One of my goals for this session is to have you acquire an appreciation for the thought that went into the development of the State of Michigan Fiscal Indicator system and the value the system can provide. As I walk through the system I will be using a web-based software tool called Munetrix. The tool has been loaded with data for most of Michigan’s 1800 municipal governments for the years 2006 – 2008. Additionally, the tool has been developed to permit the storage of budgeted and forecast data for forward-looking analysis. On this first slide you can see the Munetrix dashboard. I call the graph on the left the “Stress Meter” and will use this graph as a starting point to describe the system.
The “Stress Meter” provides an overview of the Indicator Scores. In this example the data has been filtered to show only the communities in the seven counties represented by SEMCOG (Southeast Michigan Council of Governments). I refer to this graph as a “Broad Brush” picture. The graph allows us to get an overall picture of the soundness of local governments, the trend of stability over time, and to quickly identify local units that are most in need of help. The lower the number the more fiscally sound a local unit is determined to be. There are three categories of scores grouped by color; shades of green, blue and red. I should point out that there is a small number of local units at the top representing municipal governments that have some data available but not enough to calculate a score. These are scored as null which is different than a zero. As you might have guessed, the picture displays a trend looking from left to right of locals units moving from dark green to light green, the light greens transitioning to blue, and an increasing number of reds. You can also see that we have started to manually load some audited data for 2009 and forecast data for subsequent years. By loading forecast data we can start to paint a picture for future years. The Michigan Department of Treasury will not release the 2009 indicator scores until all community data has been recorded; that should be sometime this summer.
On this slide you can see that local units scoring between 0 and 4 are labeled green and identified as “Fiscally Neutral.” Local units scoring between 5 and 7 are labeled blue and identified as under “Fiscal Watch.” Local units scoring between 8 and 10 are labeled red and identified as “Fiscal Stress.”
I know that the public release of the Indicator Scores was controversial. Before diving into an explanation of the methodology let me address the basis for these scores. First of all legislation has charged the Michigan Department of Treasury with measuring and identifying local units that may be in fiscal distress. To make certain the process of identifying fiscal distress was based on a transparent and vetted methodology, the State charged Michigan State University Institute for Public Policy and Social Research with the task of developing a scoring system. A paper was published in 2002 based on their research and conclusions. One of the primary author’s of this paper was Robert Kleine, our current State Treasurer. The algorithms and terminology that I am using today in the Munetrix software tool are based on this paper.
This slide describes a score sheet for one local unit, in this case the City of Sterling Heights, for one year, in this case 2008. At the top you can see a score of 2; relatively low and puts Sterling Heights in the middle of the green category. These reports by the way are stored as an Adobe PDF file on the Treasury’s website or available quickly from the Munetrix database. Notice that the score of 2 is the sum of each of the nine indicators identified in the right-most column of the report. I am going to briefly walk through each of the nine indicators.
The first indicator is titled Population Growth. Keep in mind that this paper was published in 2002 when we all thought of trends going in one direction; up. The State Indicator system is what I call a digital system in that you score a 1 or a 0 for each indicator. This does not tell you how much over or above you are with a particular indicator. For this reason I am showing the actual ratio as computed by the algorithm and displayed in the Munetrix software tool. This also allows a local unit to compare their ratio with their peers. A local unit with a negative population growth from the 2000 census scores a 1. A positive population growth scores a 0. The data on the screen has been filtered to show only local units in the seven SEMCOG counties. The data has been sorted in ascending order and therefore displays the communities with the largest loss of population. You can see that all the communities displayed would score a one for the Population Growth Indicator. I might mention that an unusually high or low ratio may imply the data was incorrectly reported. These are cases where additional research may be required. as an example that Sylvan Twp’s population actually rose 22% rather than declining 47%.
The second indicator identifies changes in a local unit’s taxable value. The indicator is titled “Real” because the target year taxable value is adjusted for inflation. In 2002 when the current indicator system was published, some local units were experiencing increases in their taxable value and made expense decisions based on that increase. In many cases, the taxable value had actually decreased when adjusted for inflation. Again you can see that the top 10 communities in this report all scored a one for the 2 nd indicator because they experienced a decline in taxable value.
