It is budget time for the city and within the next month City Council will approve the 2012-2013 budget, which begins on July 1, 2012.
We still face the challenges of declining property values reducing our revenues while the costs of healthcare for active, and retired employees, continue to increase. This budget includes a slight increase in State Shared revenues from last year.
The overall toughest challenge in the budget continues to be the future obligation for health care insurance for current and future retirement commitments. While the city’s pension obligation is almost 100% funded the retiree health care obligation is less than 10% funded at this time. Over the next two decades this obligation is over $20 million dollars, and we currently have a balance in the Retirement Healthcare Fund of $2 million to offset it.
A fair question is how did this gap come to be? Three factors have contributed to it. First, the dramatic and unforeseeable increases in the cost of health care insurance over the past ten years are a huge factor. Second, pressures on the budget over the past five years have reduced the city’s ability to set aside extra funding to meet the obligation. Third, over the past couple decades prior to 2008, as revenues grew, city officials made commitments that seemed reasonable at the time, but in fact were very difficult to measure out in the future. Today’s environment requires that these types of gaps be identified. While, to me, our gap seems large, it is not as large as the gap of many other cities in southeast Michigan. Unfortunately, that does not make it any easier to manage.
This gap is on the radar screen of our City Manager and Treasurer and they are working diligently to develop solutions. As you are aware many cost cutting changes have been made over the past few years, include a 5% wage sacrifice by all city employees, and benefit cuts. The city’s staff has been reduced by over 10%. More will need to be done to address the gap. Some of the strategies being explored include consolidating the numerous existing retiree health care plans into one plan to achieve administrative efficiency, evaluating self-insurance pools along with alternative health care providers, closing the pool of active employees eligible for retiree health care through the collective bargaining process, utilizing Medicare coverage to provide more cost effective coverage without a loss of benefits and, once the gap is down to a manageable level, evaluating financing alternatives to provide a consistent annual contribution.
I am very confident that the strategies being developed will contribute to resolving the gap and returning the City of Farmington to full financial health over the course of a few years. One questions in my mind is will we learn the long term lesson of matching our revenues to our obligations? I believe the lessons of the economic collase have taught us all to be careful about our budgets, our savings and our obligations.