Bob's Update on the Budget - September 20, 2007

County Administrator Bob Guenzel The proposal for the 2008/2009 budget went to the Board of Commissioners last night. (See the web cast of this presentation at the "Administrator's Report" on last night's agenda). I would say it was initially well-received, with a lot of interest and investment shown. As you know, there’s uncertainty surrounding this budget. The State, still without an answer to their $1 billion-plus deficit, and the unknowns that come with our own ongoing labor negotiations, add to that inconclusiveness.

But even with that backdrop, there are many areas where we can be very certain, that we can count on.

"Bob's Update" is a weekly message to Washtenaw County employees from County Administrator Bob Guenzel. eWashtenaw publishes these columns when they are deemed timely and useful to the wider community. Please contact Administrator Guenzel with your comments.

There’s a lot of information, a lot of your attention needed these days. Open Enrollment will start shortly, our United Way campaign started Tuesday and this Monday is the beginning of the very important Support Services Survey we’re asking you to take. But I would like to ask you to take a few minutes today to take a look at my Message (below) that is included at the beginning of the proposed budget. For an Update, it's very long but it, along with the PowerPoint that I presented to the Board of Commissioners last night, give you a very rich overview of where we’ve been, what we’re facing and where we think we can go.

Thanks for your continuing commitment to excellence – perhaps the most important certainty we have.

Bob

MESSAGE FROM THE ADMINISTRATOR ON THE RECOMMENDED BUDGET FOR 2008/2009

Every two years I have the privilege of working with an outstanding organization and community to bring forth a recommended budget and strategic plan that strive to make the lives of all Washtenaw County citizens better. This year has been especially challenging for me, as it has for so many others in the community, as the public need and demand for services continue to increase as a result of the economic realities of the State of Michigan. I am reminded during these tough times of why I entered this profession in the first place. It is all about making a difference, about being a public servant, about doing the hard work to solve the critical problems that others wish would go away on their own.

Washtenaw County as an organization has faced many formidable fiscal challenges in the past, and we learn so much with each encounter. Take, for example, the near crisis mode for County finances in the mid-90s that led to our creation of the County’s Guiding Principles. Those Principles have helped us through the past decade of fiscal ups and downs but even more importantly, they have allowed this organization to grow stronger, grow together and create the framework for much greater community impact. As a reminder to us all who attempt to live these principles every day, and for those of you who are being introduced to Washtenaw County for the first time, our Guiding Principles include:

1. Ensure long term fiscal stability for the County.

2. Reduce the cost of conducting the County's business.

3. Enhance customer service.

4. Provide the necessary knowledge, skills and resources to County employees to carry out these principles.

5. Ensure adequate provision of mandated services.

6. Focus on the root causes of problems that affect the quality of life of County citizens by aggressively pursuing prevention strategies.

7. Provide leadership on intragovernmental, intergovernmental and intersectoral cooperation and collaboration aimed at improving services to County citizens.

In addition to our Guiding Principles, we pressed further and created the County’s Business Improvement Process to find ways to achieve more for our citizens while reducing the cost of doing business. This process aimed at changing the very culture of our organization to one of continuous improvement - to bring every employee into this effort to provide World Class public service for Washtenaw County citizens.

Even the development of our biennial budget - rather than an annual budget process - was a decision based on our adherence to the Guiding Principles. It became clear that we needed to devote the time necessary for more strategic rather than reactive fiscal policies. Making decisions based on Guiding Principle #1, always staying focused on long-term fiscal stability, has been the backbone to our success. In recent years, the Board of Commissioners has made hard decisions to structurally reduce the budget. The organization lost more than 132 FTE during 2002 – 2005 when we felt the first impact of the State’s budget troubles. It was in fact our long term strategic decisions that resulted in the County’s bond rating being raised twice, along with the doubling of our reserves. All the while, this organization has continued to provide more services, smarter services and in a more customer focused way.

Our Vision

All of our Guiding Principles are important to the success of Washtenaw County government, but I believe the final principle is the future:

Provide leadership on intragovernmental, intergovernmental and intersectoral cooperation and collaboration aimed at improving services to County citizens.

Governments within the State of Michigan cannot continue along the same path as they have in the past. We must change the way government works and rethink how we do business.

