Budget Projections for FY 2015 FY2020 (Long Range Fiscal Plan)

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1 L. BROOKS PATTERSON, OAKLAND COUNTY EXECUTIVE TO: FROM: Board of Commissioners Michael Gingell, Board of Commissioners Chairperson Michael Bouchard, Sheriff Lisa Brown, Clerk / Register of Deeds Jessica Cooper, Prosecuting Attorney Andrew Meisner, Treasurer James Nash, Water Resources Commissioner Honorable Nanci Grant, Circuit Court Chief Judge Honorable Elizabeth Pezzetti, Probate Court Chief Judge Honorable Julie Nicholson, 52 nd District Court Chief Judge L. Brooks Patterson, County Executive SUBJECT: Budget Projections for FY 2015 FY2020 (Long Range Fiscal Plan) DATE: March 31, 2015 Attached is the recently completed Oakland County Long Range Fiscal Plan Summary of Future Operating Issues and Related Resolution dated March 31, Like the Framework reports produced in prior years, the Long Range Fiscal Plan Summary report identifies projected operating shortfalls, discusses business issues facing the County and proposes means to resolve those budgetary issues. The Fiscal Plan Summary is an update of significant events, business issues and impacts on the County s operating budget previously reflected in the adopted budget of the Board of Commissioners in September The Fiscal Plan serves as the preliminary basis for the development of the County Executive s Recommended Triennial Budget for FY 2016 through FY 2018 which will be presented to the Board of Commissioners by July 1. I am pleased to report that the FY 2015 through FY 2020 Fiscal Plan analysis indicates that, as of today, it will not be necessary to assign budget tasks to our operating departments for the period FY 2015 through FY This represents the fourth year of consecutive budget cycles that budget reduction tasks have not been requested of the County s elected officials and department heads. In prior years, significant economic challenges caused by the international, national, state and regional economic recession, events largely out of the control of Oakland County government, required the allocation of significant, remedial budget tasks to County operating departments to insure fiscal stability. Oakland County s public officials have met the challenge presented by these adverse fiscal conditions and, acting together as partners, Oakland County has weathered the fiscal storm. The continuing collaboration between the county wide elected officials, the EXECUTIVE OFFICE BUILDING 41 WEST 2100 PONTIAC LAKE ROAD, DEPT 409 WATERFORD, MI (248) FAX (248)

2 Board of Commissioners and our dedicated employees in sharing the economic burden for the betterment of the County is a qualitative asset of immense value in these times. As a result of our collective efforts, I am pleased to report that the Fiscal Plan allows for several significant improvements so that Oakland County can continue to be the place where people want to work and to live. The Fiscal Plan includes a reduction to the County s tax rate for both FY 2015 and FY A.10 mills reduction for FY 2015 has recently been approved by the Board of Commissioners. An additional.05 mills reduction for FY 2016 has also been included in the Fiscal Plan. Based on current property valuations, the savings to the taxpayers from the cumulative.15 mills reduction will be approximately $7.5 million annually, $75 million every decade. Going forward, the savings to the taxpayers will increase proportionally as property values increase. The millage reduction recommendation reflects good stewardship of taxpayer dollars. This is a result of the leadership demonstrated by Oakland County s elected officials which provided for a balanced budget during the Great Recession without the need to increase taxes. Maintaining a low tax rate benefits our current taxpayers, helps to attract new property development, and encourages economic development, which ultimately increases the overall tax base for the County. The budget is forecasted to be balanced through FY 2020, including the proposed millage reduction. The Fiscal Plan also includes a reasonable improvement upon the recommended general salary increase necessary to retain and recruit high quality employees. Also, the Fiscal Plan partially restores funding for capital improvement necessary to maintain County facilities. While this Fiscal Plan is more optimistic in comparison to the past several years, our challenge is not yet over. Longer term, the County s budget must become structurally balanced which is defined as the point when ongoing annual operating revenues are in balance with ongoing annual operating expenditures without reliance on use of fund balance. Budget projections for the future are moderately improving when compared to the past several years forecasts which were prepared during and subsequent to the Great Recession. Given our proven track record as a team of committed leaders and our focus on long range planning coupled with early, proactive remedial action, I am confident that together we will achieve structural balance within the next few years. Also, we will be able to continue providing high quality services that our constituents not only expect, but deserve. I look forward to your continued leadership and cooperation in the future. EXECUTIVE OFFICE BUILDING 41 WEST 2100 PONTIAC LAKE ROAD, DEPT 409 WATERFORD, MI (248) FAX (248)

3 OAKLAND COUNTY LONG-RANGE FISCAL PLAN SUMMARY OF FUTURE OPERATING ISSUES AND RELATED RESOLUTION Fiscal Year 2015 through Fiscal Year 2020 OAKLAND COUNTY, MICHIGAN March 31, 2015

