An audit shows the city of Ypsilanti has a deficit of more than $7 million in its unrestricted net assets and more than $50 million in debt, but City Manager Ralph Lange said the financial outlook isn't entirely bleak.

The financial audit shows the city has a $7 million deficit in its unrestricted net assets.

Steve Pepple | AnnArbor.com

"I feel a little bit like we're better off," Lange said. "It's obviously not good, but it's about where we expected it to be. What's important is what the numbers and projections look like with this (five-year) plan starting into 2013 and 2014."

The audit was prepared by Rehmann Robson for the fiscal year ending June 30, 2012.

Rehmann Robson representative Mark Kettner said that the unrestricted net assets deficit could increase to $11 million and possibly further to $14 million.

Unrestricted net assets are funds that have no restrictions regarding their use or function. They can be used for any purpose.

"It will have some unfavorable effects," Kettner said. "... That's the big thing coming down the road and it's going to cost you more money."

City Manager Ralph Lange said he is looking into what the deficit was for. The city isn't yet sure of the cause or the exact impact.

"I would have to analyze that number," Lange said. "...Assets can be lots of stuff."

At the end of the fiscal year, the report states the city had a total bond debt of $53,001,984.

About $23 million of the debt is comprised of debt backed by the government and the remainder of the debt mainly represents bonds secured for Water Street.

The city owes $30 million on its Water Street debt and will continue to make payments through 2031.

Highlights of the audit:

• The city transferred $1,271,960 from the general fund to the 2006 Water Street debt service fund.
• The city has $2,647,222 left for future Water Street bond payments.
• The city's total assets exceed its liabilities by $20 million.
• The city's total net assets decreased approximately 2.6 percent, or $556,742, from the previous year.
• The general fund, which is the chief operating fund for the city, had a total fund balance of $8,659,147.
• More than $4 million of it is committed for vested employee benefits, Water Street bond payments and other uses.
• Overall, the fund balance of the general fund decreased by $735,206 for the year, but it was $493,032 less of a decrease than budgeted.
• Total general fund revenue was down about 3.2 percent, or $438,942, compared with the prior fiscal year.

SEMCOG representative Dave Boerger previously said the Water Street debt is probably "the biggest area" of challenges facing the city.

Lange said the city budgeted for the general fund balance to decrease by about $1.2 million, but was happy to see it didn't amount to that.

"That was a very big thing for me," Lange said.

According to the report, most of the city's revenue is provided by property taxes, which decreased by about 1.3 percent, or $103,305, in comparison with the prior fiscal year.

The city's total value of taxable property for 2012 was approximately $301 million, a decrease of about $28 million, or roughly 8.4 percent of the prior year.

The city's state value has decreased 39.5 percent compared with 10 years ago, City Manager Ralph Lange highlighted in the audit's introduction.

City Manger Ralph Lange

"Investment continues in the downtown with the renovation of second floor apartments and facades as well as the opening of several first floor retail businesses," Lange wrote to council.

"However, the city’s tax base is eroding as the aggregate taxable value of properties in the city and the state of Michigan decline."

Ypsilanti's credit rating from Moody’s, a credit rating agency, said the city has a "satisfactory financial position."

"With declining liquidity, and declining tax base, while currently manageable, (it) is expected to require general fund support beginning in 2013,” Moody's wrote.

Overall, the city remains in "good financial condition" and long-term financial planning is essential to ensuring the city's fiscal heath, according to Lange.

In addition to the significant impact of declining taxable values on revenues, Lange wrote in the audit introduction that the city will continues to face escalating financial challenges coupled with the increasing costs of employee benefits.

"The city also faces mounting pension and other post-employment benefits costs for current and retired employees," Lange wrote. "The revenue decline, coupled with the rising expenses, pose a significant threat to the city’s fiscal structure and a long-term threat to the stability of the city's finances."

Cost containment strategies and reductions are being implemented to reduce future stress on the city's finances. The city was faced with declining revenues beginning in 2001 and began various cost reduction strategies such as deferring capital projects and equipment purchases.

Lange unveiled his five-year turnaround plan that will allow the city to remain solvent through 2018.

The city is continuing to look at many options to reduce costs, while increasing revenues, Lange wrote. Some additional items being considered are stormwater fees, combining fire and police into a public safety department, further consolidation of city hall offices, a special assessment for street lighting, and possible collaboration opportunities with neighboring jurisdictions.

Katrease Stafford covers Ypsilanti for AnnArbor.com.Reach her at katreasestafford@annarbor.com or 734-623-2548 and follow her on twitter.