a mechanic and a supervisor – but that the city had held vacancies open for them in other parts of the organization.

Sabra Briere (Ward 1) wondered what would happen if the city contracted with a merchant, then elected to decide against that contractor based on performance and then opt for a different contractor. McCormick indicated that the city had received four strong responses to the RFP.

Stephen Kunselman (Ward 3) was clear about his opposition to the the proposed conversion to merchant operations: “I’m really opposed to this,” he said. At the second round of budget talks he had already expressed skepticism about the idea.

Kunselman’s opposition is based in part on an inherent skepticism about the viability of yard waste compost as a commodity, along the lines of recyclable material. [The city uses a merchant operation for its materials recovery facility.] Because it’s not a commodity that can be reliably sold in large quantities, said Kunselman, the city would essentially be providing the merchant with tax-free land to store compostable material, until it could eventually be moved on the market. He said he did not imagine that they would be able to sell the material in 50-pound bags at Lowes.

Kunselman’s opposition is also based on the idea that there’s a built-in assumption that the merchant operation will accept yard waste from other surrounding communities – even while the city is trying to encourage its own residents to “keep it home” and reduce the amount of yard waste that is hauled from one place to another. [The elimination of the loose leaf collection program is one example.] Conversion to merchant operations, he said, was a way of subsidizing yard waste collection for surrounding suburban communities. Promoting the idea of trucking and hauling yard waste, Kunselman said, is “going in the wrong direction.”

Kunselman also noted that the composting facility was located in the southeast part of the city – his ward – and he did not want to see additional truck traffic on the roads in that part of town.

In response to Kunselman, McCormick indicated that the council would be receiving the merchant operation proposal in the next 30 days.

McCormick also told the council that the subject of privatization of residential trash collection would would be one for the following year’s FY 2012 budget, not this coming year.

Water

The budget impact statements for the water supply system show a decrease in revenue of $1 million, for a $22.5 million budget. The drop is due to a decrease in consumption of water, plus a decrease in connection charges that are applied to new construction. In FY 2009, there was only $100,000 collected in such connection charges, McCormick said, whereas an average year might bring in $1.5 million.

The decrease in revenues due to decreased consumption, McCormick explained, was partly offset by a decrease in costs for treatment of the water.

Still, without additional cuts beyond purchase delays of heavy equipment and elimination of software updates indicated on the budget impact statements, McCormick said a rate increase of  3.88% could be expected.

Marcia Higgins (Ward 4) clarified with McCormick that the 3.88% increase in water rates would be requested, if no other cuts were made. McCormick told Higgins that if the council wanted to see a smaller increase, then she needed direction sooner rather than later.

Municipal Service Charge

The water fund provided a question from Stephen Kunselman that segued to the presentation from accounting services manager Karen Lancaster and chief financial officer Tom Crawford on how the municipal service charge (MSC) works.

Why, asked Kunselman, did the MSC for the water fund drop from roughly the same levels of $535,548 in FY 2008 and $548,940 in FY 2009 down to $404,902 in FY 2010?

Similarly, he wondered, why did the solid waste fund’s MSC increase from roughly the same levels of $192,588 in FY 2008 and $197,400 in FY 2009 to $274,851 in FY 2010?

MSC: True Cost Concept

It’s worth distinguishing between the idea behind the municipal service charge compared to an internal service fund charge, like the charge for information technology (IT). Charges from the IT department to other funds are based on specific purchases and use of services – a new computer, with software and support services, installed at a desk, for example.

Calculation of an MSC is not an attempt to bill for products and services, but rather an attempt to distribute the burden of “administrative and overhead” costs to those parts of the city’s operations that cause the existence of those costs.

For example, take the city council, which could be considered a parade example of an administrative and overhead cost. The city council and mayor are paid a salary, which is an expense that is a direct dollar cost to the city. But what about the additional costs the council drives that are not necessarily reflected in a dollar amount in a city checkbook?

Those costs will probably vary, depending on the people who serve on council at any given time. An active city council that is constantly asking the city attorney’s office for analysis and feedback on various ordinance revisions causes more work for the city attorney’s office. The city attorney does not bill the city council for that work. But if the goal is to measure the true cost of the city council to the organization, then the cost of that work needs to be factored in.

Last year, for FY 2010, the city council’s “true cost” was calculated to be an additional $284,711 beyond the salaries of councilmembers. So the MSC listed out in last year’s “budget book” is $284,711. The bulk of that additional cost – $204,000 worth – was attributed to work done by the city attorney.

This “true cost” calculation does not attempt to accommodate various ways in which city councilmembers might conceivably save the organization money – by helping staff to identify more efficient ways to provide service, or by handling a constituent concern without burdening city staff.

Once the “true cost” of an entity like the city council is determined – along with various other administrative and overhead-type costs that are borne inside the city’s general fund – it’s then possible to consider the city’s departments that live outside the general fund. How do departments that exist outside the general fund benefit from the existence of those centralized administrative services supported by the general fund?