4 SUMMARY SCHEDULE - GENERAL FUND FUTURE FIVE YEAR FISCAL PLAN OAKLAND COUNTY, MICHIGAN March 31, 2015 Proposed Proposed Projected Description Notes Adopted Budget - FY-2015 to FY-2017: Revenues - total A $ 364,898 $ 378,947 $ 385,662 $ 406,524 $ 413,605 $ 413,605 Expenditures - total A (399,013) (408,108) (411,547) (427,761) (429,987) (429,987) 1 Planned Use of Equity (34,115) (29,161) (25,885) (21,237) (16,382) (16,382) Beginning Equity at October 1 - net, see below reconciliation* A 222, , , , ,325 95,943 ENDING EQUITY AT SEPTEMBER 30 BEFORE ADJUSTMENTS 188, , , ,325 95,943 79,561 Projected Adjustments to Operating Budget Fiscal Year (000s) Adopted Property value improvements above adopted budget estimates: B FY 2015 (0.7%) 1,400 1,400 1,400 1,400 1,400 1,400 FY 2016 (0.0%) FY 2017 (1.0%) - - 2,252 2,252 2,252 2,252 FY 2018 (1.0%) ,342 2,342 2,342 FY 2019 (1.0%) ,366 2,366 FY 2020 (3.0% over FY 2019) ,168 Millage Reduction: B FY 2015 (.10 mills to 4.09) (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) FY 2016 (.05 mills to 4.04) - (2,500) (2,500) (2,500) (2,500) (2,500) Revenue Sharing C 5,875 8,459 8,459 8,459 8,459 8,459 Convention facility liquor tax distribution D 1,000 1,000 1,000 1,000 1,000 1,000 DTRF transfer E - - (1,800) (1,800) (2,800) (2,800) Pension contribution Impacts F - (1,829) Building capital improvement program G - (2,000) (2,000) (2,000) (2,000) (2,000) Proposed salary increase H - (2,200) (4,400) (4,400) (4,400) (6,600) Security enhancements (enhancements completed in FY 2018) I ,895 1,895 2 Subtotal - Projected Net Adjustments to Operating Budget 3,275 (2,670) (2,589) 554 3,014 7,982 Non-budgeted Items/Assignments Impacting Fund Balance General favorability/turnover J 10,971 6,000 5,000 5,000 5,000 5,000 Other facility security enhancements (beyond $2.9 million appropriation) I (513) (4,425) (719) Security cameras/consoles K (2,257) Treasurer's tax management system K (1,199) IT reference architecture project K (1,000) Move into new leased building for equipment storage K (96) Tri-party road project funding L (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) 3 Subtotal - Non-budgeted Items/Assignments Impacting Fund Balance 4, ,281 4,000 4,000 4,000 4 Net Adjustments to Planned Use of Fund Balance 8,181 (2,095) 692 4,554 7,014 11,982 (items 2+3 above) ESTIMATED ENDING EQUITY AT SEPTEMBER 30 AFTER ADJUSTMENTS: Adjusted Beginning Equity at October 1 * $ 222,723 $ 196,789 $ 165,533 $ 140,340 $ 123,657 $ 114,289 From 1 above Budgeted Use of Fund Balance as Adopted on 9/18/2014 (34,115) (29,161) (25,885) (21,237) (16,382) (16,382) From 4 above Net Adjustments to Planned Use of Fund Balance 8,181 (2,095) 692 4,554 7,014 11,982 REVISED ESTIMATED YEAR-END FUND BALANCE PROJECTION $ 196,789 $ 165,533 $ 140,340 $ 123,657 $ 114,289 $ 109,889 Targeted Equity at September 30, 2020 (20% of Expenditures) $ 85,997 Projected Amount Above (Below) Targeted Fund Balance $ 23,892 Beginning equity as of Oct. 1, 2014, as reported A $ 253,985 Restrictions of General Fund Equity: Land sales operations A (21,100) Encumbrances A (555) Prepaid expenses and inventory A (222) Carry-forward amounts A (2,000) Substance abuse services A (7,385) Total Restricted Equity Unvavailable for Discretionary Operations (31,262) Beginning equity available for future operations * $ 222,723 NOTE - See footnote and report covering the approach, content and other comments relating to the above Summary Schedule. Adopted budget included a 3% annual increase in taxable value for FY 2015 through FY 2019 Adopted budget included a 2% general salary increase in FY 2016, 1% in FY 2017

5 LONG-RANGE FISCAL PLAN FOR OAKLAND COUNTY S FUTURE: SUMMARY OF OPERATING / BUDGETARY SHORTFALLS, BUSINESS ISSUES AND RELATED RESOLUTION OAKLAND COUNTY, MICHIGAN March 31, 2015 The Long-Range Fiscal Plan for Oakland County s Future: Summary of Operating Issues and Related Resolution ( Fiscal Plan ) dated March 30, 2015 is presented in this document. It is the first step in the process of recommending adjustments to the approved amended budget for FY-2015 through FY-2017 and preparing the budget recommendation for FY-2018 and beyond for General Fund / General Purpose operations. This Fiscal Plan has been prepared using data from: the closure of Oakland County s accounting records for FY-2014; the first quarter forecast for current FY-2015 operations; the nearly complete Equalization Report for property valuations as of December 31, 2014; recent discussions pertaining to the recommended general salary increase; recent State Legislative actions; Governor s recommended operating budget for FY-2016; recent economic reports; and other events having occurred since the approval of the FY-2015 to FY-2017 operating budgets in late September 2014 by the Board of Commissioners. SUMMARY Based on the projections and assumptions cited later in this Fiscal Plan, it is projected that budget tasks will not be necessary for the development of the County Executive Recommended Budget for FY-2016 through FY This represents the fourth year of consecutive budget cycles that budget reduction tasks have not been requested of the County s elected officials and department heads. As of September 30, 2014, General Fund equity was $254.0 million. After deducting $31.3 million of restricted General Fund equity, $222.7 million remained available on a limited one-time basis to support future operations until the County once again attains structural balance when annual ongoing operating revenues are sufficient to support annual ongoing operating expenditures. The budget plan approved by the Board of Commissioners in September 2014, included deliberate use of General Fund equity through FY-2017 in a planned manner to mitigate future projected operating shortfalls all while leaving an acceptable level of equity in the General Fund (and all related operating funds that impact the General Fund) as of September 30, Using

