Alternative Solutions to the Troy Budget Crisis

May 6,2010

Clinton Meyer Barry Hyland

3600 Old Creek 1753 Brentwood

Troy 48084 Troy 48098

Description of the Problem

Per the summary appearing on the city's website (http://www.troymi.gov/Managers/Finance.asp), Troy's general operating budget for the fiscal year ending June 30, 2010 is $62,049,170. As a result of contractually-obligated pay raises for many of the city's police officers, and the need for increased pension contributions for other employees, the cost of duplicating levels of service and personnel currently in place would increase significantly during each of the next five years. As presented in the financial summary section of the Option 1 Budget Reduction Proposal (Fall 2009), and as summarized again in the most recent proposed 2010-11 operating budget, and as confirmed in an e-mail by John Lamerato, Assistant City Manager, on April 15, 2010, continued services at fiscal 2009-10 levels would result in the following five year cost to taxpayers:

2010-11 2011-12 2012-13 2013-14 2014-15

$64,300,000 $66,500,000 $68,500,000 $70,500,000 $72,500,000

Five Year "Current Services" Expenditures

$342,300,000

In the meantime, it is now anticipated that revenues will decline in the same five year period to the following levels:

2010-11 $57,800,000

2011-12 $52,200,000

2012-13 $50,100,000

2013-14 $50,100,000

2014-15 $50,100,000

Five Year Anticipated Revenues $260,300,000

Five Year "Current Services" Funding Shortfall $82,000,000

Without other changes, then, the combination of a declining revenue stream and increasing costs will leave the city with an $82,000,000 funding shortfall over the coming five year period. [The accuracy of a similar, preliminary version of this analysis was confirmed in a meeting with John Lamerato on April 12, 2010.]

An attempt was made to cure this sizeable deficit condition by increasing city tax rates via a special millage election in February, 2010. Voters turned down this rate increase.

It is obvious that something very significant needs to be adjusted with respect to city expenditures.

Expenditure Reduction Approaches

Regarding the size and timing of required spending cuts, the following three general approaches would each alleviate the $82,000,000 shortfall.

General Approaches to Size and Timing

I: Cut departmental budgets by a total of $22.4 million, with such cuts made on an as-needed basis over the five years as follows: $6.5 million in Year One, $7.8 million in Year Two, $4.1 million in Year Three, $2 million in Year Four, and $2 million in Year Five. Cuts made in Year One would of course have an impact on the net revenue stream for each of the five years, while the cuts delayed into subsequent years would impact the net revenue stream in a declining manner.

II: Cut departmental budgets by $16,400,000 in Year One; make no further cuts in Years 2-5 III: Cut departmental budgets by $82,000,000 in Year Five; make no other cuts in Years 1-4

Comments: For legal, financial, and arithmetical reasons Approach III is unworkable. It has therefore been removed from consideration. Approaches I and II are both quite viable, however, and would each balance the five year budget via a reduction in five year expenditures of $82 million. Of these two remaining choices, however, Approach II would require considerably less pain for employees and residents over the full five year period, and would theoretically allow all departments to survive in some fashion. Approach I, on the other hand, does not confront the budget problem in the most direct and efficient manner possible, and ultimately requires more reductions in all areas of city operation than is necessary. Approach II would therefore appear to be the most prudent medium-term approach for the city to take.

General Approaches to Targets

Decisions must also be made with regard to the targets of spending cuts. The following two general approaches are both financially feasible (although not savory).

IV: In this approach, the Police Department (the city's largest area of operation, with 41% of the current budget) would ostensibly face expenditure reductions of $5.3 million over the next five years. But since the department is also scheduled for contractual pay increases of approximately $1.78 million in the coming year (and, apparently, each year thereafter), its estimated budget five years out will not only not decrease in this time of crisis, but will apparently grow to the rather stunning figure of approximately $28.8 million. This would amount to 57% of the estimated 2014-15 city operating budget of $50.1 million.

On the other hand, approach IV takes a very tough stance with most other departments, especially including the Library and Museum (together with less than 7% of the current budget). In fact, this approach takes such a tough stance with the Library and Museum that funding is completely removed within one year, causing the closure of both facilities.

V: In an alternative approach, the city would treat all departments with proportionality and respect.

Specifically, the city could reduce the current budgets of the Police Department, Library, Museum, and most other areas of city operations by a fixed percent, one that is applied in a more-or-Iess identical fashion to each of the affected areas. Although such an approach would theoretically not

undo the scheduled pay increases of the Police Department, and would therefore still leave that department with an increasing share of the new city budget (49% in five years rather than the current 41%), the Library and Museum, although less robust than in previous years (with under 6% of the smaller budget), would still be able to survive on a full-time basis.