It is clear that collaboration is the key to the future. We must come together and collaborate to provide similar services to similar citizens. We must demonstrate to our constituents that we are using their tax dollars in the most efficient manner possible across all government lines, and beyond. This collaboration must reach across sectors as well: Governments working with Governments, Governments working with Non Profits, and Governments working with Private Business. We need to be open to change, to transform our services so that we are providing the best services, the right services, in the most cost effective manner possible. This will mean looking at root causes and focusing on outcomes – and it will mean working together. A World Class Community consists of leaders who put the good of the community first. We must be community leaders.

2008/09 Budget Major Issues

A theme of the 2006/07 budget was the tension between increasing community needs and diminishing resources. That gap has only increased over the past two fiscal years. County revenues are being constrained, primarily due to the declining housing market. Based on the latest indicators, the budget includes a revision of the property tax revenue growth assumptions. In the past, the County frequently realized growth of more than 6% annually. There had been an early assumption that the impact of the housing market decline would be delayed due to the gap between our SEV (State Equalized Value) and taxable value. However, in many instances, both the SEV and taxable value are decreasing, resulting in a projected smaller growth in our total taxable value for the County as a whole.

This recommended budget is based on an assumed 3.5% growth which needs to be monitored very closely over the next few years. The slow housing market is also reducing revenue fee generation for the County Clerk / Register of Deeds Office, as well as in our Building Services and Environmental Health programs. A long-term policy strategy must be determined shortly as to the future of Building Services. I believe strongly that these are valuable services to the community, but I also believe that these mounting pressures offer an opportunity for new intergovernmental collaboration.

The non-profit community is also struggling to maintain much needed services as both their private and public funding has been greatly reduced. This is partially due to the realities of the state budget, the loss of Pfizer as a significant community leader and contributor, and a general reduction in gifts from citizens who find their resources more limited today. The County has depended on these non-profit agencies to provide services which we are not equipped to offer, nor are we the appropriate entity to offer them. In many cases, the non-profits are the first course of action for a citizen in need. Without the non-profit services being fulfilled, their customers will become ours putting even greater demand on county services and often with a higher need and cost.

It should be noted that we see a community coming together more every day with innovative ideas and new programs to more effectively and efficiently meet citizen needs. But all good ideas need funding. We cannot move this community forward in a positive direction without both the ideas and the funding coming together, along with leadership and community support. With this understanding, the 2008/09 recommended budget includes an increase in allocations to outside agencies as outlined in the Budget Preparation, Policy and Issues section of our budget publication. Some examples of these initiatives and agencies include:

Child Abuse Prevention (in collaboration with the Department of Human Services)
Success by Six Child Medicaid Eligibility
SPARK
Eastern County Incubator
Aerotropolis
Community Housing Initiative
North South Commuter Rail
Washtenaw County Literacy Initiative

The focus internally with all of our County departments was equally focused on innovation and root causes. Each of our eight declared Communities of Interest went before the Board of Commissioners to present the desired future for its customer base. These information packed presentations revealed wonderful services already provided, and many more efforts already underway that leverage existing staff time with our valuable partnerships in every sector of the community.

This across-the-board demonstration of collaborative leadership in this organization has allowed departmental budgets to remain relatively flat. For the most part, budget enhancement requests were included in the recommended budget only if they were supported by outside revenue, or clearly indicated a critical investment in the future of the community. The primary suggested modifications to County operations include:

Successful Communities Initiative – Addition of 1.0 FTE
Community Communications Strategy – Addition of 1.0 FTE
Contract Administrator for Outside Agency Allocations – Creation of 1.0 FTE with an offsetting reduction to make it cost neutral
District Court Jail Diversion Efforts – Addition of 2.0 FTE (revenue generating)
Prosecuting Attorney Victim Witness – Addition of 1.0 FTE
Home Hazardous Waste Days – County funding of $40K annually for 2008/09
Expansion of Medical Examiner – One time space renovation of $150

In any budget there are issues that must be managed effectively to stay focused on long-term fiscal stability. Several issues for the County have been on the radar for the past year or so impacting our current budget, and they are projected to continue into the future. As a result, the 2008/09 recommended budget includes adjustments in response to these concerns.

