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The Politics of Surpluses: Fudging the Numbers

In the 2010-2011 proposed budget, the General Fund is projected to bring in $76.3 million in taxes and state profit sharing, and spend $77.9 million dollars, with a $1.5 million dollar deficit (provided all of the City Administrator’s proposed cuts are adopted). Over the past three years, the city’s General Fund has been pushed, pulled and manipulated inexorably toward structural deficit. The 2009 budget book has a message from the City Administrator that includes this: “For the foreseeable future we will continue to experience 1-3% revenue shortfalls with each annual budget.”

The result, of course, has been the decimation of our city’s human capital, and the ongoing deception that the loss of 239 city staff, including almost half of our firefighters and over 100 employees (civilian and sworn officers in our police department) has saved taxpayers money. In campaign literature we’ve read time and again that this “streamlining” has saved taxpayers $10 million dollars per year. It’s a cruel deception, not only to those who were dismissed from their jobs for no reason other than sheer managerial incompetence, but also to taxpayers who trusted that they were being told the truth.

In a February 9, 2010 presentation before Council, the City Administrator claimed that the “streamlining” of city government had saved taxpayers $25 million dollars since 2002. Below you’ll find the nifty chart he used to illustrate this fairytale.

Layoffs

Why is it a fairytale? Because the city’s income tax returns don’t corroborate Mr. Fraser’s claims of saving $25 million dollars on employee wages and benefits since 2002. 

Here’s a graph with information from Ann Arbor’s income tax returns filed between 2000 and 2009:

Fiscal Year Number of FTE and Contract Employees Claimed Wages Claimed
2000 1,230 $49.6 million dollars
2001 # of employees not recorded on tax return $58.7 million dollars
2002 1,149 $55.9 million dollars
2003 1,102 $54.7 million dollars
2004 1,079 $54.2 million dollars
2005 1,128 $57.5 million dollars
2006 1,104 $60.3 million dollars
2007 1,069 $57.2 million dollars
2008 1,018 $55.3 million dollars
2009 1,029 $54.7 million dollars

You should, of course, have an immediate question: Where’s the purported $25 million dollar “savings” Mr. Fraser told Council has been realized by the “streamlining” of those 239 employees? It cost exactly the same amount in 2009 to compensate our city employees as it did in 2003, when Mr. Fraser was hired. The next question is why the total number of employees declared to the IRS doesn’t match information presented to the public by Mayor Hieftje and Mr. Fraser. In December of 2009, Mr. Fraser, in a presentation to Council, told the group that as of December 2009 Ann Arbor employes 756 people.

One of most frequent questions I get from voters is where our I’ll find the money to fund core services, such as police and fire. The short answer is that the money is already there. Finding it is not a difficult task. One simply needs the financial skills to know where to look. Ann Arbor also needs leaders who will no longer allow city staff to fudge numbers and data to support their requests for funding and their claims of competence. Something else has been happening, something even more disturbing than the false claims of savings and the patently absurd claim that our services have not been systematically reduced. 

First, we must keep in mind that Mr. Fraser has inaccurately projected revenue shortfalls in our General Fund since 2003, when he began his job as City Administrator. There have actually been budget surpluses in the General Fund since 2003, with the exception of 2009. This is significant, because those projected deficits have resulted in convenient opportunities for certain City Council members to “rescue” items budgeted to be “cut” thanks to the projected pretend shorfalls. This happened for several years to the Human Services funding. It would be eliminated in private meetings by the Council’s Budget Committee, then “saved” by Council members in public. In this election season, look for Council members who claim to have “rescued” the Burns Park Senior Center from the chopping block, as well as Mack Pool. Look for a Council member to “rescue” Allmendinger Park residents from the outrage of football Saturday parking—a “revenue source” proposed in the current budget to raise under $40,000. 

These phantom budget shortfalls have been used to pad political résumés of those on the very Committee (the Council Budget Committee) that oversees the city’s budget. This cycle of projecting General Fund deficits, targeting high profile programs for elimination, then Council members stepping in and “saving” the high profile programs is nothing short of remarkable in its political ingenuity. The result has been budgeting and governance by three ring circus. P.T. Barnum would have loved the showmanship.

Meanwhile, because our elected officials were not prepared to dig through the city’s audited financial statements, or well-versed enough in finance to understand the statements, over the past half a dozen years, the citizens of Ann Arbor have been bilked out of over $100 million dollars. How? The oldest game in the book: over-charging for services. 

Let’s start with water. Water flows to the lowest point, but in Ann Arbor the money poured into the coffers of the Republic of Water, Sewer & Stormwater Management runs right into a consolidated savings account. In that Utility Fund there is a $59.2 million dollar surplus, according to the most recent audited financial statement posted to the city’s web site. In essence, the City of Ann Arbor has over-charged residents $9.9 million dollars per year over the past six years for water and sewer in order to accumulate the surplus of funds—unrestricted funds—funds that are not earmarked for any purpose whatsoever. Sue McCormick, the city’s public services area administrator, has been allowed to amass a $59.2 million stash of our tax dollars. 