Comments: Approach V would appear to be the more far-sighted and well-rounded one for a city that wishes to place as much value on its most gentle and civilizing qualities as it does on its ability to exert the force of law. Best of all, Approach V would still leave Troy with a large and eminently capable police force funded by approximately 49% of city revenues.

Recent Actions of City Leadership

1. A considerable amount of the funding earmarked for road construction in fiscal years 2006-09 was not used for that purpose, and was instead diverted to keep the General Fund Balance at more-or-less unchanged levels. This process almost entirely masked the fact that the city was running serious deficits during this entire time (specifically: deficits of $7.1 million in 2009, $6.6 million in 2008, $2.8 million in 2007, $3.4 million in 2006). Net "transfers in" from unspent areas of the budget totaled $17.5 during the four years listed, and resulted in a net decline in the General Fund Balance of just $2.5 million for the period 2006-09 rather than a more accurate and realistically presented decline of $19.9 million. [The General Fund Balance dropped from $23.8 million in July of 2005 to $21.3 million in July of 2009.]

2. In 2008, during this period of budget deficits, the Police Department was awarded a contract guaranteeing annual pay raises in upcoming fiscal 2010-11 .and 2011-12. City leaders have also budgeted additional raises of an apparently similar size for each year through fiscal 2014-15. These pay raises, along with other unspecified increases built in to the city's ostensible five year "expenditure reduction" plan, constitute approximately $32 million of the coming $82 million budget shortfall.

3. Even more surprisingly, these increases were hidden within the summary portion of a page titled "Option 1 Savings" appearing in the October, 2009 report titled the "City of Troy Six-Year Organizational Restructuring Plan" (http://www.troymLgov/PresentationOn6YearOrgRestructPlan.pdf). The Option 1 Savings page leaves the reader with the entirely incorrect impression that the Police Department is in line for net reductions in departmental expenditures of $5.3 million over the next five years. The correct interpretation appears to be that the police will be experiencing a net increase in expenditures during this time of crisis and layoffs.

4. In the months leading up to the failed millage election in February, city leaders not only did not educate voters about the city's recent pattern of deficits, and the pay raises awarded to the police department in time of budget deficits, but inexplicably chose to describe the future five year budget shortfall as only $22 million rather than the much more accurate and stunning figure of $82 million (and this latter figure does not include remedial funding needed to restore the roads). When struggling voters saw a stated deficit in the rather modest size $22 million - in a five year operating budget totaling approximately $300 million - they somewhat understandably declined to support any sort of tax increase and sent a message to the Council to simply tighten its belt a half-notch instead.

5. At the same time that most voters were unknowingly confused regarding the size of past and future deficits, city leaders decided that a very tough approach was called for in the event that the millage vote should fail. Previously described budget Approaches I and IV (the least efficient options in their

respective categories) were combined into something called Budget Option 1 (described in detail later in this report). This severe solution to the revenue shortfall was approved by the Council and publicized as the official method of dealing with the looming budget situation in the event that voters did not approve the millage increase.

6. Another budget-balancing option, known as Option 2, was rejected by the Council. This option, among other things, would have allowed the Library and other areas to survive on a part-time basis.

7. Other budget-balancing options, not presented to the Council for consideration by the City Manager (identified as Options 3 and 3A, and fully described later in this report), combine what would appear to be the best approaches from the previously listed decision categories. Both of these options would have saved a full-time library and museum and, additionally, Option 3A would have caused only slightly more "five year pain" to the Police Department than the Council's own Option 1. And this "pain" would seemingly be more than offset by the contractually-obligated future pay raises for the police department! To have not even considered an option similar to 3 or 3A would appear to have been a misstep by city leadership.

8. Even those few voters who understood the true size of the city's fiscal problem undoubtedly felt that the so-called "quality of life" cuts in Option 1 were an unnecessarily aggressive approach to budgetbalancing, and found themselves with an additional reason to reject the millage increase.

9. After the millage went down to defeat, the Mayor inexplicably described the election outcome as a statement by voters that they wanted to maintain their strong commitment to public safety. Many citizens scratched their head at this unusual attempt to spin the result in a manner that seemed to paper over and/or ignore so much of what had come before.

10. As of this date the Council is within a few days of finalizing its plans to institute most of the Option 1 cuts beginning July 1.

A Last Hour Plea for Calm and Open-Minded Deliberation by the City Council

Although time is running short, it is not too late for the Council to reconsider decisions that appear to have been made in haste. The City of Troy has historically existed - happily and successfully - with budgets of the size anticipated over the next five years ($58 to $50 million), while managing to have a full-time library, an effective police force, and reasonable roads - all at the same time.

