Arbor Update

Well, careful: they don’t say they’re expecting a 15% cut. They say they’re picking an upper bound so they’re prepared to make cuts at uneven levels (15% in one department, 5% in another) if necessary.

Bruce,
You’re right. I changed the post to read “as much as” to reflect the fact that they might not have to cut that much.

As far as I understand, the City usually asks departments to trim 10%.

What do people who follow the City’s finances closely think?

I fear that 15% understates the likely decline in property tax revenues next year.

I think Larry’s right and it will be worse in the county than in the city where property vlues are holding better. It will not be good in 2010 and 2011.

Can anyone estimate how many City staff are likely to be laid off? The vast majority of City expenses is for personnel. I know the County is cutting its payroll. Maybe that staff reduction could be used as a model.

The county has cut its personnel by about 158 job eliminations in the last few years. The City also made massive cuts in its reorganization. You are right, David – costs of government services are mostly payroll – about 85-90%. It is a very hard thing to vote to cut positions, and in the past it was mostly retirement and attrition. That will not be so this round.

And, with the loan to auto companies failing in the Senate last night, I hate to think what it will do in terms of the demand for services that we local govenments, in partnership with non-profits, are trying to provide. Revenue for non-profits is also down, so people need to dig into their pockets and give. It is not a nice picture. The state will not be much help, and Jan. 20th can’t come fast enough.

If the auto companies collapse, which now seems likely, it will hardly matter to Michigan what happens after January 20. I don’t think a lot of Ann Arborites realize how much impact that is going to have.

I just read on the net that the White House is considering using some of the $750B to help the auto companies. (And these are LOANS, not bailouts.) However, you are right, Larry – and it is not just the companies themselves, but the suppliers, dealers, and all the ancillary businesses that depend on the custom of the auto worker families – stores, service businesses, even health care providers. It is indeed very scary.

The Free Press reported this AM that Sen. Jim Bunning of KY, a former Tiger Hall-of-Famer, is coming to sign autographs tomorrow at Cobo Hall at some sort of Expo – I hope the UAW pickets him! He was one of the leaders in refusing to help, and KY has the largest Toyota plant ouside Japan, where the average wage is $30.00 an hour. The average wage of a UAW worker, according to Keith Olberman, is $29.00 an hour – so if you match that, UAW gets a raise! (Who knows if these figures are right, but I love them.)

Back to local budgets – we are in trouble, with a lot of hard work ahead of us.

Re Post #9: I do not believe the auto companies will collapse. I agree with Mitt Romney that a Chapter 11 reorganization of the American automakers will be in the best interests of the entire country as well as the automakers themselves.

I supported the Chrysler bailout deal back in 1979 because it was largely a cash flow problem and Chrysler was committted to making changes to market its fuel-efficient K-car models and accepting federal oversight with the loan guarantee being a reasonable amount of $1.5 billion. The UAW also agreed to large concessions for its Chrysler workforce then.

Re post #11: Mark, I agree that in theory Chapter 11 is the best solution, I wish I shared your confidence that the Big Three will survive it.

Leah Gunn is correct that the City’s decline in property tax revenue will be less than the County’s decline in property tax revenue. Accordingly, 15% is the high-end of cuts that will be required. Moreover, note that this covers a two-year period, so a 10% cut over two years would be about 5% per year.

Let’s take the City Administrator’s figures for the time being. Leigh (or someone else), how much is a 15% reduction in General Fund expenses over two years in dollar terms? Also, what is a ballpark figure for the annual cost for one Full-Time Equivalent (FTE) employee, including benefits? I’m still trying to calculate roughly how many staffers will be fired under Roger Fraser’s scenario.

“how many staffers will be fired under Roger Fraser’s scenario.”

Again, a “15% redunction in General Fund expenses” is not his scenario. From the memo:

“This will assist us in making the best decisions as staff puts together a formal, two-year budget proposal for Council that includes an average 10% reduction.”

Anyway, budget details appear to be here: http://www.a2gov.org/government/financeadminservices/Pages/Home.aspx.

(Talk about a bloated budget: 37.4 MB? Surely we shrink that down by an order of magnitude or two?)

I’m looking at the memo’s goal of a 15% reduction over a two-year period.

What type of likely “public discussion” between January and April is he referring to? Does anyone know?

I am also curious about the assertion that “construction materials and other costs have declined dramatically” as to the Police/Court project; can anyone elaborate?

“I’m looking at the memo’s goal of a 15% reduction over a two-year period.”

Again, the only stated goal is to present a budget with a 10% reduction of 2 years. The 15% number arises only because reaching the average 10% goal is likely to require some departments to be cut by more than 10%.

Obviously local governments get a mix of revenue from different sources, and even the property tax picture varies across commercial, agricultural, personal property, etc.

But the fact remains that the bulk of revenue comes from residential property taxes, and the trends in that sector are dismal.

A drop of only 15% over the next two years strikes me as unduly optimistic, and a mere 10% in that period of time is just about inconceivable.