The third indicator is calculated exactly the same as the second. The digital system requires a point at which a local unit scores a 1 or 0. This point is known as a trigger, and displayed as a white line on the slides. The first two indicators were simple in that they were based on 0. The trigger for this indicator is -4%. This means a local unit that experiences negative growth in real taxable value greater than -4% scores a 1. Units with that experience a positive growth in real taxable value greater than -4% scores a 0. All of the communities listed in this report have already scored a 1 from the previous Indicator #2. The third indicator penalizes communities an additional point when large decreases in taxable value occur.
The State Indicator system is a careful balance measuring a unit’s current fiscal stability, past fiscal performance, and forward-looking stability as well. Indicator number #4 measures the size of a unit’s public sector relative to its ability to generate funds to pay for that public sector. The trigger in this case is 5% for cities and villages and 1% for townships and counties. This is the only indicator with different triggers based on the type of government. On this report, cities above the white line, the trigger, scored a 1 while those below the white line scored 0. Royal Oak Township also scored 1 as it is measured against the township trigger of 1%.
The General Fund Operating Deficit measures a unit’s balance of spending versus revenues. The trigger for this indicator is -1% meaning it’s OK to have a small (-1%) negative balance in one year. All the communities in this report scored a one for the 5th indicator.
This indicator is looking for a pattern of negative spending. This is the only indicator that can return a “2” if the local unit has a negative spending pattern in the two previous years. What you see on the screen is based on 2007 data and all the communities listed scored a 1. To fully understand a local unit’s spending patterns the data must be viewed over time.
I mentioned earlier that the State Indicator system is a digital system in that it returns a 1 or 0 for each indicator. Behind the scenes, however, is actually a nice set of ratios that can be used to compare the fiscal performance of municipal governments. The trend in the General Fund Operating Deficit is best viewed in a graph plotting the actual ratio over time. One of the features of the Munetrix software tool is the ability to create a list of municipalities, we call favorites, with which to compare data. This graph is showing the comparatives for a collection of cities around Grosse Pointe. The graph also shows the tool’s ability to store, analyze and display data for future years.
Let me make a little aside here and show you a related chart that illustrates how beneficial this system can be. One of the advantages of working in a vibrant database is the byproducts of the system. Developers refer to this as “write once – read many.” In this graph, not one of the state indicators by the way, I am retrieving data already stored for the indicator system; General Fund Expenditures by year divided by Population by year, and calculating a cost per resident over time. I am including the “best practice” benchmark of $680 per resident. I have created a grouping of similar-sized communities in Oakland County that I labeled “Lakes Area.”. From this picture it appears that the City of Keego Harbor has noticed the upward trend in expenses and made adjustments to their forecasts to bring expenditures back inline with the “Best Practice” benchmark.
Indicator #7, Size of the General Fund Balance, is more of a forward-looking indicator. It identifies how much money is in reserve for the local unit to meet its on-going obligations. The trigger for this indicator is 13%. It is recommended that a local unit’s General Fund Balance be at least 13% of its General Fund Revenues. All the communities in this report scored a one for this indicator.
If there are any fund deficits in one or more of the unit's unreserved major fund balances the unit scores a one, otherwise it scores a zero. This report is an example of an explainable discrepancy; in this case for the City of Farmington Hills. It’s deficit was actually a surplus that was transferred to the Capital Improvement Fund right at the end of the fiscal year causing the momentary deficit.
Indicator #9 is a forward-looking Indicator identifying how likely a municipal government can meets its long-term debt. The trigger for this indicator is 6%. You can see that 6 of these communities scored a 1 while the City of Flat Rock was just on the edge.
This slide gives you an idea of the data points that need to be collected to calculate your score for a given year. The important idea to take away here is how few values are required. I might point out that the Operating Millage is not needed to calculate the score but is listed here because, 1) it has been identified in the published paper as a good additional indicator and, 2) it is the basis for calculating a significant portion of a local unit’s revenues. For now it’s not important to understand all the relationships between these data points. The most important take away here can best be explained in the following slide.