Yet, on April 13, 2010, Sue McCormick went to Council and announced that Ann Arbor taxpayers need to pay more for water and sewer. Why? Because Ann Arbor has, according to McCormick, the “second lowest rates” in the state.

In an April 13, 2010 AnnArbor.com post reporter Ryan Stanton writes:

“Fraser’s proposed budget for 2010-11 includes rate increases of 3.88 percent for water, 3 percent for wastewater and 2 percent for stormwater. Sue McCormick, the city’s public services area administrator, said the rate increases are needed to maintain adequate revenues and pay for capital improvements within the system. McCormick said some capital improvements already are in progress, and new projects are coming on line that also are driving the increased rates….McCormick handed out a report Monday night showing Ann Arbor’s water and sewer rates were the second lowest when compared to dozens of other communities around the state.”

It was the same kind of ridiculous rationale the City Administrator gave when “revisiting” the parking fines charged to residents. It had been a long five years since the schedule has been examined and Ann Arbor folks were paying lower fines than, say, residents of Portland and Seattle. We darn well should be paying fines lower than those paid by those residents, and it’s about time that we adopted the governmental mantra that if ain’t broke, don’t fix it, and if it is broke, spend the money and fix it as quickly as possible.

Unfortunately, the surplus in the Utility Fund is just the beginning of a long-time unchecked scheme to create phantom deficits, over-charge residents for services, build up surpluses, then spend the surpluses to feed the bureaucracy—as opposed to supporting and expanding existing services.

Here is a list of the various departmental fund surpluses from the city’s most recent audited financial statement:

Water — $9.3 million

Sewer — $44.7 million

Street Repair Millage Fund Balance — $19.4 million

Stormsewer — $5.2 million

Solid Waste — $8.9 million

Fleet Surplus — $7.5 million

IT — $4 million

Project Management — $1.5 million

Central Stores — $1.6 million

Total unrestricted fund surpluses: $102,100,000

That surplus $102,000,000 belongs to the taxpayers. So what can be done? 

Our city’s budget needs to be examined closely, and Council must implement policies that keep departments from building up surpluses greater than, say, 10 percent of the department’s annual allocation. The surpluses above are the result of inflated charges the city levies on residents, as well as on its own units. The fleet department charges other departments $160 per hour for labor, and $300 per day to use a city-owned sedan. As a result, the fleet fund has a $7.5 million dollar surplus. Meanwhile, the Fire Department is sitting on fire fighting equipment and trucks that are outdated and need to be replaced now. The Street Repair Millage Fund balance is $19.4 million dollars, and the millage raises almost $9 million additional dollars each year. Meanwhile, Ann Arbor has the third worst roads in all of Michigan, and thanks to delays in repairing our roads will have to pay seven times more money to fix them than if the repairs had been made in a timely manner. 

Here’s a news flash that shouldn’t come as a surpise: No city with $102,000,000 million in fund surpluses needs to cut police, fire, privatize its golf courses, stop tending its parks, or start charging residents $3 to drop off recycling. Between 2006-2009, Ann Arbor taxpayers paid $1 billion dollars in taxes, fees and debt to our government. Since 2000, Ann Arbor taxpayers have, collectively, funded our city government to the tune of $2.5 billion dollars in taxes, fees and debt. 

The current administration has collaborated with city staff to spend every single dime of that $2.5 billion dollars—and then some. The current proposed budget is a sham and a shame. It represents neither the priorities of the taxpayers, nor an honest representation of our city’s true financial position. Council should direct the City Administrator to return to the General Fund all of the money from the total $102,000,000 million in fund surpluses, where such charge-backs are permissible under the auspices of the Charter, then re-fashion a budget that not only funds existing core services, but deflates the municipal service charge on which the budget is based by at least 20 percent in every department that currently has an accumulated fund surplus. 

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13 Comments for “The Politics of Surpluses: Fudging the Numbers”

  1. Carsten Hohnke is well-connected and politically savvy? Since when? If he was savvy he might have picked up on some of the stuff in this blog posting. His big political connection to Hieftje is gonna drag Carsten right on down to Davy Jones locker.

  2. Maybe the city should not be using water funds to pay for police but that’s exactly what they are doing. To help balance the FY10 general fund budget, the city decided to charge the water fund for police services. My recollection is that the amount is about $800,000 per year. The city tried a similar tactic several years earlier and tried to charge the parks millage fund for police services. The parks supporters were better organized than water users and fought off the raid on the parks millage.

    The cash and surpluses in the fleet, IT and other internal service funds are more than just accounting entries. Page 113 of the FY09 audit has the balance sheets of all the internal service funds. At 6/30/09 IT had cash and investments of $4,636,120 and fleet had $7,901,020 in cash and investments.

    The balance sheets for the utility funds are on pages 30 and 31. My page numbers are from the hard copy. The water fund had $23,793,663 in cash and investments. The sanitary sewer fund had 75,568,316. Both water and sewer are in the middle of major capital upgrades to the treatment plants so much of that cash will get used up by those projects. However, my opinion from doing some trend analysis of these funds is that they will still have substantial cash balances that could be used to give utility customers some relief from rate increases during this recession.