If the city does nothing else in the next 2 years, one of the smartest things it could do would be to work out a regional tax-sharing arrangement with the surrounding townships akin to what exists in the Minneapolis, MN region. In Minneapolis, the communities share a portion of the revenue from all commercial and industrial development in the region. Some communities are net donors and some are net recipients. The overall region benefits because:
1) There’s less incentive to go overboard with incentives because each community benefits no matter where a new development goes.
2) Older communities can maintain competitive tax rates and quality services even if property values decline. This avoids the death spiral that grips some many more older communities (Ypsilanti and Detroit inner ring suburbs for example)
3) Reduces incentive for sprawl in growing communities by eliminating the incentive to grow at any cost.

Now would be the time to pursue such a strategy. Since there’s very little development right now, there’s less of an ability for communities to claim that they are giving up something by sharing. Also, as the city is still seeing some development and new proposals, it can be seen as a contributing partner versus just looking for a hand-out. With everything going on in the Big 3, more people are aware that the region’s fortunes depend on working together.

A tax-sharing arrangement would be one way for all of the area communities to work together for the good of all. Let’s see if city leaders have the wisdom to pursue it.

pdf - The Minneapolis plan: What if we shared the wealth?

John Q: That’s a good idea in principle. The trouble is that a disproportionate amount of Ann Arbor’s commercial development is located in the DDA territory. In its territory, the DDA captures all revenue from increases in value.

If all Ann Arbor downtown development is excluded, then other jurisdictions will have no incentive to share with Ann Arbor.

If we just stick to the General Fund, looking at the 2009 budget, there’s around $77.6 million dollars in expenditure that you could realistically consider. The total GF recurring expenditures is $83.7 million. But $6.1 million of that is debt service, transfers, etc. A 10% reduction would be around $7.7 million. The city has 800 FTE (full time equivalents).

Realistically, you can’t achieve 10% reduction in budget without some pain. That means layoffs or reduction through attrition, changes in salaries and benefits and reduction in services. Just working from the budget document provided online for 2009, I would suggest these as potential costs savings:

1) Consider outsourcing the City Attorneys office. This is 14 FTEs and $2 million. Unlike other city services, this is a professional service that can be bid out to get competitive pricing from area law firms to provide these services to the city. There’s a number of law firms in SE Michigan that provide these services for many municipalities. It won’t eliminate that cost but could reduce it.

2) Mayor’s Executive Assistant – Is this necessary when there’s a full-time city administrator with staff?

“The trouble is that a disproportionate amount of Ann Arbor’s commercial development is located in the DDA territory. In its territory, the DDA captures all revenue from increases in value.”

What about the South State/Briarwood area with both retail and high-tech and industrial development? I see your point about downtown but not all of the development is taking place within the DDA. If it’s the majority of new development, the city should consider modifying the DDA revenue stream to go towards tax sharing.

Let me correct you about the DDA’s tax capture. The DDA gets the first go-round on any new development, but any increases in value thereafter go back to the original taxing entities. As an example, the DDA receives about $100,000 in taxes from the library, but the increase in value of downtown property since the inception of the DDA returns back about $400,000. This is unusual, because most DDAs in the state capture it all, but our plan was originally written differently. Also, DDAs no longer capture school property taxes (since Prop.A).

Larry, I probably don’t know enough about this to be helpful, but I’m hoping you do. For those residential properties that have been owned for a long time and haven’t had their tax rates ‘trued up’ at the time of a transfer in ownership (here’s where my ignorance starts to show—something to do with the Headlee Amendment?), might their recent drop in value have resulted in less of a drop in taxes than if they were newly owned? If so, and if enough houses fall into that category, might that soften the blow to the city’s revenue stream?

Bruce, you’re wasting your time—DD is just willfully ignorant about certain things.

John Q., great suggestion about the tax-sharing concept. Would it be legal under our state’s constitution?

Assuming a 10% reduction (which Larry thinks is overly optimistic), and assuming that the cuts come entirely from personnel, and since the City has about 800 FTEs, we are talking about firing 80 people.

Steve, you’re right, if a property (not just residential) has been under one ownership for a long time, the equalized value (based on market value) and the taxable value (increases limited to the inflation rate or 5% whichever is less) tended to diverge.

When the equalized value starts falling, the taxable value, if lower, can continue to increase.

However, once those two lines cross, the taxable value becomes equal to the equalized value, and they fall together.

This year, 30% of the properties in the county had the same number for equalized and taxable value. That is expected to increase for the coming year, perhaps to 70% or even more.

So the decline in tax revenue is less steep than the decline in equalized value, but the more value declines, the more those two numbers will converge.

Just for purposes of illustration, if the equalized value falls 30% this year, my guess is that tax revenue will fall around 25%.

“John Q., great suggestion about the tax-sharing concept. Would it be legal under our state’s constitution?”

