Though Ann Arbor hasn’t been hit quite as hard by the recession as other cities in Michigan, the state of the financial markets and the loss of a major taxpayer have led city officials to propose budget cuts for the 2010 and 2011 fiscal years.

City officials are looking for ways to reduce the budget without reducing services. Though the average budget cut is expected to be 10 percent, employees have been asked to think of ways to reduce the budget by as much as 15 percent. Other areas of the budget could see a reduction of about 5 percent over the next two years, Ann Arbor’s Chief Financial Officer Tom Crawford said.

The city has been facing economic setbacks since 2002 because of a downturn in the stock market and a weakening Ann Arbor real estate market, Crawford said.

But the University’s purchase of Pfizer, Inc.’s Ann Arbor campus adds a new challenge for city officials attempting to balance the budget.

Formerly the city’s single largest contributor to property taxes, Pfizer paid $4.1 million in taxes to the city in 2008. Now owned by the University — which does not pay property taxes — the city will collect no tax revenue from the land.

Even before the purchase was announced, city officials were already projecting a decrease in property tax revenues over the next few years due to the lagging economy.

“Historically they’ve gone up by the rate of inflation or a little bit higher,” Crawford said. “But now we’re expecting them to go down while our costs will still rise with inflation.”

In addition, the city has seen a reduction in the amount of sales tax revenue from the state, which is the city’s second largest source of funds.

Though the city has $16 million in reserve funds, Crawford said the goal of enforcing the upcoming budget cuts is to stabilize the budget in the long run.

“Dipping into reserve funds is not a sustainable way to fund the operation,” Crawford said of the city.

He said using reserve funds is a short-term fix to a problem with long-term effects.

Besides budget cuts, replacing the city’s current property tax structure with an income tax is being considered as a way to stabilize the budget.

The proposed change was introduced by City Councilmember Stephen Rapundalo at a meeting earlier this month.

The idea of an income tax, which would tax everyone who works in the city — not just Ann Arbor residents — was discussed about five years ago but rejected.

“They’re different philosophies,” Crawford said of property tax and income tax models. “How you design the income tax could have different effects or benefits.”

Ann Arbor Mayor John Hieftje and other City Council members rejected the idea of an income tax in 2004 due to the belief that renters might not be reimbursed for the decrease in property taxes that landlords would receive.

However, Hieftje said in an interview this week he is willing to re-examine the policy, especially after the University bought the Pfizer campus.

“It’s a good suggestion and something we should look at,” he said. “I’m happy to explore it again, but with a lot of reservations.”

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