Five-year projections show City facing deficit in future

By: K. Michelle Moran | Grosse Pointe Times | Published February 5, 2013

GROSSE POINTE CITY — Although things are slowly starting to turn around financially after the economic meltdown and recession, City leaders say their community is still facing major financial hurdles in the coming years.

While delivering a five-year fiscal projection to the City Council at a Jan. 28 meeting, Finance Director/ Treasurer Kim Kleinow said the gap between revenues and expenditures is expected to widen in the next few years, leaving unassigned fund balance completely depleted and the City in the red by the 2017-18 fiscal year.

“Even though things are getting better, we’re still experiencing a severe financial crunch,” City Manager Pete Dame told officials.

Commercial property tax values are expected to remain stable over the next five years and residential taxable values are projected by City calculations to increase by about 2 percent through 2017-18, with a 2.4 percent spike in 2013-14, Kleinow said. However, the City is facing a decrease in Act 51 fuel and motor tax revenue of about 1.3 percent for the next five years, forcing the City to use general-fund monies to compensate their road fund for the shortfall, she said.

And despite assuming that wages for City employees won’t go up for the next five years, Kleinow said larger contributions to pensions and retiree health care would consume a major chunk of the budget.

“The city pension contribution is the really bad news,” said Kleinow, telling officials that the City’s contribution is expected to increase by about $125,000 throughout last year.

For 2014-15, the City is anticipating making a pension contribution of $484,000, according to Kleinow’s projections. By 2017-18, that contribution is expected to be $644,204.

License and permit fees are slated to increase by about $5,500 in the 2013-14 fiscal year, with 1 percent increases to come in the four fiscal years that follow, Kleinow said. But as reserves are depleted, so are returns on investments, as the City has less and less money to invest, she said. Income from investments is anticipated at $70,668 for 2013-14, but it’s likely to be only $9,938 by 2016-17, with none projected for 2017-18 — the first year the City could be in a deficit situation.

According to the City’s actuaries, Kleinow said they’re expecting to make a contribution of $289,120 to the pension fund in 2013-14. That’s slated to grow each of the next five years, reaching $428,124 by 2017-18.

Dame said the gap between revenues and expenditures is “almost entirely attributable to legacy costs to our retirees,” which he called a “simply unsustainable” model.

City Council member Andrew Turnbull agreed that the City could no longer afford its rising legacy costs.

“We’ve all come to the realization that these are some serious issues we need to come to grips with,” he said.

However, retirees have pointed out that such City contributions are only of recent vintage. At a meeting last year, Karen Johnson — the retired finance director, treasurer and pension system administrator — said that retiree health care premiums were paid directly out of the pension fund for years, a practice that’s no longer allowed. Until the last two fiscal years, she said the City hadn’t had to contribute to the pension for more than 15 years, and until 2012-13 — when the City budgeted a $200,000 contribution for retiree health care — she said the City never directly contributed to that fund.

At a meeting last September, Paul Onderbeke, a public safety lieutenant who retired after 28 years in 2011, said the actuarial report showed that the retiree health care fund wouldn’t be self-sustaining, and he criticized the City for not contributing to it in recent years, even though he said officials knew the account would be empty by the end of the year.

“This fund appears to have been underfunded from its inception,” he said.

The City avoided a major hit last year by being able to cover its contribution to retiree health care through a surplus, Kleinow said.

Dame said the only reason the City has thus far been able to avoid falling into the red is because of various cost-cutting measures they’ve undertaken over the last five years. Those include changes to the retiree health care plan, wage freezes and reductions, a reduction in staffing levels and the elimination of certain programs, among others. Unless the City “makes significant changes” in the next few years, Dame said they’re facing a deficit within five years.

“We have a gap between revenues and expenses in the wrong direction,” Kleinow said.

City officials are expected to meet soon to start working on the 2013-14 budget, when they’re likely to look at more ways to meet the financial challenges ahead.