For instance, a national trend is being seen with juvenile crime and residential placements. This is unfortunately true in Washtenaw County, as well, resulting in an increase General Fund allocation to our Child Care Fund Juvenile Center Division, part of the Washtenaw County Trial Court. There is also an increase in costs for statutory obligations including attorney fees and jury fees within our Public Safety & Justice agencies. In our Drain’s Office there is a need to expand County owned equipment to provide the best customer services and adequately equip our employees. And lastly, one of the largest changes in our 2008/09 budget is the implementation of the revised Police Services methodology as approved by the Board of Commissioners in 2006 (resolution 06-0047).

Balancing the Budget

When looking at the 10-year budget projections during the 2006/07 budget development, the County had identified a projected shortfall for the 2008/09 fiscal years of about $3 million. There were several plans identified to bring the budget back into balance:

Realizing the savings from the new Police Services methodology;
Re-evaluating the commitment to the Human Services departments for personnel costs;
Determining if the policy to freeze/waive the Cost Allocation Plan for Human Services and County grants can continue; and
Savings in salary, medical and pension costs through negotiated labor contracts.

Since the 2006/07 budget, the projected deficit increased as we reduced our property tax and other revenue assumptions and added the enhancements and operating budget adjustments described above. All of the budget balancing options previously identified were reviewed and considered during the past year to determine the best approach to the 2008/09 budget. As mentioned above, the recommended budget does include the new Police Services methodology; however, the savings to the County have been revised from a projected $2.4 million to just about $2 million, and all of this savings plus more is being offset by the costs of the Jail Expansion Space Project and Jail Diversion Programs.

Given the realities of the demands of the community, especially as they relate to Human Services, it is not recommended at this time to alter the General Fund contribution to the Non General Fund departments for personnel cost increases or the Cost Allocation Plan. I do believe it is critical that we continue to monitor these contributions and balance the General Fund support to these Non General Fund departments in light of customer service but also fiscal stability of the organization as a whole.

The final strategy was based on the timing of our labor negotiations. Our current contracts expire on December 31, 2007. As the labor process is underway, I cannot discuss specific assumptions incorporated into the budget. Needless to say, the 2008/09 recommended budget was balanced with projected personnel savings. These savings are spread to all County funds with personnel, and impacts the General Fund through reduced personnel expenditures as well as reduced appropriations. The approach taken in the recommended budget is to use these projected labor savings in the following manner:

1. Balancing the General Fund

2. Moving towards full funding of GASB 45 for Retiree Medical due to a change in reporting requirements

3. Increasing our reserves

Balancing the budget is the first and foremost priority. With the adoption of GASB 45, the County’s liability for retiree health care grew dramatically. Although not a requirement at this time, it is recommended that we begin to fund this liability so it doesn’t become a crisis in the future. And while the county has been very focused on long-term fiscal stability, the past couple of years resulted in the use of Non General Fund reserves to help balance our budgets.

The organization realized so much stress during the 2002-2005 reductions that we needed to allow time to regroup and stabilize. It is recommended that we begin to rebuild these reserves, with a consistent policy of 8% of total budget, net of indirect costs. This level is reasonable and appropriate given the significant variables on the horizon. It will take time to get to this level, just as it did to build our General Fund reserves, but it is a needed commitment for our future.

At the same time, I am recommending that during 2008 we go back to our organization and identify further enhancements that will result in cost savings. The 2009 budget was also balanced with an assumed reduction of personnel costs of $1.38 million. This organization thrives on continuous improvement. It is through our creative strategic thinking, our thinking outside of the box, and our discussions with all of our partners that this will become possible. We need to identify and maximize every opportunity to change the way we operate that will in turn set the course for the future and develop a balanced budget for years to come.

Supporting Our Employees

As I’ve communicated many times before, I believe our employees are our number one asset. The foundation of our balanced scorecard includes equipping employees with all they need to reach their fullest potential. The county uses an interest based bargaining approach to our labor negotiations as a means to understand and fulfill employee needs when possible. Obviously, to realize the cost savings needed to balance the budget, employee compensation and benefits will change. However, the commitment to our employees, to their professional development, to providing them a safe and appropriate work space, to equipping them with technology that allows them to do their job efficiently and effectively must be retained. I am proud that this organization has come together to identify ways of enhancing the support to our employees through existing capital resources.