I’m not sure. There are some state laws that are pretty broad and vague that allow for tax and service sharing arrangements. Whether they are broad and vague enough to embrace this concept is probably up to the lawyers to decide (oops – better not contract those out yet!) Typically, you’ve seen this done in land and tax sharing agreements between communities over annexation disputes. This allows the community that loses land to annexation to still get some share of tax revenue after the land has been annexed to the neighboring community (also done in some Act 425 agreements which are “almost” annexations)>

So some level of tax sharing is done already in the state. To keep things less complicated, I would expect that the various jurisdictions would continue to levy taxes as they do now but would have a multi-jurisdictional agreement that says “Based on a formula, each community will contribute a percentage of tax dollars to a pool and each community will get a distribution of tax dollars back”. That come with language that would prevent quick exits from the agreement to avoid chaos to budgets if communities decided that the framework was no longer working.

It’s worth exploring and I would bet that there’s already been some analysis done on this topic. I think I read at one time that the regional council in the Grand Rapids area was discussing this idea so they may already have a white paper out on this.

Here’s the GR area study. It states that a change in state law would be required. But their analysis doesn’t really explain why. I think based on other tax sharing arrangements in the state, there’s a case to be made that existing law does permit this kind of tax base sharing.

http://www.gvmc.org/landuse/documents/tax_base_sharing.pdf

A quick Google search on “tax base sharing” will turn up many examples from around the countries of discussion on this idea.

With everyone’s tax base in free fall, all the governmental units will be clutching their checkbooks to their bosoms. There is no way that tax sharing is viable in the near future.

The near future, and Ann Arbor’s government, is the focus of this article.

“The near future, and Ann Arbor’s government, is the focus of this article.”

The failure to think and deal with the long-term only leads to a continual string of near-term problems. If you can’t see that from the plight of the state and federal government and the auto industry, you’re never going to see it. As for your dismissal of regional tax base sharing, it’s good thing that your viewpoint didn’t hold sway when the library was organized along as a district. By spreading the costs and the services of the library across the entire school district versus fragmenting among the various municipalities that lie within the school district, the library’s financial position is much better than any of its constituent parts.

Long-term strategies, while nice to discuss, don’t fit into an article about short-term problems.

Does anyone want to make another estimate, besides mine, of how many City employees are going to be laid off?

Why don’t you explain how you came up with your number?

“we are talking about firing 80 people”

Leave the rest of us out of your speculations, please.

“Does anyone want to make another estimate, besides mine, of how many City employees are going to be laid off?”

I estimate that DD’s estimate will be wrong and of no value.

[Note: this comment is primarily for the entertainment of the lurking crowd.]

Well, Steve, I hope you’re prepared to defend the City staff that handles your interests when the long knives come out.

I am wondering if City Council members are having “buyer’s remorse” over approving the 47-million-dollar police/court project now that the city has run into revenue woes.

Oop! Sorry I didn’t expand further on my 80-person estimate, John Q. All I did was take the 800 FTE positions, multiply by 10% to be cut, and wind up with 80.

I don’t expect there to be a significant amount of staff leaving voluntarily, since hardly any public entities are hiring. So people will have to be fired.

As to how this will be done, there are various methods. One method would be for every unit to absorb the same percentage cut. The predictable pushback will be for every unit to say that all its people are essential. And since the City has already cut several hundred staff in recent years, the “essential” argument does have some face validity.

Another way would be to cut top administrators, starting with the “bubbleheads”, and work down the food chain. Yet another way would be to cut the staff who actually serve the people, and work up the food chain.

Which way would should be used?

John Q – my rule of thumb is that communities can only enter into arrangements specifically given them by the State; since I don’t know of any State act that would specifically authorize tax-base sharing, I assume a change is needed. I could be pleasantly surprised though.

PA 425 is essentially a time-limited annexation. I suppose maybe there’s a way it could be twisted into a regional tax-base sharing system, but it seems like much more of a headache than it’s worth (which parts of which townships go into which cities? or other townships? or what?).

Also, since PA425 affects a defined geographic area, it doesn’t solve the sprawl issue of development happening outside that area to avoid the taxes. A good tax-base sharing system levels the taxing burden across the area to help pull tax rates out of the locational decision, allowing the decision to be made on better grounds.

Having spent some time studying tax-base sharing programs (the Twin Cities and New Jersey Meadowlands being the two major ones, both approaching 40 years old), I’d pessimistically say that it would probably involve an action of the State Legislature not to enable the local governments to do it themselves, but to impose it upon the local governments. In the MN case, the system came about over the resistance of the suburban communities – the Twin Cities’ legislators convinced the out-state legislators that things had gotten so bad, and only drastic action would address the problems, that they were able to out-vote the suburbs in the Legislature.

Murph, are you pessimistic about its chances because you don’t think things have “gotten so bad” in Michigan yet, or for some other reason?

David, I’m not attached to anything, so I don’t have “interests”. Give it a try sometime.

