VBT, City of Belleville on state’s
‘fiscal watch’ list

To the Editor and VBT Residents, Voters, and Taxpayers:

   Both the governmental units of Van Buren Township and Belleville are listed on the latest (2007) “fiscal watch” list of the State of Michigan Treasury Department.

   Units of Michigan government with scores of 0 to 4 are called fiscally neutral, units with scores of 5 to 7 are placed on the watch list, and units with scores of 8-10 are classified as being in fiscal stress.

   Van Buren Township and the City of Bellville have a score of 5 and 7 respectively. The average Michigan local government unit score is 1.5 on the 10-point scale. (Fiscal Stress Indicators, Institute for Public Policy and Social Research, Michigan State University, page 43)

   The State Treasury Department has classified the fiscal health for Michigan’s 1,858 units of local government into three categories. The first is what the Treasury calls fiscally neutral, meaning the local unit is in relatively sound financial condition.  The second category, called “fiscal watch”, means that the, “local government unit is notified of its relatively high score and is placed on a (State) watch list for the current and following year”. The third category, called “fiscal stress”, means, “the local government unit is notified of its high score, is placed on a watch list for the current year and following year, and receives consideration for (State) review”.

   “The fiscal indicator scores are intended to provide State officials, local officials, and the general public with objective, measurable, and straight-forward information concerning the degree of, or absence of, fiscal health in units of local government. This information provides the public with information that may not be publicly displayed from their local officials”. The Treasury Department of Michigan has, “developed a process to review certain fiscal indications that encourage sound fiscal health for all of Michigan’s 1,858 units of local government.”

   The Institute for Public Policy and Social Research at Michigan State University developed the scoring system for the Michigan Treasury Department using various statistical procedures. (Please see Michigan.gov/documents/treasury/MSUstudy_238307_7pdf for an explanation of the development of the scoring system.) One may not like the results of the scoring system, but one has difficulty in faulting the quality of the data used or the procedure developed. 

   The Institute determined there are 9 measures that separate fiscally strong units of local government from fiscally weaker units of government. In essence they developed something similar to a “credit score” for each of the 1,858 local units of Michigan government.

   A Treasury spokesperson said that some local government representatives sometimes call the Treasury to protest their unfavorable fiscal score based on local “special circumstances”, and sometimes there truly is a special circumstance. Also there may be other influences on a local unit’s fiscal health, for the 9 measures cannot capture every

possible nuance of a financial situation.

   In addition, these fiscal scores are taken at a point in time and are not necessarily predictors of future fiscal health, especially if there is a change in elected officials.

   Nevertheless, the 9 metrics are the best broad fiscal indicators identified by MSU, and the data are publicly available, uniformly collected, somewhat frequent in its collection, and  at least interval scaled. Especially important is that the data are relatively resistant to “gaming”. Another important point is that the local units need to complete standard Treasury forms so that we are comparing apples to apples in developing the scores for each unit, and representatives of a local unit should know how the scores are calculated, for this scoring system has existed for a few years. 

   A drawback to the score is that the gathering of the data takes time and especially the data are available only with some time lag. For example, one metric used is the annual or biannual audit report that must be filed with the Department of Treasury. Thus the VBT

and City of Belleville stories below concern the fiscal behavior of these units of government for the latest year score available, namely 2007.

The VBT Fiscal Story

   The Treasury data indicate VBT had a positive population growth from 2000 to 2007, and there was real (inflation adjusted) growth in taxable value in the township from 2005 to 2007. Also, there was no large taxable value decrease like a large plant closing. In addition, VBT had relatively low long-term debt as a percentage of taxable value (previous administrations had not piled up a string of yearly deficits, and there was no large bond issue outstanding) and was able to hold general fund balances at a reasonable level. 

   An increasing population may mean a larger demand for township services, but new homes and businesses also create a larger assessable tax base, and there are typically economies of scale in cost of services per township person as the population of a township increases. This combination typically creates a positive effect on a government unit’s finances, assuming, of course, that these new residents represent a normal income (and other socio-demographic characteristics) distribution.

   Deviation from a normal distribution of new residents’ income could have either a positive or negative effect on VBT’s ratio of demand for services compared to its tax base.

   For example, if some of the highly paid VBT police officers moved into the township where they are employed and built the same large-sized homes they reportedly are buying in other areas, this would probably cause some increase in the demand for more township services. But, this increase in demand for services would probably be

more than offset by an the increase in the tax assessed base for the township. There would likely be a positive effect on the township’s fiscal position because of the favorable demand (services) supply (taxable base) ratio.

   On the other hand, a substantial percentage increase in low-income people moving into the township could create an unfavorable ratio for the township’s fiscal situation. The Treasury’s data suggest a favorable ratio apparently existed for VBT from 2000 to 2007.

   However, in spite of a growing, productive population, an expanding real taxable asset base, no major shocks to the taxable base, and below-average long term accumulated debt, VBT was still placed on the State’s fiscal “watch list”.

