Alpena County dwindles cash account as costs hike, revenue shrinks
ALPENA — High pension obligations, lost revenue, and increased expenses have decimated small county budgets in Northeast Michigan over the last several years, forcing them to dig into savings more often for large amounts of money to cover gaps between income and expenses.
For years, Alpena County — like many counties around Michigan — added money to its cash accounts at the end of each fiscal year, a News analysis of audits of all 83 Michigan counties shows.
Now, financial constraints and a lack of action on budget cuts has caused Alpena County’s savings to drain rapidly. The county had about $4.6 million in its general fund fund balance at the end of 2019, but officials project that will shrink to about $2.9 million at the end of 2020 and as little as $1.5 million by the end of 2021 without action.
The News analysis showed Alpena County ended the 2019 budget year with enough money in the bank to cover about 46% of its yearly expenses, meaning the county could pay its bills for nearly six months without any income. That was just more than the statewide median of about 42% of yearly expenses and well above the 25% that local government finance experts recommend and that Alpena County policy requires.
If the 2021 projections are true, however, the county would only be able to cover about 14% of annual expenses.
Alpena County Commissioner John Kozlowski said the steep and sudden use of fund balance needs to be addressed soon. The can has been kicked down the road, and the time to pay the piper is near.
“If we continue to go down this road, we’re going to be in trouble with our general fund,” he said. “These are decisions we are all going to have to make together soon, because our fund balance isn’t going to be there forever for us to fall back on.”
NO MORE BAND-AIDS
The county has emptied or drastically reduced other funds to keep its growing yearly shortfall at bay and avoid cutting employees and hours. At a meeting this month, commissioners looked at drastic cuts to slow or stop the bleeding, but decided to wait and see if revenue improves.
That’s happened in the past.
Alpena County budgets exceptionally conservatively, a News analysis of the county’s last five annual audits shows. Between 2015 and 2018, for example, the county added or kept nearly $1 million more in its fund balances than its final annual budgets projected — an average of nearly $209,000 a year.
Last year was the first year in five years the county had to withdraw from fund balance. The county withdrew $495,539 to cover gaps, auditors said, but that was still $60,000 less than the county expected.
That’s a trend unlikely to continue, however.
Check out an interactive chart below showing Northeast Michigan counties’ fund balance as a share of annual expenses. Story continues below graphic.
A nearly $1 million payment to the Municipal Employees Retirement System of Michigan, the county’s pension manager, is budgeted next year.
That payment and similar-sized future payments on the county’s multimillion-dollar debt to current and future retirees is the primary culprit for the county’s dwindling savings, officials said.
During recent budget meetings, commissioners pondered eliminating several positions in the Alpena County Sheriff’s and Prosecutor’s offices, but instead decided to move money from several accounts into the general fund, including draining a rainy-day fund.
County Treasurer Kim Ludlow said that “was our last Band-Aid,” she said. “Now that it is gone, it is gone.”
‘THIS IS WHERE YOU END UP’
Fund balances act as more than a savings account for covering gaps between revenue and expenses. They also act as a cash-flow account, letting counties pay bills, cut paychecks, and buy supplies like fuel for snow plows in between tax collections.
To make sure there’s enough money to do all that, the gold standard is for counties to have enough money to cover 20% to 25% of annual expenses, said Bob Daddow, retired Oakland County deputy executive and former government auditor.
Michigan counties’ fund balances vary widely, from a handful of counties with less than 10% in the bank to some with enough to cover a year or more of bills, The News’ analysis of audits found.
There are plenty of legitimate reasons a county may build up its fund balances, such as saving for big capital projects, Daddow said.
And “there is no industry standard that says, if they’re losing money and they have 25%, they start chopping,” he said.
The important thing, Daddow said, is that governments plan long-term and make sure there’s not only enough money to cover this year’s expenses but potential expenses in future years, that every investment has revenue to support it, and that they aren’t losing money.
In Oakland County, for example, administrators sought to maintain enough money in the bank by the end of each year to cover 20% of projected expenses three years out. Oakland County ended its 2019 budget year with enough money in the bank to cover 69% of expenses, according to its auditors.
Budgeters ought to look at potential revenue drains and cost spikes in future years, such as the ongoing coronavirus pandemic that has stifled the economy and is likely to hurt property taxes for years.
“We’re in this COVID thing for the long-term, and they are not going to simply be hurt in 2020, they are going to be hurt until about 2023,” Daddow said.
Though Ludlow, the Alpena County treasurer, has pushed her board to adopt long-term budgeting, commissioners have yet to do so.
“Without a long-range plan, this is where you end up,” Ludlow said. “If you don’t stop and think about how you’re going to pay for increases in expenses when you’re not adding revenue, you’re not doing what needs to be done. I don’t think we have looked at this realistically.”
News Managing Editor Justin A. Hinkley and intern Alyssa Ochss contributed to this report.
Steve Schulwitz can be reached at 989-358-5689 at email@example.com. Follow him on Twitter @ss_alpenanews.com.
Check out Monday’s edition for a look at how other Northeast Michigan fund balances are faring.