The Board of Commissioners has made a significant commitment over the past several years to maintain and grow our infrastructure, and it is that past and continued commitment that is allowing us to persevere in these times.

Having said that, 2008/09 brings the opportunity to review and make decisions on our remaining critical space needs. The Board of Commissioners approved in November 2006 an updated 20 year space plan. They subsequently approved bonds and the use of our Capital Reserves and General Fund savings from the Police Services methodology change to take the first expansion efforts in our chronically overcrowded Jail. This action was absolutely needed for the Public Safety & Justice system as a whole. This was phase 1 of the 20 year space plan, with project scopes and funding to be identified for our 14A-1 District Court, our downtown Ann Arbor Courthouse and our Juvenile Center. During 2008/09 we must resolve all of the space needs of our Public Safety & Justice facilities and identify funding to do so.

Long-Term Projections

We complete 10-year budget projections in each budget cycle, and often look at them more frequently than that to ensure we understand the full impact of decisions made. This time these projections are proving to be more challenging than ever before. The County is faced with significant variables in the future that are difficult to predict. In most instances, our budgeting practices use an assumption of past practice being the best indication of the future. For matters such as property taxes and state revenue, it is more intuition than data driving the assumptions. For the 2008/09 budget, we have completed two sets of long-term projections looking at the six fiscal years following the 2008/09 budget years. Both sets of projections are identical except for one variance – State Revenue Sharing.

The County is assuming as should all local governments that the State will honor its commitment to reinstate revenue sharing once our individual “Revenue Sharing Reserve Fund” balances have been depleted. For Washtenaw County, this is scheduled for 2013. This assumes, however, that no other uses of these funds materialize. The State has discussed the possibility of discontinuing their allocation of Substance Abuse funding and instead allowing counties to use their Revenue Sharing Reserve Fund to offset this revenue loss. If that were to happen, the County would deplete its reserve in fiscal year 2012.

The first set of projections assumes Revenue Sharing returns as a direct revenue from the State beginning in 2013. These also assume the projected 3.5% property tax growth assumption continues for 2008 – 2010 fiscal years, followed by growth of an estimated 5.5% annually starting in 2011. Our property tax budget and assumptions for the future must be closely monitored. If property tax collections do not appear to increase over the next few years, or if our assumption of 3.5% for 2008 – 2010 do not materialize, the organization will need to take more significant actions to reduce operating costs to bring about a long-term sustainable budget on a reduced revenue level.

With these assumptions, you can see that the county is still projecting a deficit beginning in 2010. This includes my commitment to the Board of Commissioners to identify over $1.3 million in savings during 2008 for the 2009 budget. The strategy to balance future budgets needs to include:

Re-evaluating the policy and fiscal commitment to the Human Services departments for personnel costs;
Re-evaluating the policy to freeze/waive the Cost Allocation Plan for some departments/programs; and
Identification of regional, intergovernmental and intersectoral initiatives that will reduce the cost of doing business.

It would not be prudent, especially given the realities of the State budget, to simply assume that the State will begin to provide the county $7 million in funding once our reserve fund has been depleted. It is recommended that we review this over the next year to understand the possibilities and impact on county services this would have. In addition, it is critical that all efforts be made to keep this in front of the State legislature and executive bodies so they are fully aware of the further devastation to the local communities and its citizens if such a decision were to be made. See the long-term projections assuming the end of Revenue Sharing.

Summary

The organization has worked very hard over the past year to bring forth this guide for 2008, 2009 and beyond. I appreciate all of their efforts as community leaders and look forward to working with them to implement this plan. I’d also like to thank our union leadership for continued partnership and staying true to the values of Interest Based Bargaining. It is efforts like these that set us apart from so many others. I have no doubt that this organization will continue to amaze me with its innovation and success. It will be in collaboration with our partners that we make the critical decisions to truly make Washtenaw County a World Class Community, all within our financial constraints.

I want to end this message the same way as I did in 2006/07 as I think we must always keep this in front of us, especially in these challenging economic times.

Public service is never easy; however, it is a noble and rewarding endeavor particularly when one witnesses the result: improved quality of life for all our citizens.