6 the adopted budget for FY-2015 through FY-2017 as the starting point, this long-term Fiscal Plan includes the current FY-2015 budget and the next five-year period of FY-2016 through FY-2020, including adjustments for current business issues. During the current FY-2015 and the subsequent five-year forecast period covered in this Fiscal Plan, the General Fund is anticipated to use $112.8 million in equity to balance the operating budgets through FY-2020, bringing the ending unrestricted equity to $109.9 million, which is above the equity target of $86.0 million as of September 30, The equity target represents approximately 20% of estimated FY-2020 expenditures, an amount designed to meet best practice recommendations identified by the Government Finance Officers Association (GFOA). This practice has helped the County in retaining the coveted AAA bond rating. The projected $109.9 million fund balance as of September 30, 2020, is $23.9 million above the minimum 20% target. The cumulative projected favorable variance of excess equity over target of $23.9 million is positive news after several years of fiscal uncertainty surrounding the period of the Great Recession. However, given that the cumulative total amount of expenditures over the next five years is approximately $2.1 billion, that $23.9 million of favorable equity represents only approximately 1.1% of marginal favorability when compared to total expenditures over the next five years. When the $23.9 million is divided equally over the next five years, it equates to $4.8 million annually, demonstrating that incremental budgetary improvements facilitated by advance planning produces significant financial benefits over the long-term in terms of actual dollars. Viewed another way, if the General Fund operating budget were to experience something unexpected that resulted in an ongoing annual negative budgetary impact of $4.8 million or more, there would be no favorable variance of excess equity over target. For example, if State revenue sharing payments were reduced by about one-fifth on an ongoing basis, either as a result of currently projected State budget shortfalls or because of the failure to pass the May 5, 2015 ballot initiative on road funding, that action alone could eliminate the $23.9 million of projected favorable equity over the future five year period. We note this because historically, statutory revenue sharing has been a target for potential State budget cuts, and it was just a few years ago when statutory revenue sharing payments were reduced by one-third until only recently having been restored to the full formula-based funding level. The Fiscal Plan projections demonstrate that there is a decreasing reliance on planned use of available General Fund balance. However, use of fund balance should be considered to be a one-time resource that once spent is no longer available and is only replenished when there is an annual operating surplus. Oakland County s ability to use a limited amount of General Fund equity is the result of planned budget reductions over the past several years during the Great Recession in order to balance the budget over a longer term. In order to sustain the long-term fund balance minimum targeted amount, the County s budget must become structurally balanced which is defined as the point when ongoing annual operating revenues are in balance with ongoing annual operating expenditures without reliance 1

7 on use of fund balance. The future five-year Fiscal Plan demonstrates that new budget tasks are not required at this time. Budget projections for the future are moderately improving when compared to the past several years forecasts which were prepared during and subsequent to the Great Recession. This Fiscal Report describes the favorable and unfavorable operating results for FY-2014 in the General Fund and for those operations impacting the General Fund leading up to the ending fund equity positions as of September 30, When complete and with the fulfillment of the assumptions described, the General Fund equity position should be no less than the targeted equity amount of $86.0 million at September 30, 2020, or roughly 20% of FY-2020 projected expenditures. BUDGETARY GOALS The County s budgetary goals have continually been achieved by the early adoption and implementation of management actions by all operating departments. The cooperation of County-wide elected officials has been one of the most important distinguishing qualitative assets contributing to the success of Oakland County s long-range fiscal strength. Continued cooperation between County-wide elected officials is critical to maintain these goals. The budgetary goals expressed by the County Executive, with demonstrated support by the Board of Commissioners and the other county-wide elected officials, include: Retain stable and essential services to the public while minimizing involuntary employee separations. Avoid increasing taxes and fees on County residents and businesses whenever possible. Manage grant funded programs within the limited amount of special revenue provided for those programs. Grant programs no longer funded at prior year levels by grantors are restructured, reduced, or eliminated as needed consistent with reductions in special revenue grant funds. Alternatively, if an operating department aspires to continue such a grant program, specific alternative sources of funding shall be identified and approved by the Board of Commissioners, such as allowable and sustainable reductions in other program expenditures within the affected department or new revenue sources so that there is no net increase in demand for General Fund appropriation. This grant funding practice is designed to prevent assumption of new program obligations within the General Fund that could potentially crowd out other necessary services which are dependent upon general County resources. 2