Murph – I don’t see Act 425 agreements as the way to go. But I referenced it to show that it’s been done so we know there’s no constitutional obstacles to overcome. As you noted, there does have to be some legislation that explicitly permits it. Here’s the laws I’m thinking of:

Urban Cooperation Act
http://legislature.mi.gov/doc.aspx?mcl-Act-7-of-1967-Ex-Sess-

That explicitly allows tax revenue sharing.

I know that some communities have used Public Act 7 agreements as part of annexation/boundary agreements to share tax revenue. Looks like there’s been some local research of PA 7 (although more focused on annexation and land use)

http://www.greaterlansingurbanservice.org/Articles/Washtenaw%20County%20USD.pdf

Page 11 in this PDF:

http://swwcog.org/liaa_grant/liaa_preliminary_workbook_feb_2007.pdf

Good overview of laws covering joint services:

http://www.wmsrdc.org/map%20downloads/Map%20Document/Appendix%20A.pdf

Steve –

Yes, I would estimate that things haven’t gotten bad enough yet in Michigan for people (read: “local governments”) to be ready to try something as “radical” as tax-base sharing. The opposition is very predictable – here in Washtenaw County, every out-county leader is going to ask, “why should we make our businesses pay taxes to support Ann Arbor’s fluffy bunny programs and Ypsilanti’s failings?” about 6 seconds after the idea is formally proposed. Tax-base sharing can too easily be cast as “annexation/merger-lite”.

(For reference on “bad enough”, I asked some representatives from the Hackensack Meadowlands once what they it would take to implement tax-base sharing anywhere else in NJ, a State almost as notoriously home-rule as Michigan. The answer, “Crisis.” And acute crisis, at that – the Meadowlands authority, they said, was implemented upon the area by the State Leg. only after the marshes-qua-landfills had caught fire, blanketing the Turnpike in toxic smoke for several days and causing multiple fatal crashes through lack of visibility. I don’t think we have anything quite so telegenic going on that would make the case for such a change.)

The learning curve for people to be able to support this is steep enough that I don’t think it’s worth throwing a lot of resources at right now. Though I’m willing to be pleasantly surprised – if the Supervisors of A2, Pittsfield, Superior, Scio, and/or Ypsilanti Townships were to come out in support of such a Big Idea, my pessimism would start evaporating pretty quickly.

In the meantime, though, I’d rather spend the energy on things that I think are closer to achievable and also good projects – say, expanding AATA to a County-wide authority (or at least spanning the urbanized area of the County).

Re #23: John Q, I don’t know a thing about the Mayor’s Executive Assistant, but I wish you hadn’t singled out an individual job position in a public forum at this stage.

Back to comment 18 about the cost of construction materials, just like oil prices are going down, raw material prices like steel and concrete are also dropping. I’ve heard the mayor say the bids are coming in lower than expected because of this, but I don’t remember how much lower.

Steve & David re the cost estimates:

Steve: I found David’s estimate interesting and useful, and see no reason why he should not share his speculations with us. Let a thousand flowers bloom! My take is that an “axe” model for cuts is probably going to be pretty accurate as I know believe the most likely outcome of the auto crisis is a prepackaged bankruptcy for GM and Chrysler.

David: I have seen you repeat the idea about saving jobs from the bottom up on several occasions, but I think the strategy has to be more complicated than either top-down or bottom-up. You need to preserve the individuals with the absolutely critical hard skills; those may be people with more formal education rather than less, and therefore higher up the food chain. And you need to have enough supervisors to have a reasonable span of control, especially in direct community-facing positions where lack of adequate supervision can cause failures that directly impact real people. E.g. child protection agencies.

“I don’t know a thing about the Mayor’s Executive Assistant, but I wish you hadn’t singled out an individual job position in a public forum at this stage.”

I singled it out because I want to hear the justification for the position. There may be a very good one. Or it may be unnecessary. It’s one of the few positions that one can identify from the budget versus large departments with many employees and limited job descriptions. How does one have a public discussion of these kinds of issues without taking about the positions?

How do you think that person feels to see their description singled out in a forum like this one?

I think there is plenty to talk about in terms of strategy for cuts, etc. without zeroing in on one hapless person who in all likelihood is not a big cause of the problem, simply because that person’s job description happens to be visible.

In any event, no, even if more detailed job descriptions were available for every single job in the city, we should not have a public discussion of the merits of individual positions. It is not fair to the human beings involved.

Fred,

We’re going to have to disagree. If we talk about police and fire, every person in that department is going to wonder if their position is at risk. There’s just no way around it and I think you do a disservice to those people to pretend otherwise and then spring the cuts on them at the last minute. Better to know and be able to make a case for your cause then to find out when the decision has already been made.

JQ, I overstated my position; to be sure, some public discussion of possibly redundant positions is entirely appropriate, but I still think it was wrong to single out the Hapless Hieftje Executive Assistant.

I am also skeptical that online discussions of highly specific position-level opportunities for reduction are likely to produce good results compared to having a careful analysis done by the people who know the work. Where online forums can be most helpful is in providing strategic guidance, i.e. “more fire, less police,” or “cut from the top, save the bottom.”

