Tuscola County Financial Assessment Prepared by: Tuscola County Controller/Administrator

1. Tuscola County Financial AssessmentPrepared by: Tuscola County Controller/Administrator

2. Financial Assessment Objective • Project county financial capabilities • Board directed Controller-Administrator to prepare estimates • Information for budget development and labor negotiations • Includes three major sections: 2008 to 2012 financial history Mid year 2013 financial status and year-end projections Estimate 2014 and 2015 financial capabilities

3. County Finances Well Managed • Commissioners, department heads and administrative staff • Excellence in County Financial Reporting Award • Public funds safeguarded and properly accounted • A+ Standard and Poor’s bond rating • Comments from bond rating agency: Effective management practices Stable agricultural based economy Adequate reserves Low debt burden

4. Budget Overview and Services Provided • Commissioners responsible for $47 million all funds budget • $12.2 million general fund (GF) budget • Budget development most important commissioner function • Policy and priority setting through allocation of resources • 2013 budgets/financial reports available on county web site http://www.tuscolacounty.org/finreports/ • Controller responsible for preparation of draft budget • Controller presents draft budget for commissioner review-consideration

5. Full Range of Services Provided • Police, jail, courts, emergency services and dispatch • Record retention and management • Public health and Medical Care Facility • Economic development • Support for neglected, abused and delinquent children • Building codes • Animal control • Recycling • Equalization • Mosquito abatement • Roads bridges and drainage

6. Accounting Structure • Finances administered with “fund” accounting system • Finances accounted separately for certain services • Uniform Budgeting and Accounting Act • Many services accounted for through GF • County administers over 50 other individual funds • Primary focus of assessment is the GF and funds that interact with GF • Financial tools: Audit (Comprehensive Annual Financial Report) http://www.tuscolacounty.org/finreports/. Budget Monthly Financial Reports

7. 2008 to 2012 Financial Downturn • Turbulent challenging financial period • GF peak revenue 2008 $12.4 million - 2012 declined to $11.8 • Alarming decline $600,000 or 4.8% in four years • Same pattern of decline for most other county funds • Especially true for funds based millage and property tax

9. Property Tax Revenue Decline • Downward spiral caused by residential value decline • Property tax revenue single largest revenue source to GF • Accounts for 45% of total GF revenue • Major land value declines especially residential class • GF property tax revenue declined by $434,000 or 7.4% from 2008 to 2012

12. Adjustments to Declining Finances • Expenditure reductions required to balance budget • Service base and staffing levels reduced • Significant concessions and sacrifices required • Difficult decisions to prevent financial problems • Reductions included: Decreased staff Elimination/reduction of services Wage freezes and benefit concessions Employees share for health insurance/retirement increased

15. Capital Improvement Fund Drawdown • Capital improvement (CI) fund balance reduced • 2007 CI fund balance $2.1 million - 2012 $1.1 million • County unable to make GF transfers • All GF revenue prioritized for operational purposes • 2010 to 2011 $600,000 spent to solve office space needs • Depletion will continue unless GF revenue is transferred • Fund could be reduced to $600,000 in three years • Critical that part of wind revenue used to restore CI funds

17. 2012 Audited Financial Standing • All funds in positive year end 2012 standing • Significant accomplishment difficult circumstances • GF revenue $11,804,137 compared to expense $11,614,040 • First time in five years GF transfer to CI fund $110,000 • Total GF fund balance $2,546,000 on 12/31/12: Unassigned portion of fund balance (portion available for expenditure) - $1,024,000 Assigned portion (amount required to comply with policy of 10% of next year budget amount for cash flow and other unanticipated emergency needs) - $1,212,000. $310,000 is defined as an advance to the Revolving Drain Fund

18. Financial Variables and Instability • New normal - fiscal uncertainty • Worst economic/financial decade in state history • Automobile employees reduced by 2/3 • Wind energy revenue positive • Method of assessing/taxing wind energy uncertain • Difficult to forecast and plan financially • Taxable values will not increase at the rate of decrease - Headlee and Proposal A limit

19. Financial Variables and Instability • Federal and State intergovernmental aid has declined • Local control declined - state making more decisions • Counties lack taxing authority • Most revenue sources and amount charged set by state • Point in time further consolidation difficult to achieve • Elimination of tax exempt status for government bonds • 2016 county may lose over $100,000 due to eligible manufacturing personal property exemption

20. Financial Variables and Instability • Costs to implement Affordable Care Act concern • Health insurance/retirement system costs huge factors • Jail remains overcrowded most costly county service • Some officials believe current method of funding local government no longer viable

21. Wind Development Overview • Wind turbines significant event to impact county • Renewable energy standard set by state • 10% electricity produced from renewable sources by 2015 • County has sufficient wind velocity and consistency • Land lease agreements negotiated and signed • Two major unanswered questions: How will wind turbines be assessed/taxed? How much revenue will be generated?