8 Retain the County s financial strength in stable fund equity and cash positions in all operating funds; provide adequate cash flows throughout the year to meet operating needs. Maintain low outstanding bonded debt. Restrict the use and reliance on equity and other one-time budget sources in solving structural operating shortfalls. Rely heavily on strong accounting, budgeting and other business practices in achieving long-range planning efforts. All new major capital and technology projects are to undergo a rigorous return on investment analysis before they are launched. Capital projects are to be funded out of current operations to the extent feasible. Provide continuous communication with County-wide elected officials and the public concerning the status of the operating budget. If and whenever expenditure reductions are needed, the County-wide elected officials are encouraged to resolve their share of operating shortfalls in order to avoid unwanted interference from County administration and the Board of Commissioners. Address adverse budgetary situations on a timely basis with actions that serve to mitigate the budgetary impact on current and future operations. Provide residents and businesses with meaningful open access to County records, forms and other information via the County s web site and through public forums. To date, these goals have been embodied in operating budgets adopted by the Board of Commissioners and honored by Oakland County s elected officials. Over the past several years, all County-wide elected officials have restructured operations and met allocated budgetary tasks when needed such that Oakland County is one of only a few governmental units with balanced multi-year, line-item, operating budgets that are adjusted frequently on a rolling basis for known events to benefit current and future operations. The bond rating firms, which have objectively analyzed the County s financial condition, have recognized the County s strong business practices and have awarded the County with coveted AAA bond ratings in prior debt issuances even as their rating standards criteria have become more strict. Oakland County successfully weathered the fiscal storms of the last decade and met each of the budgetary goals. Presently, as outlined in the Fiscal Plan, Oakland County s budget is balanced, including some adjustments that will be included with the County Executive s Recommended 3

9 Triennial Budget for FY 2016 FY 2018, and with the expectation that an appropriate level of equity can be maintained between now and September 30, SUMMARY SCHEDULE The attached Fiscal Plan schedule entitled Summary Schedule General Fund Future Five Year Fiscal Plan (Summary Schedule) and this related explanatory report are presented based upon financial analyses created by the Fiscal Service and Equalization Divisions of Oakland County s Department of Management and Budget, and Department of Human Resources. It is based, in part, on various reports and material. This Fiscal Plan is a high-level financial planning and strategic report that summarizes the results of Oakland County s budgeting process, identifies known budgetary exposures, and assists in setting fiscal and fund equity targets as the starting point for the preparation of the recommended triennial FY-2016 through FY-2018 operating budgets and the longer term five-year forecast. In last year s Fiscal Plan, the three years of adopted budgets / plans were included with the proposed next two years forecast. The current Fiscal Plan includes an additional year (e.g. FY-2020) for consideration by the County Executive in developing his budget recommendations, due to the Board of Commissioners on July 1. The Fiscal Plan and related analyses rely on: the closed September 30, 2014 accounting records which have now been audited and a Comprehensive Annual Financial Report for the year then ended released, the FY-2015 through FY-2017 County operating budgets and plans as adopted by the Board of Commissioners in September 2014, which are continually monitored and amended as needed, analysis of fiscal matters arising after the Board s adoption of the County s FY-2015 through FY-2017 operating budget, projections for the future property values used in calculating property tax revenues, and other financial information. The FY-2018 and FY-2019 projections are based on the five-year forecast contained within the County Executive s budget message and included in the budget document that was adopted in September The FY-2019 forecast assumptions have then been rolled over as a starting point for FY-2020 for the extension of an additional year in the long-term forecast. Then, all fiscal years affected by this Plan, including the current FY-2015 and the future five years of FY through FY-2020, have been modified with macro adjustments for revenue and expenditure items. Over the past several years General Fund equity grew as planned as a result of budget adjustments that were initiated in advance of future forecasted fiscal periods with projected budgetary shortfalls. During the year ended FY-2014, the equity increased as well, arising from various actions taken as outlined subsequently, even as the prior Fiscal Plan indicated a 4

10 reduction in equity. The accumulated growth of General Fund equity over the past several years allows for the declining use of that equity during the FY-2015 through FY-2020 period. The estimated use of General Fund equity decreases from approximately $25.9 million in current FY-2015 to $4.4 million by September 30, 2020, as outlined in this updated Fiscal Plan. This planned use of equity that has been acquired in excess of targets allows the County to provide stable services to the public, provides employment security for County employees necessary for the execution of those services, mitigates fee and tax increases, and otherwise allows departments to fulfill the operating goals cited in this Fiscal Plan. Proceeds from the planned growth of General Fund equity in prior years are being used to help cover any remaining structural operating shortfalls through FY An operating budget shortfall means the County is annually projected to spend more than the annual revenue levels alone will support. As reflected in the budget adopted in September 2014, amounts budgeted in use of fund equity to balance annual operating shortfalls through FY-2019 were $34.1 million in FY-2015, and are $29.2 million in FY-2016, $25.9 million in FY-2017, $21.2 million in FY-2018, and $16.4 million in FY The combined total for use of fund equity over that five-year period is $126.8 million based on the budget adopted in September However, the revised estimated use of fund equity reflected in this updated Fiscal Plan for that same time period of FY-2015 through FY-2019 has been reduced to $108.4 million, an improvement of $18.4 million since the adoption of the budget. It is expected that the planned use of fund balance will continue to decrease (improve) as the County continues to identify budgetary and operational improvements as has been demonstrated in past updates of the Fiscal Plan. Going forward, if the budget continues to improve with respect to ongoing revenues and/or expenditures, it should be possible to attain structural operating balance in the next several years. The use of the planned growth in the General Fund equity and the process used to ensure the stability of services to the County s residents is highly dependent upon the continued cooperation of the County s elected officials to rise above individual departmental needs for the betterment of the solid fiscal condition of Oakland County. This cooperation is the cornerstone of the retention of the AAA bond rating and the fiscal respect held by Oakland County in the region and State. As has been the case for decades, Oakland County s administration continually monitors the budget and actual results of both the current year and future years budgets on a monthly, quarterly and annual basis. Budgetary adjustments for all fiscal years are proposed at every Finance Committee of the Board of Commissioners to reflect changes in operations and / or budgetary assumptions subsequent to the adoption of the operating budgets from the prior September (hence, the process is often referred to as a rolling budget ). This updated Fiscal Plan reflects only those business issues having a new net impact on the operating budgets as reflected on the Summary Schedule and discussed as follows. 5