Take the water fund as an example. The city’s water department benefits from the centralized payroll services of the city and the city attorney’s office in ways that are fairly clear. It even benefits from the city council. For example, the water rate increases that will be requested this year will need to be weighed, considered and approved by the city council.

There is a lag in the calculations, because the calculations are based on actual costs. A study is performed every two years by an outside consultant – the city uses a firm called Maximus – which corresponds to the city’s two-year budget planning cycle. For the first year of a budget planning cycle, the city uses the numbers from the consultant’s study. For the second year, the city applies an inflationary adjustment of 2-3%.

MSC: Water and Solid Waste

Here’s a breakdown of the calculation for the way the water fund and the solid waste fund were charged the “true cost” of centralized administrative services in FY 2008, and how it was budgeted in FY 2010. The numbers in the columns correspond to the consultant’s report on FY 2006 – used for the FY 2008 budget – and the consultant’s report on FY 2008 – used for the FY 2010 budget.

Water Fund
                              Actual  Budget
                             FY 2008 FY 2010
Building Depreciation              0       0
Equipment Depreciation             0       0
Mayor & Council               34,658  49,185
City Administrator            50,738  49,972
Facility Management                0       0
Human Resources               99,621 110,353
Procurement                        0       0
City Attorney                137,866  47,754
City Clerk                    21,858  42,129
Finance Administration        29,426  48,054
Accounting                    99,837 103,819
Assessor                           0       0
Treasurer                      7,465  10,137
Non-Department Expenses        5,437   8,386
Community Development              0       0
Public Svcs Redistribution       318     543
Public Svcs Gen Fund Retiree       0       0
Parks & Recreation Admin           0       0
Parks & Rec Gen Fund Retiree       0       0
Community Svcs                     0       0
Building Dept Redistribution       0       0
Utilities Redistribution      30,666  30,078
Customer Service Call Center       0       0
Environmental Coordinator     17,661       0
Total Allocated              535,551 404,902 

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Solid Waste Fund
                              Actual  Budget
                             FY 2008 FY 2010
Building Depreciation            361       0
Equipment Depreciation             0       0
Mayor & Council               17,688  33,957
City Administrator            25,177  27,921
Facility Management                0       0
Human Resources               62,154  68,406
Procurement                    3,208   7,353
City Attorney                 16,415  11,951
City Clerk                    11,155  29,094
Finance Administration        15,019  33,186
Accounting                    33,340  50,378
Assessor                           0       0
Treasurer                      4,879   7,717
Non-Department Expenses        2,986   4,856
Community Development              0       0
Public Svcs Redistribution         0      22
Public Svcs Gen Fund Retiree       0       0
Parks & Recreation Admin           0       0
Parks & Rec Gen Fund Retiree       0       0
Community Svcs                     0       0
Building Dept Redistribution       0       0
Utilities Redistribution           0       0
Customer Service Call Center       0       0
Environmental Coordinator          0       0
Total Allocated              192,589 274,851

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So Kunselman’s question about the differences in the MSC for these funds can be given the first part of an answer by looking at this breakdown. For the water fund, the decrease in MSC can be attributed primarily to an increase decrease in the amount attributed to the city attorney: a drop from $137,866 to $47,754.

For the solid waste fund, there are increases across several services, perhaps most notably the doubling of the amounts attributed to the city council and to finance administration.

MSC: Why Do It?

At Monday’s council meeting on the budget, Karen Lancaster stressed that the idea behind the MSC was about cost recovery to the general fund. In FY 2008, the total amount of administrative and overhead costs identified in the general fund budget for FY 2010 and FY 2011 – the current two-year cycle – was about $12 million.

Out of that $12 million, around 75% of it goes to support general fund activities. So it’s only a little over $3 million that is recovered to the general fund from outside the general fund.

Other funds besides the general fund get their revenue in various ways. Some funds, like the solid waste fund, have their own dedicated millage. Other funds, like the water fund, get their revenues from fees.  For funds that are fee-based, it’s reasonable to want the rates that are charged to be an accurate reflection of the true cost of providing the product. The idea is that rates should be high enough so that consumers of city water are paying an accurate price for the water they use, without an administrative subsidy from the general fund.

To the extent that a consumer of city water is also a property taxpayer to the general fund, there might be a reasonable expectation that delivery of water is a core city service. That is, the property taxes that someone already pays – and has no way to influence up or down through one’s day-to-day behavior – could be expected to pay for administration and overhead costs of the water fund, so that property tax payers can enjoy a slightly reduced rate for their water.

On the other side, not all consumers of city water support the general fund through property taxes.

In FY 2009, the University of Michigan used – and paid for – about $7.3 million in water and sewer services from the city. But UM does not pay property taxes. Without an MSC that allows the general fund to recover the cost of administration, general fund property tax payers would, in effect, be subsidizing a part of UM’s water bill.