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Michigan’s 2011 CPI for Taxable Value: 1.7%

Tuesday, October 26th, 2010

As Michigan local governments begin to think about next year’s budgets, there is significant uncertainty regarding revenues:

  • The housing market continues to be weak, which leads to lower property values and lower assessed values.
  • The State’s revenue sharing program remains uncertain as the state grapples with its own financial troubles.
  • Interest rates are at historically low levels, so investment income is now just a fraction of what it used to be.
  • Development-related income from building permits, land sales and zoning requests, is also significantly lower than in years past
  • Limits on taxable value growth, established with the passage of Proposal A in 1994, remain constrained.

This last bullet is of particular interest, since it is what drives the allowable tax revenues from property owners. Under Proposal A, taxable value is allowed to increase at the rate of inflation, or 5%, whichever is lower. Last year, Michigan property owners saw a decrease in taxable value, since the Proposal A inflation factor was calculated to be a negative 0.3%. This year, the rate of inflation is expected to be 1.7%, which means for all parcels of property not already “capped” at the property’s assessed value, the taxable value will increase 1.7%. As illustrated in the chart below, during the 15-year history of Proposal A, the inflation rate has fluctuated between -0.3% and 4.4%, with an average of 2.5% per year.

Michigan Proposal A Inflation History

In a time of seriously constricted revenues, any increase in taxable value is a relief for most local governments. However, due to the repeated decreases in assessed value for many communities in the past 3 years, the 1.7% increase will likely translate into less than a 1% increase in total taxable value.

Knowing the inflation factor for next year’s taxable values lends some certainty to the budget process, but once again, the numbers suggest another difficult budget year for Michigan’s local governments.

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7 Strategies to Effectively Manage Municipal Finances

Sunday, June 6th, 2010

Local governments the world over are searching for ways to keep their finances healthy. While certainly not an exhaustive list, here are 7 strategies that should get any government headed in the right direction:

1. Forecast critical budgets. Using a single year budget limits your ability to anticipate when things might get better or worse for your most important funds. Knowing 2 or 3 years in advance that you are headed into a stressed financial period gives you time to strategically manage the issue, rather than react under pressure.

2. Establish effective financial policies. Do you have policies in place to ensure financial stability? At a minimum, you should have policies governing:

  • Minimum reserves/fund balance
  • Utilization of excess cash
  • Debt limits
  • Capital projects funding

3. Recover as many costs as possible. Local government costs include mandated services, as well as administrative or policy-driven costs. Wherever possible, set fees for public services at levels that recoup the true cost of providing non-mandated services. Internally, develop a comprehensive cost allocation plan to recover general fund central service costs required to support non-general fund functions.

4. Set spending priorities. It’s important to know the most critical services your government provides to its constituents. Focus spending on areas that provide the greatest benefit to the community, whether roads, senior services, public safety, recreation or economic development. If cuts are required, be sure to preserve highly valued services and eliminate or cut back on less desirable services.

5. Measure performance. If you aren’t doing it already, start measuring some of your government’s outputs. Measurements should reflect the goals of each department (e.g., response time for fire calls, % taxes collected for Treasury, time required to complete zoning reviews, maintenance cost per mile of streets, etc.). Benchmark your unit costs and other metrics against those of similar communities. If your costs are disproportionate, find out why and make changes to bring cost in line. Track how you are doing year to year, so you can report progress to your constituents and help improve management.

6. Run an efficient operation. Ensure staffing levels are appropriate. This can often be accomplished through a management or operational analysis. Use software to cut down on staff time and reduce errors. If remodeling, consider the layout of office space to reduce wasted motion. Conduct an audit of energy use, including street and park lighting, building lighting, heating, air conditioning, vehicle fuel economy, utility operations, etc. Install more efficient devices where possible (grant funding may be available to help offset the costs).

7. Shore up revenues. Besides fees, what other options do you have to increase revenues? Could you diversify your tax base by shifting a portion of your property taxes to income taxes or sales taxes? Are there grant funds available for specific services or improvements your government is undertaking? Are you maximizing your investment income through effective cash flow management? Are your utility rates set appropriately to recover the full cost of providing water, sewer or electric services? Could you “sell” services to other municipalities (e.g., contract out meter reading, emergency dispatch, HR, recreation services, etc.).

 Feel free to share any additional strategies you have found successful!

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Economists present outlook for Oakland County

Saturday, May 1st, 2010

Every year for the past 25 years, University of Michigan economist George Fulton has developed and presented an economic outlook for Oakland County, Michigan. I was fortunate enough to attend this year’s presentation to hear first-hand the prognosis of this generally prosperous county in southeast Michigan.

First the bad news:

  • The county has lost about 155,000 jobs over the past decade, including more than 60,000 in 2009
  • The unemployment rate is 12.9%, the highest it’s been in decades
  • Home values have fallen precipitously in the past 2 years

The good news:

  • New jobs are being created-particularly in emerging industries and healthcare
  • Average earnings have increased, due in large part to the relative increase in jobs requiring higher education
  • Inflation will likely remain low for the next 3 years-under 2% annually

Despite the good news, there’s more bad news:

  • Unemployement will likely increase to 13.4% in 2010, and remain close to 13% through 2012
  • Job growth is expected to increase over the next three years, but only after losing another 9,800 jobs in 2010. Following this year, the forecast projects less than 10,000 jobs will be created between 2011 and 2012.
  • The outlook for new development and overall property values is concerning for local governments, which rely on property taxes for the bulk of their operating revenues.

This last bullet wasn’t included in the economic forecast that was presented to a sold-out room of over 600 at the Troy Marriot. However, it is an obvious conslusion, given the projected unemployment levels. The presenters did say that those who have jobs should fair well over the next few years, but those without a job will face an extended period of difficulty.