11 NOTES TO SUMMARY SCHEDULE The footnote references included on the attached Summary Schedule General Fund Future Five Year Fiscal Plan (Summary Schedule) are explained below. Note A General Fund Equity Prior to Recommended Adjustments As reflected in the Summary Schedule, the General Fund equity as of September 30, 2014 is the starting point in determining whether projected equity is sufficient to offset any projected operating shortfalls accumulated for the periods FY-2015 through FY These amounts are based on the budget as adopted in September 2014 and then adjusted for subsequently identified issues which are quantifiable and have either a positive or negative impact on the budget or General Fund equity position. In brief summary, the ending General Fund equity as of September 30, 2014 is stronger than the amount projected in the Fiscal Plan dated June 4, 2014, which the adopted budget was based on, for the following reasons: The most significant reasons why the equity position increased over previously set projections are: the continued restructuring of various departmental operations; exercising prudence when filling vacant positions which results in favorable operating variances since the County budgets for full employment; using part-time non-eligible employees in lieu of full-time equivalents and / or under-filling positions; restricting new capital and other major projects; and general actions by operating departments to voluntarily control spending. In total, General Fund expenditures were 8.26% under budget for FY-2014 resulting in over $35.7 million of expenditure favorability. Total operating revenues were also favorable, with nearly $13.0 million in favorable revenue variance or 3.28% more than budgeted. The revenue favorability was primarily attributed to the improvement in the real estate market, which resulted in a 1.65% increase in taxable property value (compared to 1.00% budgeted increase), favorable land transfer tax and recording fees, and a high volume of tax-forfeited properties sold. Also, based on an analysis and assessment of future exposures, the County reversed $1.55 million in liabilities estimated as of September 30, 2013 for Michigan Tax Tribunal (MTT) cases in FY-2014 and beyond. As the backlogged MTT cases are getting resolved, the exposures to retroactive claims are reduced. Presently, the County has $750,000 recorded as a liability for MTT cases. The County used approximately $9.2 million of its fund equity during FY-2014 for onetime type of expenditures, primarily for capital projects such as facility and equipment for building security enhancements, Tri-party road projects, projects funded through the Water Resources Commissioner Long-term Revolving Fund and expenditure appropriations that were carried forward from FY-2013 to be spent in FY Although the FY-2014 amended budget included the planned use of almost $38.1 million of fund balance to support operations, it was not used as planned because total operations as 6

12 were favorable by $48.7 million in total for revenue and expenditures. The end result was an operating surplus in FY-2014 which increased General Fund equity by almost $11.2 million. More details regarding the County s operating results for FY-2014 are included with Board of Commissioners Miscellaneous Resolution #14295, Fiscal Year 2014 Year-end Report and Budget Amendments. To determine how much of the fund equity is available for future operations, the total ending equity as of September 30, 2014 has been reduced for those components that are restricted by law or other commitments in the amount of $31.3 million. The General Fund equity restrictions include matters such as: land sales transactions (formerly a separate fund), encumbrances (expected to be spent directly after year end), prepaid expenses, inventory, substance abuse services and carry-forward amounts. Because these dollars cannot be used for other discretionary General Fund operations, the amounts have been eliminated in the reconciliation of available General Fund equity in the Summary Schedule. The reconciliation results in an adjusted beginning net equity amount of $222.7 million as of October 1, 2014 for use in resolving operating shortfalls in FY-2015 and beyond as noted previously. Two of these equity restrictions are specially noted below: The former Land Sales Fund was closed into the General Fund effective September 30, 2011 to comply with recent Government Accounting Standards Board accounting pronouncements. In doing so, the September 30, 2011 restricted General Fund equity artificially grew by $3.5 million. With the property auctions conducted in FY-2011 through FY-2014 being above budgeted amounts, the restriction for land sales operations in General Fund equity has grown to $21.1 million. The equity is restricted by State statute and because of this restriction cannot directly be used by the General Fund for discretionary purposes. While the restricted land sales equity may eventually benefit the General Fund discretionary operations as time passes, the immediate amount and timing cannot presently be determined. No adjustment in the Summary Schedule for years FY-2015 and beyond has been provided in unrestricted equity for operating use that might be freed up in future years. In addition to the above, the Convention Facility Liquor Tax distribution from the State was well above historical levels and the amounts budgeted for FY One-half of this distribution is restricted by State law for use in substance abuse service programs. The September 30, 2014 equity restriction for substance abuse is $7.4 million. In accordance with a recent law change, as of October 1, 2014, state-funded substance abuse programs are now provided by the Community Mental Health Authority, which is a separate entity from Oakland County. Thus, going forward, any amount attributable to the dedicated one-half of Convention Facility Liquor Tax distribution paid by the State to Oakland County will be recorded as a liability, payable to the Mental Health Authority, and will no longer be reflected as restricted fund equity. 7