Let’s be honest, if we don’t work in city hall or have a working insider knowledge of city government, most of our commentary is going to be less than useful. Even saying “more fire, less police” or “cut from the top, save the bottom” is going to be nothing more than revealing our own personal biases and desires, not what’s really needed or not needed. How can your typical resident know whether the city is over or understaffed in Police or Fire or which department is more efficient or effective? Our hope and expectation is that the people running the city in the administration and the people leading the city on Council will have that information and make informed decisions based on what they know. Out here, we’re left with picking through the budget and pointing out the items that stick out as red flags or throwing out alternatives to how things can be done or funded. That’s why one of my alternatives was contracting out the services of the legal department. It may be a good idea or there may be reasons for keeping it in-house. But it’s one set of services that I know many communities do contract out so it’s something to look at in terms of whether the same work can be done just as well (or better) at less cost to the city, or at least with fewer people on the city payroll.

Thanks for the explanation in #28, Larry.

Just to follow up on #28, Steve, your original assumption in #26 was correct. The communities that had a lot of new housing built over the past 10 years are the ones that are seeing an immediate impact from declining property values because the gap between equalized and taxable value was so small. Those communities also tended to have a lot of turnover in existing homes so those homes also had less variation between equalized and taxable values. As Larry noted in #28, once those two numbers are equal, taxable value starts falling and so does local property tax revenue.

Another “gotcha” to be aware of is that whenever these values bottom out, this will become the new base from which future increases are determined. From the local government viewpoint, it means that even when home values start to recover, the tax base will likely have decreased quite a bit and future increases in home values will be limited by Proposal A to the rate of inflation or 5%, whichever is less. Most homeowners will like that but for the city, it means that the tax base to fund services and improvements will be much less than it was just a couple of years ago. That’s one more reason to be looking at regional tax base sharing now, rather than waiting until the economy starts to recover.

John Q #50 — thanks for the reality check, yes, we agree, we have a poor vantage to make this sort of analysis.

I did think your point about the legal department was a good one — 14 sounds like a lot of FTEs for a city the size of Ann Arbor. On the other hand, I like what Steve Postema has done with the zealous enforcement against drug and alcohol nuisances, and cutting legal services might well turn out to be pound-foolish.

Fred, the only way I see David’s speculation being “useful” is in the generation of more speculation, but I’m open to your thoughts on that. Also, he’s not just sharing his speculations, he’s doing so in a way that appears to be an attempt to limit or direct the discussion.

Fred,

Outsourcing legal services doesn’t mean cutting legal services. But by moving that service out of City Hall, you can reduce long-term liabilities that come with employee pensions, health care, etc. and things like providing office space, the administrative support, etc. Ideally, you can get the same level of service without spending as much. But even if you spent the same amount in the short-term, there are long-term benefits that could accrue to the city.

I have no idea what will happen, or should happen. The more ideas, the better! I can think of at least two reasons why suggestions here about various cuts/whatever are valuable:

First, the City is asking for them. According to Fraser’s memo, there will be a number of opportunities for public discussion early next year. I am sure someone will be looking at Arbor Update and similar “new media” forums for ideas.

Second, in the recent past, there was a public campaign to save a particular staff person’s job in the Police Department. Community groups and others were contacted by people on behalf of this person. I would not be surprised to see similar campaigns next year. So I don’t think public discussion about a particular person is off limits.

John Q, if we could have 100% confidence that outsourcing legal services would result in no reduction of quality and an assured, significant, permanent reduction in cost, it would be a no-brainer, wouldn’t it? but we can’t have 100% confidence in either part of the proposition, so the idea is a risk. It may well be a risk worth taking, but something that would require some careful investigation and consideration. I suspect you would agree. We’re just kicking ideas around at this stage.

David re 56, I still think there is a substantial difference between campaigning to save someone’s job (wasn’t it the outreach coordinator?) and making a public issue of eliminating a support person’s job simply because that person’s job description is readily available and not immediately self-justifying. It just strikes me as unfair to the person involved.

It’s worth looking at the potential savings in the city attorney’s office. The 2009 budget for the city attorney is about 2.1 million. The county 2009 budget for corporation council is about 273,000. The city attorney budget includes 14 people compared to 1.5 people for the county corporation counsel. The county budget book says the corporation counsel handles all legal matters in house and there is only about $10,000 for other services in the budget, which is where the cost of outsourcing would go.

Some of the difference in the budgets is because the city attorney’s budget includes prosecuting cases in district court and the county prosecutor has a separate budget. We’d need to know how many of the 14 people handled district court cases to get apples to apples.

When I re-read Fraser’s memo, the sentence that jumped out at me was:
—
The upheaval in the stock and bond markets has reduced the City’s pension and retiree health care trusts. Without a significant improvement in the financial markets, the City will likely be required to contribute significantly more money for these benefits.
—-
I would like to see some numbers about this. I am not sure we’ve seen the bottom of this downturn.

