Ann Arbor
City Budget 2004-2005

Official Policy
May 2004

Last year, the Ann Arbor Area Chamber of Commerce recommended approval of the proposed city budget largely because it was balanced without depleting the General Fund balance or other reserves, without relying on one-time windfalls, and without raising tax rates for the already heavily taxed residents and businesses of Ann Arbor.  These key principles have guided our recommendations again this year.

 For fiscal year 2004-05, the City Administrator has submitted to City Council two budget proposals – a base budget proposal that adheres to these principles and a second proposal, recommended by the Administrator, that, in our view, does not.  We support the base proposal, but do not believe the Administrator’s recommended budget (which adds approximately $4.5M in revenues and costs over the base) should be approved.  The incremental costs contained in the recommended budget are funded through depletion of reserves and adoption of two new, and likely permanent, sources of tax revenue (a 0.67% administrative/collection fee applied to tax bills and raising the General Operating Levy to its Headlee maximum).  We are concerned that, after just one year, the City would return to a practice of depleting reserves to fund operating costs.  Further, we do not believe the City has presented a compelling justification for adopting new sources of tax revenue, including clearly articulating why the continuing revenue growth from existing sources isn’t adequate or that the City has exhausted the opportunities for significant cost reductions and efficiency improvements. 

Other observations:
--For the community to assess whether new sources of tax revenue are appropriate, it’s important to understand the revenue growth history and outlook for 2004-05 from the existing sources.  Throughout the 1990’s, the City’s revenues (both tax revenues and total General Fund revenues) grew at rates above inflation (increasing more than 5% annually).  Over the last couple of years, tax revenues have continued to rise at more than 5% a year.  For 2004-05, we estimate the base budget will result in tax revenues again increasing about 5% ($3 M) over 2003-2004, reflecting strong increases in the City's property values (SEV's) and new construction, generating higher tax revenues for the City even though the millage rates are essentially unchanged.  If the millage rate is increased and the Administrative/Collection Fee is adopted, tax revenues for 2004-05 would be up 8%, ($5 M) year-to-year.
--We understand that the City’s General Fund revenues include state-shared revenues, fees, fines, charges for services and several other revenue items, as well as the portion of total taxes/millages that are not enterprise funds and remain in the General Fund; we also understand that state-shared revenues have declined the last few years.  From 2001-02 to 2004-05, state shared revenues will have declined by $2.6 million and that reduction is well understood in the community.  Less understood is that GF tax revenues will have grown by $6.4 million over the same period ($8.8 million if the recommended tax revenue actions are adopted).  We estimate that annual GF revenue growth has slowed from the 5% or more experienced in the 1990’s and up through 2002-03, to about 3% annually (5% annually on taxes, offset by lower growth in other GF revenue elements) the last couple of years.   We recognize that represents a challenge for the City, but as we’ve indicated previously, do not believe the City has a revenue problem.  Revenues do continue to rise each year and we are not yet convinced that all cost reduction opportunities have been exhausted and that the only alternative in balancing the budget is to adopt new sources of tax revenue. 
--We commend the City on the progress made in reducing staffing levels with minimal service impacts.  Full-time equivalents (FTE’s) are down from the peak of 1,000 in 2000-01 to 861 for this year.  We also recognize the base budget reflects a further reduction to 820 for 2004-05.  Not surprisingly though, with some significant pay increases and rising health care costs, these staffing reductions have not translated into a reduction in total personnel costs.  Our estimate is that over the last three years (from 2001-02 to the 2004-05 base budget), total personnel costs are up 1-2% in spite of a 15% reduction in the number of FTE’s .  That suggests the City should be accelerating its efforts to implement less costly, more competitive health care and other benefit plans – a difficult challenge, but one addressed by many other public and private organizations by having employees contribute directly to the cost of their own health care.
--One of the significant changes in the proposed 2004-05 budget is the establishment of solid waste as a stand-alone enterprise fund, moving it out of the General Fund.  We certainly do not object to this change, which seems to demonstrate that the true cost of solid waste operations was much higher than previously reported, and that the contention that the Solid Waste Millage was subsidizing other General Fund departments was not correct.  We do object, however, to the proposed elimination of front-load dumpster pick-up service.  In our view, it is inappropriate for these service users to pay a solid waste/refuse property tax and the cost to contract out the service.  
--While we recommend that City Council approve the base budget proposal, we also encourage the City to more fully articulate to the community the methodologies and priorities utilized in developing it.  If “across the board” cost containment targets were applied, the City should confirm whether that approach is likely to result in proportional impacts on all the various services the City provides.  Moreover, we question whether it is appropriate to impose the same cost reductions to basic city services as compared to more discretionary services.  In fact, the Police/Fire year-to-year FTE reductions are even higher (6.8% vs. 3.5%) than for the other service areas.  That may be one way to meet a cost target, but will it result in a disproportionate impact on the service levels provided
--Although we understand and support the full cost recovery principle the City utilizes, we remain concerned about the increase in fees.  For 2004-05, we are aware of significant increases recommended for housing inspection and private development fees, but are not clear if there are others.  (The City has indicated that fee information will be provided at an upcoming City Council meeting.)  Many of our members are affected by these fee increases and we encourage the City to do all that is possible to contain the underlying costs and resulting fees. 
--Regarding the recommended Administrative/Collection Fee, our view is that “a tax increase is a tax increase” and that adopting this fee isn’t justified simply because other cities may have them.

 The Chamber’s analysis of the City budget largely focuses on year-to-year and historical trends in tax revenues, total GF revenues, and expenditures.  The omission of summary level, historical trend schedules and data from this year’s budget materials, coupled with the significant changes in reporting methodologies and organization structure for 2004-05, made that analysis very difficult.  In many other respects, the budget materials were much improved over a year ago and inclusion of the summaries provided for 2002-03 and earlier would result in more complete materials that would satisfy any reader.  

Nevertheless, we encourage City Council to approve the base budget and to resist adopting new, and likely permanent, sources of tax revenue.  As always, the Chamber very much appreciates the assistance provided by the City Administrator and his staff.