13 Note B Property Value Improvements/Millage Reduction The 2014 Equalization Report published last year on April 17, 2014, reported a 7.11% increase in County-wide assessed value. This represented a significant turning point and improvement over prior years considering that during the 5-year period from 2007 through 2012, the Countywide assessed value decreased in each of those years for a total cumulative decline in assessed value of 34.3% during that period. The 7.11% increase in assessed value in 2014 was the largest single year increase in County-wide assessed value since However, because of State constitutional tax limitations, County-wide taxable value increased only by a modest 1.65% in FY The September 2014 adopted budget and the five-year forecast included in the budget message provided for an estimated 3% consistent annual increase in taxable value for each year FY-2015 through FY-2019 and called for an unchanged millage rate of Based on the most recent data being compiled for the soon to be published 2015 Equalization Report, it is estimated that county-wide taxable value will increase by 3.7% in FY-2015, which is a 0.7% improvement over the adopted budget amount. The increase in assessed value is estimated to be 10.4%, the largest increase since For existing individual property parcels that did not have a change in ownership, the annual increase in taxable value is capped, limiting the taxable value increase for such properties to the rate of inflation or 5%, whichever is less. However, overall county-wide taxable value can change above the rate of inflation for several reasons such as: properties that become uncapped as a result of a change in ownership, additions/improvements to existing property, and new construction. In 2015, the rate of inflation as authorized by the State for calculating taxable value was only 1.6%. Thus, the overall estimated 3.7% increase in taxable value includes the 1.6% inflation cap on existing same-owner properties plus an additional 2.1% resulting from economic improvements (e.g. real estate sales and new construction). The rate of inflation used to calculate FY-2016 taxable value will be based on the change in Consumers Price Index (CPI) from October 2014 through September Thus far through February 2015, the change in CPI has been trending downward, with the most recent measurement being only a.72% increase in CPI since October Low oil prices, increased productivity, and monetary policy effects are some primary reasons for the current low rate of inflation. Some economists predict that inflation will begin to increase to normal levels perhaps by next year or the following year. Based on the Michigan House Fiscal Agency s estimates provided at the January 2015 Consensus Revenue Estimating Conference, the change in CPI by calendar year is estimated to be 0.6% in 2015, 2.1% in 2016, and 1.9% in To increase taxable value above these estimated changes in CPI would require continued economic improvement in both sales of existing realty and new construction. So, for example, if CPI turns out to be 0.6% in 2015, then in order to achieve a total taxable value increase of 3.0% in FY-2016 as currently estimated will 8

14 require continued economic improvement (largely new construction development) to achieve 2.4% additional increase in taxable value above the CPI limitation on capped values. The Fiscal Plan currently includes an estimated change in County-wide taxable value as follows and as quantified in the summary schedule: FY 2015: +3.7% (0.7% improvement over the adopted budget) FY 2016: +3.0%, (same as adopted budget) FY 2017: +4.0%, (1.0% improvement over the adopted budget) FY 2018: +4.0%, (1.0% improvement over the adopted budget) FY 2019: +4.0%, (1.0% improvement over the adopted budget) FY 2020: +3.0% (new year added beyond adopted budget period) If the CPI continues to drop below current estimates, it will decrease the estimated change in taxable value for existing properties that do not have an ownership transfer. If the change in CPI ends up being negative this year (as occurred in 2010), it will actually decrease taxable value for existing same-owner properties and the only opportunity for offsetting increases to help sustain total property tax revenue will be from property transfers (sales) or new development. If CPI continues to decline so that it becomes negative by September 2015, it s possible for FY-2016 taxable values to actually decrease even while assessed values (which approximate market value) increase. The County Executive Administration is monitoring CPI very closely. Eventually the Headlee Constitutional Amendment of 1978 will require the County to roll back its maximum allowable tax rate. The major variables that will impact the Headlee rollback calculation include: Change in CPI The lower the CPI, a greater impact on rollback The higher the CPI, a lesser impact on rollback Taxable value uncapping from property transfers ( pop-ups ) The greater the number of pop-ups, a greater impact on rollback Losses in personal property (recent tax exemption) will have a greater impact on rollback Primarily as a result of suppressed and/or decreasing property values, Oakland County s maximum allowable tax rate has not changed over the past 10 years. The maximum allowable tax rate remained unchanged at from 2005 through That rate is above the County s actual levy rate of mills for those same years. As a result of the three variables cited above, i.e. the low 2014 CPI of 1.6%, an increased number of pop-ups, and the recent voterapproved tax exemption for personal property, the maximum allowable tax rate will be rolled back for The exact amount of the rollback will not be known until the Equalization Report is finalized and published in April It is expected that the maximum allowable tax rate will still be above the mills that the County had been levying. 9

