May 16, 2003
Dear Mayor Hieftje, City Council, and City Administrator Roger Fraser:

Previous City budget documents have won awards for their clarity and thoroughness of presentation – while the budgets they presented relied on one-time windfalls and dips into savings to achieve "balance". We do not expect the current budget presentation to win any awards; important information, including much of the historical data and financial summaries that provided helpful perspective, is difficult to find or absent, as are the extensive presentations of departmental priorities and cost detail that filled out past budget books. But the budget presented is, at long last, one that achieves balance on terms we can wholeheartedly support – without further depleting the General Fund balance or other reserves, without relying on other one-time gimmicks or windfalls, and without raising tax rates on the stressed taxpayers of Ann Arbor. For this, the City Administration is to be congratulated and we encourage City Council to approve it with minimal modifications.

Other observations: 

• Historically, the City's revenues (both tax revenue and total General Fund revenue) have grown at rates above inflation. For the proposed budget, tax revenues are projected to increase another 4.7% compared with the estimate for the current fiscal year. The growth reflects strong increases in the City's property values (SEV's), generating higher tax revenues next year for the City even though the millage rates are essentially unchanged. Total General Fund revenue, at $82.2 million, is about 3% higher than the projection for this year with the increase accounted for by the higher taxes, selected new or raised fines/fees, and by improving upon this year's collection performance of existing fines/fees. State-shared revenue (including fire protection revenue) is budgeted to remain at the reduced levels the City experienced this fiscal year.  

• Last year, we did not support the City budget because it assumed filling many of the positions vacated by the early retirement program. While the budget was approved over our objections, we are pleased that the City was restrained in actually filling most of the positions. This allowed the proposed budget to achieve significant reductions in authorized personnel, to 860 FTE's (full time equivalents) compared with 941 FTE's budgeted for the current fiscal year and nearly 1005 FTE's only three years ago. Personnel make up by far the largest part of City spending.

• The current budget presentation gives little evidence of the restructuring that has been planned over the past year, other than a diagram of how existing departments are being grouped into "bubbles" for improved communication. From our discussions with City Administrator Roger Fraser, however, it sounds like the review of City services may be comprehensive, and that there may be a willingness to consider options like contracting out services that might improve efficiency and service quality. We look forward to hearing more about the changes as they are developed.

• Mr. Fraser has indicated that the mix of City spending needs to shift from programs and operations to capital and infrastructure. We agree. We believe the City should be reducing operating costs over time in order to both meet rising infrastructure needs and replenish the City's General Fund balance – presently at about 7% of the annual budget compared with the City's target of 8-12% identified in its Long Term Financial Plan. This budget still makes only minor improvement in both areas.

• Casual readers of the budget should not be fooled into thinking that there has truly been a spending decline of some $10 million over the past two years. That results entirely from a decision to separate out over $11 million in millage revenue and spending that were previously run through the Non-Departmental portion of the General Fund budget.
  
• The spending restraint achieved through the early retirement program and other City decisions has allowed the City to weather numerous unpleasant surprises, from dramatic increases in health insurance, liability insurance, and energy costs, to significant cuts in funding received from the state. Total costs, however, continue to rise. Despite the progress, particularly on FTE's, we question whether more aggressive cost reductions should be considered now to better position the City for the future -- when the City will need to resume its employer contributions into the Employee Pension Fund and when infrastructure needs will be even more dramatic. At a minimum, continued spending restraint will be necessary even as the economy rebounds.
  

• The City is considering a significant change in how water utility charges are determined – from flat rates to varying the rates with usage. We do not have sufficient information on the proposal at this point to form an opinion; we do hope, however, that in the course of the public discussion, the City shares with the community a historical perspective on water, sewer, and stormwater rate increases for Ann Arbor (residents and businesses). Our sense is that these rates, like tax revenues, have grown at a pace well beyond inflation, and that the proposal being considered amounts to another healthy rate increase. If we are correct, an explanation from the City on why the increases have been necessary would be appropriate.
  

• In the past, we have commented that the City should have a detailed five-year financial plan. We believe that is necessary now more than ever and while such a plan may exist, it has not been shared with us.  We also are concerned that another important process improvement – integrating the City's Capital Improvements Plan (CIP) process with the annual budgeting process – may have lost momentum. Improved integration of these processes would be a key enabler in ensuring the funding for required capital and infrastructure improvements is in place.

In summary, there is much in the current budget for us to like – and more to like in what we hear from Mr. Fraser, that suggests responsible budgeting may truly become a way of life for the City in the future.

Sincerely,
Martha Johnson, Vice President of Government and Community
Ann Arbor Area Chamber of Commerce