MARQUETTE — While Marquette’s annual financial audit for 2016 shows the city in “good shape,” challenges loom in the form of rising costs, growing pension liabilities, the future of the Presque Isle Power Plant, tax issues and continuing reductions in state funding.

The Marquette City Commission discussed the audit at a work session this week ahead of its regular meeting.

Michael Grentz, CPA of Anderson, Tackman & Co., presented the audit report, showing the city’s net position increased from fiscal year 2015 by about $2.8 million.

Grentz said the city is in “good shape.”

“But the future is unknown, and if you look at the trend, revenue’s gone down and expenses are going up and trying to balance the two’s (going to) be interesting for the next few years,” Grentz said.

Despite lower than expected revenues, the city added $442,000 to its general fund due to even lower expenses, leading to a $13.5 million equity balance.

“Which in this day and age is looking pretty good because you never know how funding is (going to) work out,” Grentz said. “You have a lot of issues coming forward with property taxes and state revenue, so having a reserve fund is good.”

The savings weren’t a result of any one project or line item, but a “little bit everywhere along the board,” Grentz said, which means not only the administration, but the departments are spending conservatively.

“So I like to see that kind of budgeting,” he said.

Major concerns going forward include the likely retirement of the Presque Isle Power Plant, the city’s largest taxpayer, by the end of this decade, leading to a projected loss of 11-14 percent in annual general fund revenue, according to the audit report.

Also, revenue sharing from the state has steadily declined over the last decade, including by 1.7 percent in 2016.

According to the report, federal and state revenue “remain highly volatile and mostly in decline,” which, along with changes in property tax collections from businesses, Veteran Real Property Tax exemptions and protocol changes from the Michigan Tax Tribunal, is leading to “tremendous uncertainty.”

The city administration views the state revenue as “speculative” and no longer reliable, according to the report. Based on previous years distributions, the report estimates the “city has ‘lost’ almost $1 million per year due to cutbacks from the state since 2000.”

“That’s a huge sum of money and for us that would be very, very significant,” Mayor Pro Tem Tom Baldini said. “So we got through this, it’s in good shape but … the state has really cut back on revenue sharing, they haven’t cut back on mandates, and it’s really quite negatively affecting us.”

The report says due to these losses and new reporting requirements for pension and other post-employment benefits, the city could face a need for higher property taxes and fees.

“The city could face dire circumstances if the most significant risks come to pass, and lead to substantially diminished service provision as well as fewer capital improvements and maintenance,” the report’s introduction says. “The city administration will continue to monitor these situations closely, and recommend conservative fiscal policies until risks are resolved and stronger economic growth and recovery is demonstrated.”

CFO Gary Simpson said the city’s pension liability through the Municipal Employees Retirement System is about $26 million, or 61 percent funded. Added to liability from the independent police and fire pension fund, it’s almost $38 million.

When the city has to put its health care liability on the books next year due to scheduled reporting changes by the Government Accounting Standards Board, it will all total more than $45 million, he said.

Grentz said those numbers are estimates.

“Really, at the end of the day, we don’t know what that number’s (going to) be until we live out the life of the plan,” he said.

In answering how there was a $7 million increase in the MERS pension liability from 2015 to 2016, Grentz explained that was due to reduction in the projected earned interest from 8.25 percent to 7.75 percent, as well as a rise in the life expectancy rate and other changes in actuarial assumptions.

Commissioner Mike Conley said he’s been concerned about the assumed interest rate for a long time, since some states are dropping it to as low as 6 percent, and even lower would be more realistic.

“It’s politically expedient to keep it at an artificially high rate,” Conley said.

Grentz said his rough calculations based on averages for the last 10 years indicate about a 5.5 percent rate of return.

“That sounds about right,” Conley said. “But that would ruin us if they ever dropped it down.”

Grentz said it’s a conundrum from MERS’s standpoint, because if communities couldn’t pay their required monthly contribution, they would start to go defunct.

“It’s a bit of a catch-22,” he said.

Mary Wardell can be reached at 906-228-2500, ext. 248. Her email address is mwardell@miningjournal.net.