15 Based on the projected taxable value improvements and revenue adjustments included in the Fiscal Plan, the County Executive recently recommended and the Board of Commissioners approved a.10 mills reduction in the millage rate for the upcoming July 2015 levy. This brings the County s millage rate down to 4.09 mills. As a result of the passage of Michigan Public Act 357 of 2004, the County levies and collects it property taxes in arrears. This means the County is required to levy its property taxes in July for its fiscal year which began on October 1 of the preceding year. Taxable value is not determined until the Board of Commissioners approves the Equalization Report in April, approximately two months prior to the issuance of the July tax bills. This requirement for counties to collect property taxes in arrears adds greater uncertainty for budgetary planning, since property taxes must be estimated approximately 18 months prior to the levy date for timely adoption of the annual General Appropriations Act. Given the concern discussed above regarding the declining CPI, the Fiscal Plan includes an additional.05 mills reduction for FY Unfortunately, the amount of rollback required in FY-2016 will not be known until approximately April 2016, approximately one month before the tax bills are printed and more than six months after the beginning of the fiscal period to be funded by the July 2016 levy. Based on current property valuations, the savings to the taxpayers from the cumulative.15 mills reduction combined for FY-2015 and FY-2016 would be approximately $7.5 million annually, $75 million over a 10-year period. Going forward, the savings to the taxpayers will increase proportionally as property values increase. The millage reduction reflects good stewardship of taxpayer dollars. This is a result of the leadership demonstrated by Oakland County s elected officials which provided for a balanced budget during the Great Recession without the need to increase taxes. As demonstrated in the Summary Schedule, the budget is forecasted to be balanced through FY-2020, including the approved millage reduction for FY-2015 and the proposed millage reduction for FY Note C Revenue Sharing One significant change in the estimated revenue for FY-2015 and beyond is the restoration of State revenue sharing payments. As historical background information on this issue, State revenue sharing payments to counties were eliminated with the passage of the State s FY-2005 budget. As a temporary replacement for these state payments, the legislature imposed a summer county tax across the state, which transitioned over a three-year period beginning in July The end result after the three years was a permanent date shift in the county tax collection period from winter to summer. The intentional result by the State was an additional year of property tax collections over the three years. In essence, four years of property taxes were levied within three fiscal periods. The accelerated one year s worth of additional property tax revenue was required by State law to be placed in a restricted Revenue Sharing Reserve Fund (RSRF). The RSRF dollars were used to supplant the State-suspended revenue sharing payments to counties in Oakland County s case, over eleven (11) years into The remaining amount of the RSRF was depleted in FY-2015 as planned and intended by the State. 10

16 State revenue sharing was restored to Oakland County for a partial year in FY-2015 and fully restored starting in FY Up until FY-2015, the State did not fully fund statutory revenue sharing payments and reduced payments by approximately one-third. Last year the Legislature passed a budget bill which restored full funding of statutory revenue sharing payments in FY 2015 to all eligible counties. This is the first time in over a decade that the State appropriated full formula funding for county revenue sharing payments. There was concern that the fully restored revenue sharing appropriation was still at risk as the Legislature robustly debated how to provide additional road funding during the lame duck session at the end of Thus, the adopted budget included the conservative assumption that the County would not receive full revenue sharing and instead that it would be reduced by one-third back to the previous level of funding for statutory revenue sharing (a reduction of approximately $8.5 million annually for Oakland County). Since the statutory revenue sharing appropriation was maintained at full funding by the State for FY-2015 and since the Governor s budget recommendation includes continued full funding for county revenue sharing, this has a positive impact on the County s fiscal plan in the amount of $5.9 million for FY-2015 and $8.5 million for FY-2016 and beyond. Note D Covention Facility Liquor Tax Distribution The State collects liquor tax which is deposited in the State Convention Facility Development Fund for redistribution back to the counties. State law requires that half of the liquor tax revenue received by the County must be used to fund substance abuse programs (which subsequently gets transferred to the Oakland County Community Mental Health Authority as the provider of those services on behalf of the County). The other half is retained in the County s General Fund. Based on the past 3-5 years of increased liquor tax revenue, the Fiscal Plan recognizes an additional $1 million annually. Note E DTRF Transfer The Delinquent Tax Revolving Fund (DTRF) was established in 1974 to help stabilize annual revenues for local taxing units. It does this by paying our local communities 100% of their share of delinquent property taxes in anticipation of the collection of those taxes by the County Treasurer. The County funds the DTRF by borrowing money and issuing revolving fund notes. Payment of the notes is made from the proceeds of delinquent tax collections. Once the notes are paid in full, any surplus in the fund may be transferred to the County General Fund by action of the Board of Commissioners. In FY-2006 the equity position of the DTRF increased above the long-term target amount of $200 million, in part because of a growth in penalties and interest over the prior several years from increased property tax delinquencies resulting from the problems in the real estate and employment markets. DTRF equity peaked at $229.4 million by the end of FY The retention of available surplus equity above the target amount without specific plans for its use would be inappropriate if, alternatively, severe cuts to essential programs would otherwise be 11