Citizens of a like mind with the authors of this report respectfully request that the City Council start over with an open mind and a clean piece of paper when making decisions that can so negatively impact most of our citizens - and all of the youngest, most thoughtful, and most gentle members of the community - for many years to come. Thank you for your consideration in this matter.

Full numerical underpinnings for the five year projected budget deficit and the various choices facing the city have been presented in the following pages.

Specifics of the

Five Year Revenue Shortfall

"No Change in Services" 5-Year Budget Summary

Scenario: Expenditures frozen at 2009-10 levels (where possible, but large increases in some areas); cuts as needed to balance annual budgets

2010/11

2011/12

2012/13

2013/14

2014/15

Five Year Totals

Anticipated Revenues

. 57,800,000

52,200,000

50,100,000

50,100,000

50,100,000

260,300,000

Expenditures ("frozen" at 2009-10 levels) 62,100,000 62,100,000 62,100,000 62,100,000 62,100,000 310,500,000
Built-in (and accumulating) increases 2,200,000 2,200,000 2,200,000 2,200,000 2,200,000
2,200,000 2,200,000 2,200,000 2,200,000
2,000,000 2,000,000 2,000,000
2,000,000 2,000,000
2,000,000 31,800,000
"No change in services" Expenditures 64,300,000 66,500,000 68,500,000 70,500,000 72,500,000 342,300,000 "No change in services" Annual Deficits

(6,500,000)

(14,300,000)

(18,400,000)

(20,400,000)

(22,400,000)

(82,000,000)

Annual (and accumulating) cuts needed

6,500,000 6,500,000 6,500,000 6,500,000 6,500,000
7,800,000 7,800,000 7,800,000 7,800,000
4,100,000 4,100,000 4,100,000
2,000,000 2,000,000
2,000,000 82,000,000

accumulated savings resulting from $22,400,000

in timed cuts

Two New Potential Solutions Described and Analyzed Numerically

Description of New Solutions Available to the City numerical analysis on following pages

Proposed Option 3

Total of five year departmental reductions = $22.4 million Cumulative Five Year Deficit Offset = $82.0 million

Scenario: Staggered timing of cuts, but with impact uniformly applied to most departments in each year in a manner proportional to current size of department; Library and Museum remain open on a reduced-scale but full-time basis

Proposed Option 3A

Total offive year departmental reductions = $16.4 million (73% of each department's five year Option 3 cuts) Cumulative Five Year Deficit Offset = $82.0 million

Scenario: All Option 3 cuts for the five years moved forward (at 73%) and enacted in Year One; Library and Museum remain open on a reduced-scale but full-time basis