With all due respect to Larry Kestenbaum, the City will not see the steeper declines in property tax revenue that will surely hit the townships and thus the County as a whole. This is not speculation: the data are already in because the property tax revenue projections for FY 2010 are based on sales data that ended 9/30/08. The City is not suffering as much as the townships because, as Steve Bean and John Q correctly point out, the City’s residential taxable values are low compared to assessed values. The reasons for this include (1) the age of our housing stock, (2) the longevity of our residents (which reduces the number of “pop-ups”); and (3) the City’s more stable property values. Moreover, commercial property tax revenues inside the City are expected to increase for FY 2010.

I understand David’s desire to rock the boat by speculating that 80 FTEs will be eliminated. I can say this with confidence: the City will not eliminate 80 FTEs. How will we avoid that? Look at history: The City has — year after year — plugged the holes in the budget in a variety of ways, only some of which included eliminating FTEs. Every employee in the City has been asked to suggest ways to cut costs, and the suggestions are coming in fast. Early next year, senior managers will propose specific solutions for achieving their 15% target. Then we’ll begin a more comprehensive public dialogue to achieve the 10% target over two years. Accordingly, it’s too soon to speculate about how many FTEs will be eliminated.

I appreciate the suggestion about outsourcing the Attorney’s Office; no idea should be off the table, and I encourage everyone to offer specific suggestions. However, outsourcing the Attorney’s office would cost the City money, not save money. Here’s why. The office employs eight full-time attorneys (i.e., 8.0 FTE). They all work much more than 40 hours per week, but they also get vacation time and sick time, attend administrative meetings, etc. If you assume each full-time attorney spends approximately 39 hours/week performing “billable” legal work, and that each attorney works 46 weeks/year, that equals about 1,800 hours of “billable” legal time per attorney per year. With 8.0 FTE attorneys, that equals 14,400 hours of “billable” legal time per year for the entire office. The cheapest hourly rate the City could secure from an outside firm is $150/hour. At that rate, our outside legal help would cost $2,160,000 — just to replace the legal work performed by our existing attorneys. That doesn’t count the “billable” work performed by our paralegals. That also ignores the fact that most of the attorneys work more than 39 billable hours/week. (It’s common knowledge that they work nights and weekends). That also doesn’t count the money included in the Attorney’s $2.08 million budget that goes for outside legal counsel. That legal work would still need to be performed, so add another $150,000. We’re now well over $2.3 million under the outsourcing scenario, which is $200,000 more than the Attorney’s current budget of $2.08 million. And that assumes we could find a firm willing to do the work for $150/hour. A more reasonable estimate is $175/hour. And, we’d lose the institutional memory of the Office’s attorneys, most of whom have worked there for more than five years. Outsourcing legal counsel is great for small communities that may only need sporadic legal assistance. It’s far more cost effective for larger cities, such as Ann Arbor, to go in-house. Karen Sidney’s figures are woefully inaccurate. The County — understandably and reasonably — spends far more than $10,000/year in outside legal counsel.

Leigh, what are the legacy costs incurred by the city by maintaining that service in-house? What are the support costs for those staff? The direct costs for paying people each year is just one element of the total costs of having staff on payroll.

Leigh, believe me, I hope you’re right, but I’m seeing a whole lot of denial going around. Even those folks who should know they will be very hard hit (metro Detroit area) don’t appear to see it coming.

Larry #63 is right. Moody’s (to be sure, not the more confidence inspiring source) issued a report today projecting a 75% chance of prepackaged GM bankruptcy. that’s the best case.

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/16/AR2008121602675.html

Whooosh.

John Q- Excellent questions. The City’s pension fund is 100% funded (or at least it was as of the last fiscal year ending 6/30/08; God knows what will happen come 6/30/09). The Attorney’s office contributes money to the pension plan for each of its employees to continue that level of funding, and those contributions are included in the Office’s annual $2.08m budget. The City has some money set aside in a VEBA fund for future retiree health costs. We do not draw down from that fund, and instead pay for retiree health benefits on a pay-as-you-go basis. Those expenses are also included in the Office’s budget. In all, the Office spends 50 cents on benefits and insurance (approx. $547k in FY09) for every dollar it spends in wages (approx. $1.137m in FY09). The Office’s expenditures for benefits/insurance rose 10% from FY08 to FY09.

The support staff consists of 6.0 FTE, which includes four paralegals, one specialist, and one Office Manager. Each of the four paralegals are, in theory, doing significant “billable” legal work for which the City would need to pay an outside firm (albeit at a rate less than the $150+ per hour charged for attorney billable work).

Larry- I share your concern about the potentially dangerous optimism of other local governments. But, the data are already in. Our staff carefully studied the sales results — and assumed a high number of successful assessment appeals — to calculate the projected change in tax revenue. The biggest factor benefiting the City is undeniable: the typical single-family home has a much larger “gap” between taxable value and assessed value.