22. State Tax Commission Multiplier Schedule Changes • 2011 STC unilateral decision changed multiplier schedule • No studies or rationale for change • Reduced wind energy revenue by estimated 27% • STC implemented without local input opportunity • Tremendous frustration to local government entities • Michigan Renewable Energy Collaborative (MREC) formed • Protect local interests and determine equitable method of assessing/taxing wind generators • Clark Hill law firm hired

23. Wind Revenue Critical Fiscal Factor • New revenue source but not “fix all” • County recovering from four years of decline • Only helps to maintain service base and CI needs • Estimates need updating regularly - situation changes daily • Caution until assessment/taxation method determine • Caution until pending assessment appeals reconciled • Wind revenue variables: Project completion date - utility companies reported cost Federal cash grant applied to value or not Which multiplier schedule is applied How many turbines installed and megawatt capacity Value of underground collection and substation

25. Projected Wind Revenue • GF receives first revenue 2013 - estimated $450,000 • $88,000 escrowed for 2013 pending Nextera appeal • Special millage funds begin receiving revenue 2014 • Special millage funds also need to be escrowed • Critical to understand – REVENUE DECLINES WITH TIME Peak GF revenue in 2015 - estimated $927,500 2027 GF decline to $411,000 Peak special millage revenue 2016 – estimated $1,079,000 2027 decline to $448,000 • Unless more projects occur revenue begins declining after 2016

30. Wind Revenue Essential to County Finances • Without wind continued property tax revenue decline projected • Wind revenue is anticipated to off-set decline • Without wind revenue further reductions required • County heavily dependent on wind energy revenue • Wind revenue critical to sustain services

32. Need to Escrow Portion of Wind Revenue • Nextera appealed 2012 assessment - 68 generators Gilford • If successful 2013 GF revenue reduced – estimated $88,000 escrowed • Taxes for 2013 were based on “old” multiplier schedule • Nextera claims federal grant reduces value by 30% • Escrow mid-point of difference between assessment and amount Nextera would pay under appeal • Only GF impacted by Nextera - 68 generators Gilford • If other projects appealed need to escrowed funds each year • May take years before Michigan Tax Tribunal hears cases

34. 2013 Amended GF Budget • Amended 2013 GF budget $12,227,753 • Dependent on revenue from phase 1 Nextera wind project • Budget assumes no use of reserves in 2013 • Includes transfer of $109,000 to CI fund – may be more • Recommend amending budget to account for escrowed funds

35. 2013 GF Revenue and Expenditure Projections • Projected revenue $12,210,000 close to $12,227,753 budget • Projected 2013 revenue $421,000 more than 2012 • Department expenditures tracking below budget • Courts, jail and buildings and grounds • Expenses estimated $12,210,000 - budget $12,227,753 • 2013 wages and staffing levels held constant • Increase GF fund balance or transfer to CI fund • Currently increase GF transfer to CI

36. 2014 and 2015 Financial Capabilities • Unassigned and assigned GF balance to start 2014 projected same or larger than 2013 • Core questions and objectives: Can same fund balance be maintained for 2014/2015? Can the service levels be maintained? Can employer absorb health insurance/retirement costs? Can a modest inflationary wage increase be provided? Can GF requirements to other funds be met? Can GF requirements to CI needs be met? • Never 100% assurance - reasonable probability • Is there enough flexibility to adjust should changes occur?

37. 2014/2015 Revenue Assumptions/Objectives • GF wind revenue increases in 2014 and 2015 • Manage wind revenue use for operational purposes • Continue to escrow funds if necessary • State revenue sharing remains constant - $886,000 • District court revenue remains about same as 2012 • Delinquent court fines remain about $200,000 to $220,000 • Register of deed remains at a level as 2013 projected • State continues to pay diverted felon • Indirect cost revenue remains similar as 2013 budgeted

38. 2014/2015 Expenditure Assumptions/Objectives • No staffing increases • 2% wage increase for 2014 and 2015 • Health insurance cost same for 2014 - 5% increase 2015 • Retirement costs same for 2014 – 5% increase 2015 • GF Transfer to CI fund

39. Financial Assessment Conclusions for 2014 and 2015 • Optimistic budgets can be balanced and accomplish objectives: Maintain current services and service levels Maintain current staffing levels Employer pays health insurance/retirement increases Provide modest inflationary wage increases Maintain at least the same GF fund balance levels Satisfy objective of rebuilding depleted CI fund • Anticipated GF revenue increase for 2013-2014-2015 • Wind revenue enough to off-set other land value decreases • See GF revenue and expenditure spreadsheets • See spreadsheet for funds that interact with the GF