This translates into continued housing foreclosures, as homeowners without a steady income make difficult decisions about paying mortgages or putting food on the table. Continued housing foreclosures puts downward pressure on market prices, which further drives down property values and the resulting income from property taxes.

While the presenters and sponsors of yesterday’s economic outlook were generally optimistic that things are getting better, I fear the reality is they won’t get better fast enough for many local governments to avoid serious financial difficulties in the near future.

Hang on, Oakland County, as well as the rest of the State, the economic roller coaster ride is still rolling down the big hill to the bottom! It looks like this ride will continue for at least anther three years. In the meantime, municipalities should begin developing strategies to stay solvent for the foreseeable future.

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Panning for Gold in the Municipal Budget

Monday, February 1st, 2010

Similar to a prospector sifting through the dirt and mud, many local managers and elected officials are carefully reviewing budgets for any opportunity to save money or increase revenues. Every now and then, a nugget is found buried in a budget line item, resulting in cost savings or some additional revenue.

I recently read of a citizen in Florida who discovered he was being billed for solid waste services he was not receiving. He decided to review the city’s trash hauling contract to get a better understanding of fees. Through his review, he discovered the city had been overpaying the trash hauler, and the waste management company had underpaid its franchise fees to the city. An initial review of the contract and payments suggested the city was owed several hundred thousand dollars. This is just one example of budget mining that resulted in true savings.

Reviewing external contracts on a regular basis can help ensure compliance and avoid overpayment or insufficient collection of fees.

Another revenue source that is often overlooked is internal administrative charges. Most governments operate a multitude of budget funds, including internal service funds, enterprise funds, grant funds and others, which rely on a number of central services funded through the general fund. These often include:

• Human resources
• Payroll
• Finance
• Legal affairs
• Maintenance
• Insurance
• Recordkeeping
• Information technology
• Communications
• Audit fees

Private businesses have long utilized cost accounting to assign specific costs to various operating departments. Governments have slowly been adopting this approach, because it allows them to identify and recoup the costs of supporting non-general fund operations. It is appropriate for the water and sewer funds, as well as special revenue funds, grant funds and others, to pay the cost of administrative services. Without the support of the general fund, each of these funds would have to have their own staff and space to perform HR, payroll, finance, and other administrative functions. Clearly, it is more cost effective to centralize these services, and it makes better business sense to share the costs of these services.

Properly designed cost allocation plans often result in significant cost recovery in the general fund. Based on plans I’ve developed, most governments might expect to recover between 5% and 10% of total general fund expenditures through cost allocation.

I’m not sure if saving 5%-10% of general fund costs year after year is important to your community. Most people panning for gold, though, would recognize this as a claim worth staking.

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Michigan’s CPI: Inside the Black Box

Friday, January 8th, 2010

When the Michigan State Tax Commission released the inflation multiplier for 2010 property tax calculations, many people were surprised to see a negative number. In the 15 years since passage of Proposal A, the CPI has fluctuated between 1.5% and 4.4%, always below the 5% threshold established when voters approved the tax system changes in 1994. There had always been concern about the impact of the upper limit, should inflation actually exceed 5%. But no one I have talked to over the years considered the lower limit of the inflation adjustment factor.

Following the rapid rise in prices during the summer of 2008, and the sudden drop in economic activity just a few months later, we started to perceive a downward trend in prices. Using a custom spreadsheet to track and forecast the CPI, we were able to alert our clients to the potential for a negative CPI as early as May 2009. This file is available for local assessors and managers to access or download to use locally.

As municipal budgets continue to see declining revenues and rising expenditures, it is increasingly important to be able to understand and anticipate how revenues may change in the coming budget cycle. Property taxes are the primary revenue source for most local governments in Michigan, so it would seem imperative that local leaders have a firm understanding of potential changes in taxing limits imposed on property values.

In addition to tracking the CPI, local assessors and equalization departments should be monitoring and communicating property sales trends to the people responsible for the community’s budget. This should help improve budget estimations and avoid any last minute surprises.

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2010: A Year of Difficult Decisions for Local Government Leaders

Friday, December 18th, 2009

For many local governments in Michigan, 2009 has produced some significant changes in government funding:

• Housing value declines have lead to stagnating or declining property tax revenues
• New construction virtually halted, resulting in significant revenue losses in planning fees, building permits, register of deeds, and other development-related income streams
• Losses on Wall Street have dwindled retirement savings, causing many locals to increase retirement contributions out of already stressed operating funds
• State fiscal problems have been pushed to the local level in the form of reduced revenue sharing payments

While this year has been difficult, 2010 is shaping up to be even more challenging. We already know that the Proposal A limit on taxable value will, for the first time in its 15-year history, be negative, resulting in a reduction in property taxes paid by almost all property owners in Michigan. On top of this, property values are expected to decline further and more sharply in many communities, and the State may make further cuts in revenue sharing.

As a result, most local elected officials will find themselves having to make some difficult decisions in 2010. Layoffs, cuts in employee compensation, service reductions, tax increases and other unpleasant choices will have to be considered.

How will your community adjust to the “new normal” of municipal financing in the new year? Many local governments are turning to longer-term financial planning and budgeting, while others are re-evaluating fees, operating costs and other avenues of cost savings.

The important thing is, you have to start making decisions soon, and ideally those decisions will be based on realistic forecasts of revenues and expenditures. Taking the time to strategically plan for your community’s long-term success will result in less drastic changes and a more acceptable outcome!

For more ideas on how you can better position your government to manage and adapt to fiscal changes, visit www.municipalanalytics.com

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