   One bad mark against VBT was that the 2007 VBT administration generated a “non-trivial” (the Treasury’s terminology) general fund deficit in 2007. (The administration spent 128 percent of VBT’s general fund revenue.) To add to the problem, and to add to the negative points in the Treasury’s assessment of VBT’s fiscal health, the administration in power also managed to generate a “non-trivial” general fund operating deficit in both 2006 (expenditures 148 percent of revenue) and in 2005 (expenditures 130 percent of revenue). 

   Additionally, the Treasury reports VBT had a large fund deficit in one or more of its unreserved fund balances in both 2006 and in 2007.

   Another major problem in 2007 for the township’s fiscal position and for VBT taxpayers was that VBT’s general fund expenditures as a percentage of taxable value in the township was substantially higher than other townships. The Treasury says this measure, “assesses the size of a unit’s public sector relative to its ability to generate revenues”.

   Simply, VBT taxes for its general fund were substantially higher per dollar of taxable value than the taxes per dollar of taxable value in the vast majority of other Michigan townships. (Raising taxes to cover the big deficits was a very limited option, for VBT’s taxes were already at a high rate compared to other townships in Michigan). To decrease the ratio of expenditures to revenue the VBT administration in 2007 with no increase in the tax rate would have needed to cut its expenditures or increased the number of new residents and businesses (the tax base) or some combination thereof.

   Since population did, in fact, increase in the township from 2000 to 2007 and there was no change in the effective tax rate, expenditures increased faster than the tax base.

   Clearly, there was an explosion in deficit spending in VBT in the years 2005, 2006, and 2007. Also the VBT administration during this period left VBT with major fund deficits for 2006 and 2007. By the end of 2007 the VBT administration’s profuse spending had put VBT on the fiscally irresponsible “watch list”, a list defined, measured, and evaluated by the Treasury Department of the State of Michigan.

   Based on its experience and research the Institute for Public Policy and Social Research at MSU discusses probable causes for fiscal stress in Michigan’s units of local government. Unfavorable population and job market shifts are probably the major causes of fiscal problems in many local government units. Clearly, this was not the situation for VBT in 2005, 2006 or 2007. 

   The Institute suggests a second possible cause for fiscal problems may be “bureaucratic growth”. A third possible cause is called “interest group demands”. This explanation suggests that overspending results if the local elected officials are vulnerable to special interest groups. Spending is increased to “win the support of various groups.”

   Would someone please help here?  Can anyone think of a large, powerful special-interest group in VBT that was/is involved in the political process and tried/tries to influence local elections? Is there any special interest group in the township that helped to put their “girl” in place as a major decision maker in the township, oh, say in the supervisor position?  Now if this special interest group also could get its “boy” in place as token head (or chief) of a big VBT department, there would be few barriers to stop this special-interest group from mining, grabbing and pillaging VBT tax dollars.

   In fact, were members of  this special interest group so successful at enhancing benefits to themselves during this 2005-2007 period that they endangered the fiscal health of the township?

   Another possible cause of a local government unit’s fiscal distress is called “bad” management. This explanation focuses on the decisions of local officials and the tools used by them in making these decisions. 

   You, the reader, will need to decide for yourself the relative weights of these possible causes or explanations of VBT’s fiscal mess at the end of 2007.

   Current Treasurer Sharry Budd and Trustees Phillip Hart and Jeffrey Jahr held these same positions in VBT in 2005, 2006, and 2007.

The Belleville Fiscal Story

   The City of Belleville received a “fiscal watch” classification for a number of reasons.  It lost population from 2000 to 2007, there was negative real taxable value change in the City from 2005 to 2007, and this decline was relatively large. Also, the City gets negative points for having a general fund operating deficit for both 2005 and 2006. In addition, it had a deficit in at least one or more of the City’s unreserved major fund balances for 2006, and it kept a low current fund balance as a percentage of its general fund revenue. 

   At the end of 2006 the City of Belleville truly was in a bad fiscal position. However, by 2007 the City’s administration began to address its fiscal problems. Its general fund expenditures as a percentage of its taxable value was within reasonable limits. 

   Furthermore and significantly, the City’s expenditures were covered by its revenue in 2007. That is, there was no general fund operating deficit for 2007, and by 2007 there was no major fund deficit in one or more of its unreserved major fund balances.

   Furthermore, the City’s long-term debt as a percentage of taxable value was within reasonable limits.

   In short, by 2007 the decline in the City’s fiscal situation appeared to be bottoming out. However, there are questions concerning why the fiscal score got so bad.  Yes, probably most of the City’s fiscal problems were caused by a decline in population and a rather big decline in real taxable value.

   But, there was a general fund deficit in 2005 and 2006. Why did it take until 2007 to match expenditures to current revenue? Why was this not done in 2006? How much of the problem is explained by contracts existing at the beginning of 2006, and how much is explained by inertia or leaders not willing (or able) to make unpopular cuts in services or personnel?

   In summary, the City appears to have adjusted its spending to its revenue steam, but what can the City do to increase its population and/or its real taxable value in the future?

Don Houtakker

Van Buren Township

Editor’s Note: Van Buren Township survived its deficits by using money from its landfill royalties to balance its budgets. Dr. Houtakker is a retired professor of finance from Wayne State University.