If one agrees that the State Indicator Score is a broad brush identifying the fiscal stability of a municipal government, then this chart emphasizes how few of the values a community can actually control in the near future. Fund expenditures and Operating Millage are the only two data points you can control in the short term. Managing budgets & forecasts by focusing first on data at this level is referred to as “top down planning.” This methodology can speed the process of developing future fiscal plans. With that I will turn the podium over to Dave Boerger to explain the fiscal management process.
Michigan State Fiscal Distress Indicator System for Municipal Governments
Explaining the State of Michigan Fiscal Distress Indicator System Presented by: Buzz Brown Email: [email_address] Twitter: @BuzzBrown
The Fiscal “Stress Meter” <ul><li>Count of Municipal Governments by State Indicator Score </li></ul><ul><li>0 – 10 Scale </li></ul><ul><li>Color-coded into three categories </li></ul>Powered by Munetrix™ - 2008 Data
3 categories Unit of local government is notified of its high score, is placed on a watch list for the current year and following year, and receives consideration for review. Fiscal Stress 8-10 Unit of local government is notified of its relatively high score and is placed on a watch list for the current and following year. Fiscal Watch 5-7 No State action needed Fiscally Neutral 0-4 State Action Category Points from Scale
Basis for the Process <ul><li>Legislation </li></ul><ul><ul><li>PA 72 of 1990 </li></ul></ul><ul><ul><li>PA 34 of 2001 </li></ul></ul><ul><li>Peer-reviewed publication - 2002 </li></ul><ul><ul><li>Fiscal Distress Indicators: An assessment of current Michigan law and development of a new “early-warning” scale for Michigan localities </li></ul></ul><ul><ul><li>Michigan State University Institute for Public Policy and Social Research </li></ul></ul><ul><ul><li>http://bit.ly/axIIjr </li></ul></ul>
1 - Population Growth Powered by Munetrix™ - 2008 Data Population (Target Year) – Population (2000) Population (2000) -11.7 Wayne County City Harper Woods -11.7 Wayne County City Wyandotte -11.8 Wayne County City Grosse Pointe Farms -11.9 Wayne County City Grosse Pointe -12.0 Wayne County City Grosse Pointe Park -12.2 Wayne County City Ecorse -14.8 Wayne County City River Rouge -15.5 Wayne County City Highland Park -47.2 Washtenaw County Township Sylvan -50.4 Oakland County Township Royal Oak Township Indicator County Type of Government Municipality
2 – Real Taxable Value Growth Powered by Munetrix™ - 2008 Data Taxable Value (Target Year) / Inflation Deflator Minus Taxable Value (Target Year – 2) Taxable Value (Target Year – 2) -12.1% Oakland County City South Lyon -12.1% Livingston County City Howell -12.2% Saint Clair County Village Emmett -12.7% Wayne County City Trenton -12.9% Washtenaw County Village Barton Hills -12.9% Macomb County Township Lake Township -13.5% Oakland County Township Holly Township -13.5% Washtenaw County City Saline -14.1% Wayne County City Grosse Pointe Shores -14.5% Oakland County Village Holly Indicator County Type of Government Municipality
3 – Large Real Taxable Value Growth Powered by Munetrix™ - 2008 Data -12.1% Oakland County City South Lyon -12.1% Livingston County City Howell -12.2% Saint Clair County Village Emmett -12.7% Wayne County City Trenton -12.9% Washtenaw County Village Barton Hills -12.9% Macomb County Township Lake Township -13.5% Oakland County Township Holly Township -13.5% Washtenaw County City Saline -14.1% Wayne County City Grosse Pointe Shores -14.5% Oakland County Village Holly Indicator County Type of Government Municipality