This A2 News article has a table listing which municipalities will see their taxable values go down, and by how much, as compiled by SEMCOG. Ann Arbor City is not on the list, Ann Arbor Twp is, although the article says it was largely due to a bunch of annexations to the city.

Re Post#44: That is really good news, Chuck.

Roger Fraser’s memo rocked the boat, I didn’t. I was grossed out by it, actually.

As Leah Gunn pointed out, nearly all of the costs the City/County have are people costs. So there is no way around the fact that big cuts in costs mean big cuts in people.

Those who believe to the contrary are in the longest river in Egypt.

DeNile?

I know a lot of local organizations are going through these cost-cutting exercises. Usually when these types of memos go out, it means there are not going to be large, across-the-board employee cuts. Those tend to happen with much less notice. The idea here is to give employees input since they are the closest to the action. Depending on the organization, the employees can have very little real input or a lot. Either way it is important that people really take a hard look and bring forward any cost-saving options they think might help rather than just flail around thinking they are going to be fired.

While it is true that the average citizen doesn’t know the inner workings of the City, we may be able to think of cost-saving options. It may be that they don’t pan out, but it is amazing sometimes how much money little changes can save. For instance, does the city pay employees for parking? How much would it save if they don’t. Or what if we all took our garbage and recycling to a single pickup spot in a block rather than at individual houses, would that save time and gas? What about limiting hardware or software purchases? Printers are always problematic, maybe just have one a floor or one every two floors. Or turning down the thermostat in the winter and up in the summer? Maybe some of these things would save $1000 and cost $10,000 or maybe there would be savings. Unless you do these exercises, you don’t know if money can be saved. And sure, maybe some jobs or employees can be cut without anyone noticing (or this could be a good way to get rid of a problematic employee), but it seems reasonable to look for other things first.

This can’t help Ann Arbor’s revenue stream.

Here is what the AA News reports that Mayor Hieftje is saying: “As a result, all city department will be asked to submit budgets with 15 percent cuts for the fiscal year that begins July 1, Hieftje said.”

Also, I had been assuming that no employee wages would be cut; instead, employees would be fired. According to David Leonhardt’s “Economic Scene” column in yesterday’s New York Times, this is “the sticky-wage theory. Economists have long been puzzled by the fact that most businesses simply will not cut their workers’ pay, even in a downturn. Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.” The reason is that morale suffers with pay cuts.

However, I think pay cuts are worth considering rather than a lot of layoffs. After all, morale in City Hall could hardly be lower.

Leigh, are pay cuts part of a reasonable non-layoff scenario?

The city has reduced staff without resorting to massive layoffs by not replacing employees when they retire. A quick check of the last 4 months of retirement board minutes shows 16 people retiring. If many of them are not replaced it reduces staff without layoffs. Of course, the city still has to pay retirement benefits so there are not large savings in the short term.

Has there been any discussion of offering incentives for early retirements for certain municpal employees?

“I think pay cuts are worth considering rather than a lot of layoffs. After all, morale in City Hall could hardly be lower.”

Would the unions agree to contract changes to allow lower pay? That’s one reason that people get fired instead of paid less.

The UM/Pfizer deal is good news for the long-term health of our regional economy, but it will further exacerbate the short-term financial challenges facing the City, County, and others local governments. Accordingly, I believe that everything — including employee “givebacks” and early retirements — should be on the table. David and I agree (gasp) for the third time in as many weeks. There’s no doubt that employee givebacks (e.g., a salary reduction) would reduce the number of job eliminations and protect vital City services.

In response to Karen Sidney’s comments: If employees retire, their retirement benefits are paid by the pension fund, which is a stand-alone fund with separate governance. Accordingly, she’s wrong to say that the City doesn’t save money when employees retire and are then not replaced. Indeed, the last early retirement program in the early 2000s now saves the City well over $8,000,000 per year… and yet the pension fund remains fully funded (as of 6/30/08).

I’m not familiar with how the city’s pension plan is funded but as the value of the plan’s funds decrease (due to the crash in the financial markets) at the same time the number of people eligible for retirement pay increases, won’t that require the city to contribute more towards the pension fund to keep it fully funded?

“Willie Powell, the executive director of the retirement system, needed a couple of tries to get the grim news out: plan assets had dropped $30 million (preliminary) in October, and combined with a $50 million drop in September, the asset value was now just below $300 million – down 33% year to date. I noticed a definite groan coming from the vicinity of Tom Crawford, chief financial officer for the city of Ann Arbor.”

http://annarborchronicle.com/2008/12/02/column-stew-on-this-2/

It seems to me that it’s fairly clear from all this info that 2009 will be painful but not horrendous. We should be focusing on the period 2010-2012 and assuming that there will be a prepackaged bankruptcy of GM and Chrysler and maybe Ford too. Have any city officials made any comments about their thinking for that period?

Regarding the reduction of the city’s pension and retiree health care trusts, why did the city invest so heavily in volatile stock and bond markets? Could the losses been avoided?

“..why did the city invest so heavily in volatile stock and bond markets? Could the losses been avoided?”