Proposed Option 3 using revised revenue estimates
Total of five year departmental reductions = $22.4 m, Cumulative Five Year Deficit Offset = $82.0 m
Scenario: Departments impacted on a staggered basis, annually, and generally in proportion to their current size.
Library and museum remain open on a reduced scale, full-time basis
a b c d e a+b-c-d+e 5a+4b+3c+2d+e
Cumulative
Share of Applicable Total of Five Year
City Budget ** initial cuts further cuts further cuts further cuts further cuts All Cuts Deficit
2009-10 2010/11 2011/12 2012/13 2013/14 2014/15 5 Year Period Offset
Police 0.4460 2,072,341 3,478,488 1,828,436 891,920 891,920 9,163,105 32,436,725
Fire 0.0787 365,620 613,704 322,588 157,360 157,360 1,616,632 5,722,760
Building Inspection na 1,056,777 0 0 0 0 1,056,777 5,283,885
Library 0.0647 300,842 504,972 265,434 129,480 129,480 1,330,208 4,708,840
Museum 0.0093 43,263 72,618 38,171 18,620 18,620 191,292 677,160
Parks and Recreation 0.1563 726,453 1,219,374 640,953 312,660 312,660 3,212,100 11,370,600
Roads and Streets 0.1012 470,315 789,438 414,961 202,420 202,420 2,079,554 7,361,470
Engineering na 462,423 0 0 0 0 462,423 2,312,115
Council/Exec, Adm. 0.0660 306,464 514,410 270,395 131,900 131,900 1,355,069 4,796,845
Finance 0.0557 258,741 434,304 228,288 111,360 111,360 1,144,053 4,049,865
RE&D na 485,900 0 0 0 0 485,900 2,429,500
Planning na (152,021) 0 0 0 0 (152,021) (760,105)
Other 0.0222 102,929 172,770 90,815 44,300 44,300 455,114 1,611,070
1.0000 6,500,047 7,800,078 4,100,041 2,000,020 2,000,020 22,400,206 82,000,730
**Note: Building Inspection, Engineering, RE & 0, and Planning have been impacted entirely in Year One and in a non-proportional manner.
Proportional cuts to all other departments based on their fraction of the remaining budget. Proposed Option 3A using revised revenue estimates (requires only 73% of Option 3 Cuts)
Total of five year departmental reductions = $16.4 m, Cumulative Five Year Deficit Offset = $82.0 m
Scenario: All departments impacted entirely in Year One; most departments impacted in proportion to their current budget size.
Library and museum remain open on a reduced scale, full-time basis.
a b c d e a+b+c+d+e Sa+4b+3c+2d+e
Cumulative
5hare of Applicable Total of Five Year
City Budget ** initial cuts further cuts further cuts further cuts further cuts All Cuts Deficit
2009-10 2010/11 2011/12 2012/13 2013/14 2014/15 5 Year Period Offset
Police 0.4460 6,487,345 0 0 0 0 6,487,345 32,436,725
Fire 0.0787 1,144,552 0 0 0 0 1,144,552 5,722,760
Building Inspection na 1,056,777 0 0 0 0 1,056,777 5,283,885
Library 0.0647 941,768 0 0 0 0 941,768 4,708,840
Museum 0.0093 135,432 0 0 0 0 135,432 677,160
Parks and Recreation 0.1563 2,274,120 0 0 0 0 2,274,120 11,370,600
Roads and Streets 0.1012 1,472,294 0 0 0 0 1,472,294 7,361,470
Engineering na 462,423 0 0 0 0 462,423 2,312,115
Council/Exec. Adm. 0.0660 959,369 0 0 0 0 959,369 4,796,845
Finance 0.0557 809,973 0 0 0 0 809,973 4,049,865
RE&O na 485,900 0 0 0 0 485,900 2,429,500
Planning na (152,021) 0 0 0 0 (152,021) (760,105)
Other 0.0222 322,214 0 0 0 0 322,214 1,611,070
1.0000 16,400,146 0 0 0 0 16,400,146 82,000,730
**Note: Building Inspection, Engineering, RE & 0, and Planning have been impacted non-proportionately.
Proportional cuts to all other departments based on their fraction of the remaining budget. Option I Summary Original Option 1
budget budget proposed cuts proposed cuts proposed cuts proposed cuts proposed cuts Total of All
2009-10 2010-11 actual cuts 2010-11 2011-12 2012-13 2013-14 2014-15 Proposed Cuts
Police 25,230,580 27,008,140 (1,777,560) 160,000 290,000 3,173,000 1,687,000 0 5,310,000
Fire 4,451,610 4,238,338 213,272 0 34,000 72,000 274,000 0 380,000
Building Inspection 2,019,290 962,513 1,056,777 959,400 0 a a a 959,400
DPW 5,726,110 5,376,569 349,541 155,000 320,000 a 939,000 a 1,414,000
Engineering 2,414,420 1,951,997 462,423 375,200 a a a a 375,200
Library 3,662,530 2,259,670 1,402,860 1,000,000 2,663,000 a a 0 3,663,000
Museum 526,670 218,571 308,099 315,000 110,000 a a a 425,000
RE&D 485900 a 485,900 184,000 a a a a 184,000
Planning 553,500 705521 (152,021) a a a a 0 a
Other General Govt 1,252,890 1,176,620 76,270 a a a a a a
Parks and Recreation 1,654,719 1,550,000 a a a 3,204,719
Nature Center 270,000 92,000 a a a 362,000
8,844,530 7,524,747 1,319,783 1,924,719 1,642,000 ° ° ° 3,566,719
City Attorney 130,000 a a a a 130,000
City Clerk a 147,000 a a a 147,000
Community Affairs 240,000 0 a a a 240,000
Human Resources a 95,000 a a a 95,000
3,731,120 3,548,978 182,142 370,000 242,000 ° ° ° 612,000
Acctg/Risk Mgmt 176,000 a a a a 176,000
Assessing 365,000 a a a a 365,000
Purchasing a 168,000 a a a 168,000
Treasury 30,000 a a a a 30,000
3,150,020 2,825,836 324,184 571,000 168,000 ° ° ° 739,000
City Donations 200,000 a a a a 200,000
Longevity a 540,000 a a a 540,000
4 Day Work Week a a a a 2,700,000 2,700,000
62,049,170 57,797,500 4,251,670 6,214,319 6,009,000 3,245,000 2,900,000 2,700,000 21,068,319

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