  3. Lou Glorie, what are planning to do to beat the well-connected and politically savvy Carsten Hohnke this August?

    Should voters take you as a serious candidate?

  4. Is there anyone in that building on the corner of Fifth and Huron who is minding the store? I just heard from a neighbor that a candidate has emerged to challenge Christopher Taylor. This is good news for all of us. No one on council should run unopposed.

  5. I love this blog. The variety of opinions and information presented really make for some pretty good reading. This entry didn’t come as a great surprise. I believe it was Mayor Bloomberg in New York who discovered immense cash stashes/hoards in several departments in his city. Why shouldn’t the same thing be going on in Ann Arbor? I’m confident that Pat is prepared to take the heat this discovery is going to generate. The Mayor will have his toadies out all over town claiming that the facts are in error. The problem is that he has spent so long contradicting himself that his credibility has been damaged, rightly so, but sadly.

  6. Long have I wondered why the city was neglecting our streets in spite of the extra taxes we agreed to levy on ourselves to maintain our streets. I also wondered why our streets were an unholy, holey mess when there was a $22 million balance (now $19 million) in the street fund. Even curiousser.

    Then at one of the FITS Fests, Eli Cooper let the cat out of the bag. Part of the FITS grand project is the Haussmannization of Fuller Rd. Our barons of planning foresee a grand boulevard leading from US 23 to, the not quite Arc de Triompheian, BIG GARAGE. That’s what passes for planning today in Ann Arbor.

  7. #6 I’m not surprised you’re a bit out of your depth. The city doesn’t make it easy to understand the accounting. Let someone from inside City Hall tell you that the surpluses are not just accounting entries, they’re reflective of cash on hand (investments/savings). There is absolutely a Fleet Fund into which various departments pay with the idea being when fleet purchases for those departments are made the costs will be deducted from the Fund. The fire dept, as Lesko points out, has been paying in, but has not been afforded the opportunity to purchase equipment. I can tell you that this surplus list is absolutely correct, and that it has been business as usual to budget more than some departments spend in order to build up surpluses. This talk of fund surpluses is going to make a lot of people very uncomfortable, and it should. There are millions that could/should be returned to taxpayers and the General Fund. As for the Water/Sewer Fund it’s an excellent question as to why Sue M. is not paying out of her savings if only partially for improvements. The borrowing is chronic. The spending is out of control. Lesko is 100 percent on the right track. Keep it up!

  8. According to the Statement of Net Assets in the 2009 City financial statement, there is a total of $80,100,000 in “Unrestricted” Net Assets. However, “unrestricted net assets” are typically subject to unrestricted spending only for the purpose of the fund in which they are located. Of the $80,100,000, $69,900,000 is located in funds such as Water, Sewer, Storm Water and Solid Waste. The City can not go out and spend money from the Water fund to pay Police salaries and benefits. If that were to occur, our water bills would be paying for much more than water.

    Subtracting out the $69,900,000 leaves us with $10,200,000. That is the true surplus funds available to the City. Of course, we are free to spend the $10,200,000 on current expenses but prudent management requires maintaining some sort of surplus to deal with unanticipated situations. Sort of like keeping some money in the bank rather than spend every dollar one earns.

    All these surpluses in “Internal Service Funds” such as the “Fleet Fund” are just an accounting entry. There is no special stash of money sitting in a bank account for the City’s fleet. Any money supposedly in these “Internal Service Funds” are all part of the larger City financial structure. And as the accountants reported, the true unrestricted “surplus” is $10,200,000.

    This comment is not intended to defend the current City adminstration or their spending priorities. However, the citizens of Ann Arbor and I should not be misled by a barrage of questionable statistics.

  9. Wow. Incredible. I can’t wait for you to debate Hieftje.

  10. The purpose, as I understand it, in squirreling away such huge sums of money is to 1) have cash on hand to pay the down payments associated with capital improvements; 2) have cash on had to improve the city’s bond rating; 3) have enough positive cash flow slack in the budget to make the bond payments. If you have a town run by developers, for developers this is what you would want, huge surpluses that can be used to underwrite development projects.

    I get angry every time I drive by the new city hall annex; it does not even fit with the older part of the building. The new PD courts building looks like it is ad hoc and if we are seeing cuts in basic city services so we can have more projects like this one, I get even more angry!

    If citizens want capital improvement, put a millage increase before the voters to pay for it. If the millage fails, a big mistake is avoided. If it passes, the citizens get new digs to enjoy.

  11. So, our city is crying poor and holding $102,000,000 of taxpayer money? That’s 1.5 times the current total GF balance. One has to wonder why, then, the sewer and water improvements are not paid out of the cash on hand to the extent that is prudent and less debt taken on in these unsure times. I’m not sure I’d want the GF amounts of $102,000,000 back, because it represents only a few thousand dollars per household, but I absolutely agree with your conclusion that the budget assumptions need to be re-evaluated and changes made so that such surpluses are not built up to such an extraordinary degree in future budget cycles.

  12. Great post as usual!

  13. [...] This post was mentioned on Twitter by A2 Politico. A2 Politico said: New Blog Post: The Politics of Surpluses: Fudging the Numbers http://www.a2politico.com/?p=3442 [...]

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