Probably not. Like individual investors, the pension funds have to balance the need for short-term security (for current retirees) against the need to grow the funds long-term (for future retirees). While an individual investor can shift to less risky investments as they grow older, the city doesn’t have that luxury since the pool of future retirees expands with each employee who becomes vested in the plan. To meet those long-term obligations, the city’s always going to have some exposure to the inherent risk which comes with investment in that part of the financial market. The risk for taxpayers is that to the degree the pension plans can’t meet the obligations of the retirees, taxpayers are on the hook for making up the difference.

I think the Mayor and City Council should lead by example and vote themselves a 15% pay cut or, in the alternative, voluntarily give 15% back to the City Treasurer.

This claims the current annual salaries for mayor and city council members are $41,200 and $15,450, respectively.

If anything I’d prefer that we spend much more on the people that we’re trusting to pass the (on-the-order-of 100 million dollar?) budget. I think it’s an investment that would save money in the long run.

Bruce, that is a magnificently contrarian call for counterintuitive change.

Let’s move as many public resources as we can towards our elected officials. Then their interests will be more aligned with ours.

Why should city council members get a salary at all?

Mark, who do you anticipate following council’s lead in taking such a self-imposed pay cut? City staff?

Fred, why shouldn’t they get a salary? Clearly, your thinking is outside the norm. Please explain it to us.

Yes, absolutely. It will be extremely difficult for the Mayor and City Council to seek, with any moral standing, to negotiate any type of reduction in pay or in workforce without initiating similar belt-tightening on themselves. To not make any self-sacrifice while expecting staff to do so smacks of hypocrisy. Such leading by example would increase morale among city staff and the citizenry at large.

Do not forget that most City Council members, unlike the majority of city staff, have income from a full-time second job so a 15% reduction on these Council members’ pay is far less of an impact than those who work for the city full-time, as opposed to Council members for whom their seats are merely a part-time second employment. For most city employees, especially unionized ones, I suppose that layoffs of those in municipal departments lacking seniority are probably the only viable way of reducing expenditures in those departments; I have already indicated that incentives for early retirements may be an alternative to other, more painful, remedies to reduce departmental costs.

Steve,

From time immemorial, legislatures have awarded themselves stipends. There are a lot of reasons why this occurs, many of them good.

I have no doubt that after a few meetings, the first legislature of cave men and cave women decided that they ought to get a couple of slices of boar for their trouble.

The amount of the stipend is a needle on a gauge, set at its current value as a compromise towards balancing a variety of goals—making it easy for citizens to serve, etc.

My point is that it’s not an entitlement. in tough times we may have to move the lever back a bit towards 0.

As Mark points out, it’s going to hurt Council’s credibility if they don’t share in the sacrifices.

According to the council members I’ve talked to, being on council is about a 20 hour/week job, so they pay is pretty slim to begin with. And the mayors job is pretty much full time. How does that compare to other city employees? Maybe we should peg the council’s and mayor’s pay to the median salary of employees, with the mayor’s at the median salary and the council’s at 45%.

But seriously, for me the question is of governance. Would changing our compensation affect the quality of our governance? I’m suspect that there’s a sweet spot: too low of compensation and you don’t get enough qualified people to make the commitment to fully engage. Too high of compensation and you get people getting in for the money.

I’d say we’re pretty close to that sweet spot. We seem to have a number of well-qualified candidates running in each race, and people from different backgrounds. So I’m not sure that we’d want to bump up pay, but I’m not sure how much we can cut it.

If the citizens of Ann Arbor want developers and law firms who have business with the city running the city, then by all means continue to pay near poverty level wages to the council and mayor. I would much rather see the city cancel the city hall expansion than cut pay for our elected reps.

I would much rather see the city cancel the city hall expansion, but I am not sure that can be done given the fact the bonds have been issued. Also, don’t forget that many of the City Council members get intangible benefits from serving on Council, such as public visibility resulting in increased clientele for the respective law firms and other businesses they may have an interest in. Several council members have attempted to translate this public visibility as stepping stones into runs for higher office (e.g. Wendy Woods for mayor, Leigh Greden for state representative, Joan Lowenstein and Chris Easthope for judge).

I agree with Chuck W. that we may be pretty near the sweet spot. I am not actually in favor of cutting council salaries, simply pointing out that if circumstances put “everything on the table,” that means everything.

Former State Representative Joe Hune of Hamburg Township, who served as Chairman of the House Insurance Committee and was considered one of the House’s most influential members during his tenure, recently announced his candidacy for State Senate and issued a statement last week reported in the Detroit News that I believe should be heeded to locally:

“We are in a time of unprecedented economic pain and it is absolutely imperative that government lives within its means,just as our citizens are forced to do.”

All elected officials should adhere to this fiscal wisdom imparted by Mr. Hune.

Mr. Hune was at the Michigan Republican State Convention in Lansing this morning meeting with party leaders and promoting his upcoming candidacy for the State Senate.