City budget review the 'most difficult'

April 11, 2010
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As Grand Rapids city commissioners begin their three-month review of the 2011 budget for the general fund, one member of that board already has been through this often painstaking and sometimes painful process 14 times.

As mayor, George Heartwell has tackled this budget for the past six years. Before winning the city’s top elected seat, he delved into it eight times while representing the Third Ward as a commissioner.

How does he compare the previous 14 reviews to his 15th?

“This is certainly the most difficult of the 15, and the reason is that over the course of the past seven for me and the last 10 for the city, there has been a cumulative effect of service reduction and cost-cutting that brings us to a point where we get hit with this one — which is certainly the largest deficit we’ve had to confront. And we’re doing it after 10 straight years of cuts, many of them substantial,” said Heartwell, who spent four years out of city office after serving as a commissioner and before being sworn in as mayor in January 2004.

“In its magnitude, both in terms of the size of the deficit and the limitations that we have on us as the result of 10 years of cutting, it’s the most difficult budget that I’ve dealt with,” he added.

The decade-long cuts the mayor referred to included reducing spending from the general fund by more than $100 million over those years, resulting in the city’s work force being shrunk by more than 500 employees since 2001. Overall, the city’s staff has been downgraded by 25 percent. Some departments, such as Parks and Recreation, have lost up to 60 percent of their workers.

Commissioners are scheduled to meet 11 times by the end of June. Each review session could last for three hours, as each one will focus on a different element of the general fund, which pays for most city services.

No fiscal miracles are expected to emerge from the sessions, but Heartwell does expect to accomplish a few goals.

“Well, obviously, as the guy who’s responsible for the process at the commission level, my objective is to come out when we’re ready to cast a vote in June, and everybody has a full understanding, and we’ve developed a solid consensus around the various elements of this budget,” he said.

A wrench, though, could be thrown into that process if voters fail to approve a five-year increase to the city’s income tax in a few weeks. The ballot measure asks voters to raise the tax from 1.3 percent to 1.5 percent for city residents and from 0.65 percent to 0.75 percent for nonresidents who work in the city. Should voters approve it, the city would receive an estimated $7.5 million in new tax revenue for five years — which is the length of time City Manager Greg Sundstrom said is needed to change the way services are delivered.

“I would put it at the level of critically important,” said Heartwell of the ballot proposal. “If it doesn’t pass, then we’ve got to find another $7.5 million. You know, that’s $7.5 million on a $103 million general fund budget, so it’s not small potatoes in and of itself, and it comes on the heels of, as I mentioned, 10 consecutive years of budget cuts. So $7.5 million, I think, is in the neighborhood of another 100 positions that would have to be eliminated.

“When you look at the city’s organization and where the bodies are today, most of them are in police and fire. That’s 70 percent of our total budget. So without this income tax approval by the voters, we’re clearly going to have to cut police and fire positions, along with many other positions.”

Heartwell said he has received a mixed response to the ballot measure. Some have told him that they don’t like to pay taxes but value the services the city provides and will support the increase. He said others have asked him if he was out of his mind to ask for higher taxes in this economy and have said they won’t back the proposal.

“I understand both positions. I hope that it passes. But I certainly understand when people tell me that they can’t support it because they’re economically strapped themselves,” he said.

The two major forces that are driving the budget’s expenditures are the city’s costs for health insurance and pensions. Spending for each employee’s health insurance in 2011 is at $11,509, but is projected to rise to $15,716 in 2015. The city’s contribution rate to the general pension is 13.6 percent and 11.6 percent to the police and fire pension in 2011, but those rates have been forecast to more than double, to 27.5 percent and 28 percent, respectively, in 2015. The pension funds lost a total of $200 million when the financial markets fell in 2008. A year earlier, both pensions were overfunded.

“We can solve for this year’s problem but as we look down the road, if we’re not successful in making changes in health insurance and pensions, it will be a perpetual problem that we’ll be facing. That’s what the chamber of commerce said. Their objection to (the tax request) is that we haven’t been able to get a hold of health care costs and … I shouldn’t put it that way because we’ve really done an exceptional job on health care costs,” said the mayor.

“It’s just that the ongoing expensive health care, especially for retirees who have not reached the age of 65, and the pension costs, as a result of market losses that we experienced, are the two that are just persistent problems. So as we go back to the bargaining table this spring — because we are going back to the labor table right away — we have set pensions and health costs at the top of the list for collective bargaining,” he added.

Three commissioners, including Heartwell, are covered by the city’s health insurance plan and voluntarily agreed last year to double the amount of what they contribute toward their premiums, from 10 to 20 percent. The mayor said the city will ask employees to do the same this spring. “We’re going to be looking for higher co-pays; that is on the agenda for contract negotiations. We’re at 10 (percent), and I told the manager I want to see us get to 20 percent,” said Heartwell.

The deficit for the general fund was pegged by Sundstrom at $27.4 million last fall. But the city reduced spending by $12 million in November, largely through a major job cut that took effect Jan. 1 and well before the 2011 budget would go into effect.

“As the manager looked ahead to the 2011 budget, he saw there was a $27 million deficit that was looming for us, and he said he needed to get a jump on that and not wait until July 1 of 2010. So he trimmed the work force substantially with layoffs of 125 people in January — not because we needed to do it in the 2010 budget but because it would reduce the magnitude of the challenge we’re facing,” said Heartwell.

“It would allow us to build up a little bit more fund balance in 2010 that we could draw on then to balance the 2011 budget.”

Commissioners received the preliminary 2011 general fund budget two weeks ago. It has $106.9 million in expected revenue and $107.7 million in estimated expenditures for a projected deficit of $857,588, which is to be covered by the fund balance. But as Sundstrom noted, the preliminary budget is based on a handful of assumptions being realized. The biggest of those is that voters will approve the tax increase May 4. If they don’t, the deficit will rise to about $8.3 million on May 5.

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