4 – General Fund Expenditures as a Percent of Taxable Value Powered by Munetrix™ - 2008 Data General Fund Expenditures Taxable Value 3.8 Oakland County City Pontiac 3.9 Oakland County City Hazel Park 4.1 Oakland County Township Royal Oak Township 4.2 Wayne County City Wayne 4.7 Wayne County City Melvindale 4.9 Wayne County City Inkster 8.2 Wayne County City Hamtramck 9.4 Wayne County City River Rouge 11.3 Wayne County City Ecorse 25.7 Wayne County City Highland Park Indicator County Type of Government Municipality
5 – General Fund Operating Deficit Powered by Munetrix™ - 2008 Data General Fund Revenues – General Fund Expenses General Fund Revenues -25.4 Wayne County City Ecorse -26.0 Oakland County Township Brandon Township -28.6 Wayne County City Riverview -32.1 Wayne County Township Van Buren -35.9 Monroe County Township Ida -39.2 Monroe County Township Bedford -59.5 Monroe County Township Ash -87.7 Washtenaw County Township Sharon -90.0 Wayne County Township Sumpter Township -205.4 Wayne County City Highland Park Indicator County Type of Government Municipality
6 – Prior General Fund Operating Deficit Powered by Munetrix™ - 2007 Data -27.7 Wayne County Township Van Buren -28.3 Saint Clair County Township Burtchville -31.1 Oakland County Township Brandon Township -36.3 Washtenaw County Township Pittsfield -36.5 Washtenaw County Township Salem -37.7 Saint Clair County City Yale -41.6 Saint Clair County Township Clay -46 Macomb County Township Harrison Township -75.4 Saint Clair County Township Kimball -101.8 Wayne County Township Sumpter Township Indicator County Type of Government Municipality
6 – Prior General Fund Operating Deficit (continued) Powered by Munetrix™ - 2008 Data
6 – Prior General Fund Operating Deficit (continued)
7 – Size of General Fund Balance Powered by Munetrix™ - 2008 Data General Fund Balance General Fund Revenues 6.9 Wayne County City Riverview 5.8 Wayne County City Grosse Pointe Park 5.5 Oakland County City Hazel Park 5.1 Wayne County City Hamtramck 1.9 Wayne County City Melvindale 1.8 Oakland County Township Royal Oak Township -8.9 Saint Clair County Township Ira -12.2 Wayne County City River Rouge -14.4 Oakland County City Pontiac -73.1 Wayne County City Ecorse Indicator County Type of Government Municipality
8 – Fund Deficits in Current or Previous Year Powered by Munetrix™ - 2008 Data $105,676.00 Oakland County City Huntington Woods $106,187.00 Saint Clair County Township Ira $110,641.00 Oakland County Township Royal Oak Township $204,323.00 Oakland County Township Independence Township $254,966.00 Oakland County City Southfield $256,134.00 Washtenaw County Township Scio $1,286,983.00 Oakland County City Farmington Hills $1,664,264.00 Wayne County City River Rouge $7,007,957.00 Oakland County City Pontiac $9,270,027.00 Wayne County City Ecorse Indicator County Type of Government Municipality
9 – General Long-term Debt as a Percent of Taxable Value Powered by Munetrix™ - 2008 Data General Long-term Debt Taxable Value 4.9 Wayne County City Inkster 5.1 Wayne County City Wayne 5.3 Monroe County Village Dundee 5.9 Wayne County City Flat Rock 6.8 Washtenaw County Township Sylvan 7.9 Oakland County Township Lyon Township 8.1 Wayne County City River Rouge 8.3 Oakland County City Clarkston 19.2 Washtenaw County City Ypsilanti 37.1 Wayne County City Highland Park Indicator County Type of Government Municipality
Data Elements X Annual Inflation Adjuster X Operating Millage X Long-term Debt X X Major Fund Deficit X X Taxable Value X Fund Balance X X X Fund Expenditures X X X Fund Revenues X X Population Target Year Target Year -1 Target Year -2 2000 Element
Focus on what you can manage Low Annual Inflation Adjuster High Operating Millage Medium Long-term Debt Medium Major Fund Deficit Low Taxable Value Medium Fund Balance High Fund Expenditures Medium Fund Revenues Low Population Control Data Element
Contact Information <ul><li>Email: [email_address] </li></ul><ul><li>Phone: 248-217-7979 </li></ul><ul><li>Twitter: @buzzbrown </li></ul><ul><li>LinkedIn: Buzz Brown </li></ul><ul><li>Blog: http://buzzbrown.blogspot.com/ </li></ul>