Arbor Update

Ann Arbor Area Community News

Third Greden Budget Letter

21. March 2005

March 2003

Dear 3rd Ward Resident-

As you know, the City Council is preparing the 2005-2006 City budget. As part of this process, I am distributing periodic e-mails to residents regarding the budget process. In the first message, I provided background regarding the City budget. In the second message, I outlined the steps the City has taken in recent years to cut spending. In this message, I will describe why the City faces a structural budget deficit despite our cost-cutting efforts.

The City faces a $3.2 million general fund budget deficit for fiscal year 2006, which begins July 1, 2005. Although the City’s property tax revenues are growing by 3-5% each year, property taxes constitute only a portion of the City’s total revenue stream. Other sources of revenue are not growing as fast and, in some cases, are declining. For example, grants to the City from the State and federal government have been slashed by millions of dollars. Accordingly, total general fund revenues are rising by only 2-3% each year. Expenses, on the other hand, are rising faster than revenues (by approximately 5% per year). This structural budget deficit is expected to continue into the foreseeable future.


The “Headlee amendment” to the State Constitution limits property tax growth for local governments in Michigan. Under the Headlee amendment, increases in a city’s property tax revenue stream that are generated by increased property values and new real estate development must be partially offset by mandatory reductions in the city’s property tax millage rate. This process is known as a “Headlee rollback.” Many communities – including Royal Oak, Grand Rapids, and Plymouth – have asked or may ask voters to approve a “Headlee override,” which allows a city to increase its property tax rate to offset the Headlee rollbacks.

Proposal A, which was passed by Michigan voters in the 1990s, also limits property tax growth for Michigan municipalities. Proposal A, which applies to a taxpayer’s primary residence, limits annual increases in the property’s taxable value to the rate of inflation or 5%, whichever is less. Together, the Headlee amendment and Proposal A have saved Michigan taxpayers millions of dollars in property tax payments, but they also severely limited revenue streams for local governments in Michigan – including Ann Arbor.

Under Headlee and Proposal A, property tax revenues in Ann Arbor are growing by 3-5% per year. Other sources of revenue are growing at a slower rate or, in some cases, declining. Accordingly, total general fund revenues in Ann Arbor are projected to grow by just 2-3% per year. The following are examples of other sources of revenue that are growing slowly or declining:

  • State revenue sharing: Counties, cities, and townships in Michigan receive “revenue sharing” from the State based on population. The State faces a structural budget deficit, and it has responded by slashing revenue sharing to local governments by $429 million over the last three years. Here in Ann Arbor, State revenue sharing has been cut by several million dollars.
  • Federal grants: The federal government has cut millions of dollars in grants to cities, including Ann Arbor. For example, in the mid-1990s, the City received over $1 million/year under the COPS program to fund police officer positions. Today, the City receives less than $100,000. The federal government also slashed funding for programs supporting the purchase of bulletproof vests, domestic violence prevention, and juvenile violence prevention. For fiscal year 2006, the Bush administration proposes massive cuts to the U.S. Department of Housing & Urban Development (HUD) that could cost Ann Arbor millions of dollars for human service and housing programs.
  • Fire protection grants: Under State law, cities that house State-owned buildings – such as universities and prisons – receive an annual grant from the State to cover a portion of the city’s fire- prevention expenses. The fire protection grant program is designed to ensure that cities with State-owned facilities maintain adequate fire departments to protect the State-owned buildings. Under the current State formula, Ann Arbor is entitled to approximately $1.6 million per year in fire protection funds. Fire protection grants have fallen in recent years, and this year, Ann Arbor is expected to receive approximately $400,000 – or just 25% of our share – in fire protection grants.


As outlined above, the City’s general fund revenues are projected to rise by approximately 2-3% per year. Expenses, however, are expected to rise by twice that amount. Expenses are expected to rise despite the millions of dollars in cuts the City has enacted in the last three years. The following examples illustrate the cause of the City’s rising expenses:

  • Rising health insurance costs: Health care expenses for employers nationwide have risen 12-18% per year during the last several years. Ann Arbor has experienced similar increases. This year, the City transferred all active and retired employees to a Preferred Provider Organization (PPO). This transfer is expected to slow the increase in health care expenses, but expenses are still expected to rise faster than the rate of inflation.
  • Rising retiree health insurance costs: For decades, the City’s labor contracts have promised health coverage to retired employees. Over the next several years, the City will incur several million dollars in un-funded liabilities because of the retiree health care program.
  • Rising energy costs: Most Michigan households have experienced skyrocketing energy costs (e.g., heat and fuel) in recent years. Ann Arbor is not immune to this problem. The City’s energy cost saving programs helped limit the growth in these expenses, but they have nonetheless exceeded the rate of inflation.
  • Un-funded capital expenses: For years, the City failed to adequately invest in its technology systems. Today, we must play catch-up by spending millions of dollars to upgrade City technology systems. These investments are expensive, although they have already paid off by making City operations more efficient.

Problems in other cities

Ann Arbor is not the only city in Michigan facing a structural budget deficit. The Michigan Municipal League has described the current statewide budget crisis as the greatest fiscal crisis facing local governments since the Great Depression. Accordingly, it is naïve to believe that Ann Arbor could or should be immune to this crisis. Fortunately, our 4% projected general fund deficit is considerably less than the deficits facing other cities. Consider the following examples:

  • Grand Rapids projects $100 million in deficits over the next five years, which equals more than 10% of their general fund budget.
  • Mt. Clemens projects a $1.5 million deficit, which equals more than 10% of its $12.8 million general fund budget.
  • Plymouth is projecting budget deficits for the foreseeable future, despite cutting police and leaf collection services. Plymouth City Manager Paul Sincock recently told the Detroit News: “The Michigan model [for financing local governments] is broke. Its plan is for all governments to go broke, whether it’s this year, or next, or five years from now. Every community will go broke.”
  • Ypsilanti recently closed its entire recreation department.
  • In response to a structural budget deficit, Warren laid off fire fighters and scaled back community services.

Ann Arbor avoided these draconian cuts – and we do not face the same dire budget projections for next year – because of the cost-cutting efforts we implemented in recent years. (See Budget Message #2, February 2005).


I hope you find this information useful. I plan to distribute an additional message in the coming weeks explaining the various proposals to raise revenues and cut spending. In the meantime, please e-mail me at if you have questions or would like to be removed from this e-mail list.

– Leigh Greden, City Council (3rd Ward)