City’s budget process to reduce losses remains on track

May 15, 2015
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One point about the fiscal year 2016 preliminary budget businesses and residents will probably be happy to hear is there will be no significant changes to service fees.

The city is already operating under a full cost recovery policy, which it adopted as part of its transformation plan.

“What I’ve tried to do over the last six years is to reduce our losses,” said Greg Sundstrom, city manager of Grand Rapids.

For example, Sundstrom explained, in the past the city might charge a child $1 to swim in one of the city’s pools while the actual cost to the city was nearer $20.

Under the full cost recovery model, the city has closed those kinds of gaps in its fees. Sundstrom noted the city is now reviewing its fees every year and making adjustments on an annual basis.

The city is only allowed to collect fees up to the cost of delivering the service, however.

“There is case law that is very strong and clear that says a local government can charge up to the cost we incur to provide a service,” Sundstrom said. “So we can break even or we can lose money, but we can’t make money.”

The new policy of full cost recovery ensures the city is getting the most it can for services.

The change doesn’t mean kids will have to pay $20 to get into city pools, however.

“The city commission makes the default position that we charge full cost recovery unless they want to intercede for other reasons,” Sundstrom explained.

In another example, he said if the city’s cost for issuing a license to a pedicab was $100 but a nearby city was charging $10, the city commission could decide to charge a fee that does not meet the full recovery cost but is in line with what other cities are charging for that service.

“I’m OK with that if the elected body makes the decision and directs us to charge that,” Sundstrom said. “I am not OK with it if city staff says, ‘Hey, we think $10 is a good number.’”

In cases like swimming pool entrance fees or pedicab licensing, if the city chooses to charge a fee less than full cost recovery, an alternative cost recovery goal will be recommended and a source of subsidy for any unrecovered costs will be identified.

In terms of revenue, city service fees make up the largest source of revenue for the city: approximately 39 percent of total expected revenue. That percentage has gone up under the new emphasis on full cost recovery.

The majority of revenue from user charges comes from Enterprise Funds, Water Supply System, Sewage Disposal System and Parking System. Other city funds with user fee revenues include the 61st District Court, Refuse Collection and Disposal, Building Inspection, Street, Vehicle Storage and Parks.

The other five revenue streams for the city are: city income tax, which accounts for 25 percent; city property tax, which accounts for 11 percent; state revenues and grants, which account for 14 percent; investment income, which accounts for 1 percent; and other revenue sources, which account for 10 percent.

Sundstrom said besides city service fees, income tax and property tax are the other main revenue sources for the budget.

Income tax is the second-largest revenue source, but in recent years, it’s been less stable.

“For the first 40 years of our income tax, it grew every year,” Sundstrom said. “With the downturn in 2008, we started to see declines in income tax revenues for the first time. Now income tax revenues have recovered and, in fact, we are projecting a growth this year of 5.5 percent.”

Sundstrom said he expects to see growth of 3 percent for next year and 2.5 percent each year following. He noted those projections are conservative.

As part of the city’s focus on its future financial health, Sundstrom is recommending the additional revenue gained this year, which will be just above $2 million, be put into the budget stabilization fund.

Another important aspect of income tax revenue is that in May 2010 the city’s electorate authorized a temporary increase from 1.3 percent to 1.5 percent for residents and from 0.65 percent to 0.75 percent for non-residents, effective July 1, 2010, through June 30 of this year. In May 2014, voters approved extending the temporary income tax increase another 15 years to fund the Vital Streets budget.

While many people might assume that increasing property values would mean a big increase for the city in the form of property taxes, that assumption is wrong, Sundstrom said. He noted there are laws that limit the city’s property tax revenues, which means that even as the economy rebounds and property values rise, the impact on the city’s coffers is minimal.

“Property taxes are very limited in their growth due to Proposal A and the Headlee Amendment, typically growing at 3 percent or less, at best,” he said.

According to Scott Engerson, city assessor, Proposal A puts a cap on the growth and taxable value at the Consumer Price Index. In the current year that value was 1.6 percent. That percentage applies for residential, commercial and industrial property.

Property taxes are a key source of funding for most of the city’s component units, including the DDA, Monroe North Tax Increment Financing Authority, Smart Zone Local Development Financing Authority, Brownfield Redevelopment Authority and the various corridor improvement districts.

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