17 required. Thus, for a limited period of time during from FY-2009 through FY-2012, the County judiciously used the DTRF operating surplus to fund certain General Fund and other County operating costs. As part of a planned multi-year approach which utilized DTRF equity above the $200 million target amount, the authorized transfer from the DTRF to support the FY-2012 General Fund budget was $23.15 million, which was the last year in the long-term plan for an elevated amount of operating transfer. Since then, the budget has included only a $10.8 million operating transfer from the DTRF to the General Fund. The most recent analysis of the DTRF by the Treasurer s office indicates that the DTRF can sustain the current budgeted use of DTRF equity in the amount of $10.8 million in FY-2015 and FY However, beyond FY-2016, continued use of equity at that level could bring the DTRF fund balance below the $200 million target. Therefore, it is the Treasurer s recommendation that the amount budgeted for use of DTRF equity be reduced by $1.8 million down to $9 million in FY-2017 and FY-2018 and then reduced by an additional $1.0 million down to $8 million in FY-2019 and FY These recommended reductions are included in the Fiscal Plan. Note F Pension Contribution There are three basic components that drive the projected required pension contribution for the County s defined benefit pension plan: market value of the investment portfolio, benefits paid and the actuarial accrued liability (complete with the assumptions used by the actuary to formally calculate the amount). Exhibit A to this Fiscal Plan projects the FY-2016 through FY-2019 pension contributions. Comments on each of the three components follow: Investment Portfolio Value. The net assets of the pension system portfolio as of September 30, 2014, was $787.9 million, an increase of $23.6 million after deducting $43.7 million in non-investment net cash outflows (benefit payments offset by employer and employee contributions). Investment income was $67.3 million for FY-2014, yielding a market value rate return of 9.06% during the fiscal year, which is higher than the long-term assumed rate of 7.25%. While the actual investment earned is above the assumed rate of return, any gain is mitigated in any individual year by the County s 5-year smoothing of investment gains and losses. For FY-2015, the increase in assets is based on the actual amount realized through February 2015, which is already slightly above the assumed annual 7.25% rate of return only five months into the fiscal year plus the annual required contribution (ARC) payment scheduled for transfer in March Given the daily volatility in the market recently, estimating the assets based on the actual amount of investment income realized to date in FY-2015 is a more conservative approach rather than assuming that the market will continue to increase throughout the remainder of this fiscal year and result in an annual return that would be significantly above the long-term assumed average rate. For FY-2016 through FY-2019, the increase in net assets is based on the 7.25% assumed long-term rate of return less the amount of non-investment net cash flow which includes an ARC payment in FY

18 Non-Investment Net Cash Flow. The non-investment net cash flow represents the pension benefits paid less employee and employer contributions. Actuarial Accrued Liabilities (AAL). The most subjective projection relates to the AAL representing the net present value of future pension contributions to be paid to retirees. In the past, the County s projections of this liability have been reasonably accurate, but because of its sensitivity in the calculation of current pension contribution requirements it is a critical input to Exhibit A. Using the base AAL as of September 30, 2014 ($742.9 million), FY-2015 and future years projections have included a growth of approximately $3.0 million annually. In comparison, the average increase in AAL between FY-2011 and FY-2014 was approximately $1.7 million annually, however, it was essentially flat in FY-2012 when compared to FY-2011, then a decrease of approximately $1.4 million in FY-2013, followed by an increase of $6.5 million in FY According to the actuarial valuation report for FY-2014, the Corrections Deputies group had unfavorable experience due to higher than expected liabilities for new retirees from County employment. The FY-2015 required pension contribution of approximately $4.6 million is a known amount based on the September 30, 2013 actuarial report. There is a two-year lag in the actuarial report and the actuarially-recommended pension contribution. There is subjectivity in the projections but the annual projections have followed the increases and decreases of the unfunded AAL (e.g. the difference between the AAL and the smoothed investment assets) on a two year lag basis. The FY-2013 amount of unfunded AAL (e.g. $19.4 million) impacts the annual required pension contribution in the FY-2015 budget. On March 23, the County received the actuarial valuation report as of September 30, 2014, which quantifies the ARC payment required in FY-2016 at approximately $3.3 million. The adjustment in this Fiscal Plan for FY-2016 is the difference between the recommended revised amounts and the amount of $1.5 million appropriated in the adopted budget which was based on the analysis in the prior Fiscal Plan dated June 4, Thus, an additional $1.8 million will be recommended for appropriation for FY As shown in attached Exhibit A, an ARC payment is not projected to be required in FY-2017 through FY Pension contributions for the Sheriff Command and Deputy Pension Pools in FY-2012 and prior years were covered by the excess assets in the General Employee Pool so no new pension contributions from the County General Fund were required to cover the shortfalls in those pools. The impacts on pension contributions caused by the significant investment losses in FY-2008, FY-2009, and FY-2011( a result of the national recession) were not expected to have an impact on funding requirements until at least FY-2012 since investment gains or losses are recognized over a five-year smoothing period. 13