Budget

Mayor Pall, Members of Petoskey City Council, and Citizens of Petoskey:

I am pleased to present to you for your consideration the 2012 Annual Budget for the City of Petoskey.  The 2012 Annual Budget has been prepared in accordance with the City Charter, and adheres to stated financial management policies and guidelines of maintenance of adequate reserves, and conservative revenue and expenditure forecasting.  Each of the funds within this proposed budget are balanced, and none are in a deficit position, although reserves might supplement revenues.

Totaling $24,852,900, this proposed 2012 budget is 16% less than the total of $29,519,700 proposed for 2011.  Notably capital expenditures for 2012 are proposed at $2,329,500, or $5,051,700 less than 2011, and proposed operating expenditures are nearly unchanged from 2011 at $22,523,400   While portions of several large capital projects will extend into 2012, including the Atkins Road extension project and improvements at the City’s wastewater treatment plant and main sewer lift station, capital spending will decrease in 2012 primarily due to the completion of several large one-time capital projects including the construction of Public Safety West and more than $3,000,000 in water system improvements funded by an agreement with Consumers Energy.

Traditionally, during a challenging economy Petoskey has experienced delayed, more modest income reductions than occur in other communities in Northern Michigan, thanks to strong financial policies and because our leaders have set direction that diversifies our revenue stream.  However, this economic downturn is of a long duration, and while Petoskey has weathered the storm well to date, we continue to see a horizon of declining property tax revenues, and increased threats to other funding sources.

As a result of this economic climate, two of our financial policies are at odds - the mandate to prepare a balanced budget while also maintaining existing levels of services to the community.  Property tax revenues, which are responsible for approximately 22.8% of the City’s revenues, have decreased 16.5% in the last two years, and are anticipated to decline an additional 5% in 2012 as a result of a drop in taxable values.  Compared to 2009, property tax revenues are down $1,085,000.

Further, it is unlikely that the City’s property tax base will significantly strengthen in the near and medium term future.  Not until the number of foreclosures in the market place is significantly reduced will the value of other properties begin to increase which, along with new construction, will increase taxable values as a whole.  All indications are that it will take several years until the real estate market stabilizes, and under current Michigan law which limits increases in taxable values to the rate of inflation or 5%, it could be many years before the City’s taxable values return to peak levels reached in 2009.

Another key indicator of the City’s current financial health is the year-end General Fund balance which has declined significantly in recent years.  The total General Fund balance has declined from $3,327,972 in 2006 to $1,867,599 at the end of 2010.  Over that same time period, unrestricted General Fund cash reserves have decreased from $2,774,735 to $1,078,035.  However, based on proposed budget cutbacks, in 2012 the total General Fund balance is expected to increase marginally by $72,700, resulting in an ending fund balance of $1,768,099 or 25% of annual expenditures within the General Fund.  The unrestricted General Fund balance is expected to be approximately $1,058,100 at the end of 2012.

In 2012, no increases will be recommended in property tax millages, which currently total 13.8318 mills, nor does the proposed 2012 budget include a property tax administration fee, although both of these issues may need to be re-visited in the future if taxable values continue to decline.  Instead, the 2012 budget includes numerous expenditure reductions that are designed to reduce expenses while minimizing the impact these reductions may have on the community.

As a reminder of recent budget cutbacks, in 2010, the City cut approximately $400,000 from the original budget, increased a variety of user fees, and increased the General Operating Millage by 0.2258 mills in an effort to balance the budget and maintain service levels.  In 2011, three full-time positions within the General Fund were left vacant following retirements. 

Ongoing cost cutting measures include evaluating alternative approaches for service delivery and actively pursuing outside sources of funding to help supplement capital and operational expenditures.  These measures, taken into account as part of the consideration of the 2012 Annual Budget, have set the stage for continued analysis of cost saving measures and productivity enhancements in a systematic manner throughout 2012. 

Particular financial pressure has been placed on activities within the General Fund including Public Safety and Parks and Recreation.  Unlike other City funds that are supported by property tax revenues, and which can financially contract primarily through a reduction in capital expenditures, personnel costs comprise approximately 60% of all General Fund expenses.

My sincere thanks to our City’s Department Heads: Director of Parks and Recreation Allen Hansen; Director of Public Works Michael Robbins; Director of Public Safety John Calabrese; and their staffs; as well as City Planner Amy Tweeten, for their efforts in preparing the proposed 2012 Annual Budget.  Special thanks are also owed to Director of Finance Alan Terry, who was instrumental in composing this document for your consideration, as well as Administrative Assistant Sarah Bek.

Sincerely,

City Manager