DDA Retreat: Who’s on The Committee?

During the most recent regular monthly meeting of the Downtown Development Authority board, its treasurer, Rene Greff had asked Mayor John Hieftje, “When are you seating the committee?” At that regular board meeting, a clear answer was not forthcoming.

But at the board’s mid-year retreat, held on Wednesday morning from 10 a.m. to 2 p.m. on the Michigan Theater stage, Hieftje was more candid about why city council has not yet formed a committee.

What committee were Greff and Hieftje talking about?

The committee in question is a city council ad hoc committee that would  begin discussions with its already-formed counterpart from the DDA board. The discussions between the two bodies would focus on establishing “a mutually beneficial” financial arrangement – one that is already reflected in the DDA’s recently adopted budget as a $2 million contingency.

The DDA board voted to place that contingency in its budget in response to a city of Ann Arbor FY 2011 budget plan that assumes a $2 million payment from the DDA to the city – a payment that the DDA is not (yet) contractually obligated to make.

In the course of the retreat, Hieftje explained that the city council’s delay in seating a committee of its own was partly related to pending litigation – a topic addressed during a nearly 50-minute long closed session that began the board’s retreat.  

Closed Session to Discuss Pending Litigation

That closed session – which was voted to be held before The Chronicle arrived at the retreat – involved the letter of notification that was sent last week by Noah Hall, executive director of the Great Lakes Environmental Law Center, to the mayor and all councilmembers. The letter raised the  possibility of an environmental  lawsuit against the city of Ann Arbor based on a violation of the Michigan Environmental Policy Act – in connection with the justification for, as well as the construction-related and operational environmental impact of  an underground parking structure on Fifth Avenue. Chair of the DDA board, Jennifer Hall, recused herself from the closed session. She and Noah Hall are married.

After the board returned from the closed session to begin the retreat, Susan Pollay, executive director of the DDA, clarified for The Chronicle that Jerry Lax, the board’s legal counsel, had been present to discuss attorney-client privileged information. The closed session thus satisfied the requirements of the Michigan Open Meetings Act.

The Chronicle has not explored in detail the legal question of whether the DDA  could or would be named in the possible environmental lawsuit as a co-defendant along with the city of Ann Arbor. But constructing the underground parking garage does require cooperation between the two separate entities – the city approved the issuance of the bonds used to finance the garage, and the DDA will be servicing the bond debt as well as paying the city a $1.4 million bond user fee (spread over two years). The bond user fee is assessed because it’s the city that is ultimately responsible for the debt, if the DDA should fail to make the payments on the debt service.

And it’s the notion of cooperation between the city and the DDA that is the source of current friction over the “mutually beneficial” arrangement that the city council has called upon the DDA to discuss. Council expressed its desire that conversations begin by passing a resolution to that effect at the beginning of the year. [For additional background, start with The Chronicle's report on the  April 1, 2009 DDA board meeting and the May 6, 2009 DDA board meeting.]

Two months ago, the DDA responded to council’s request by forming a committee consisting of Jennifer Hall, Rene Greff, Roger Hewitt and Gary Boren to begin the conversation. City council has yet to respond with the formation of a committee or some other proposal for conducting the conversation that it called for.

Council’s Discomfort with DDA Committee Membership

It’s partly the “cloud hanging over Jennifer [Hall]” – in connection with the potential lawsuit that Noah Hall might bring– that Hieftje identified in the course of the retreat as a barrier to council’s moving forward with discussions over the $2 million. [A "cloud hanging over" suggests a duration longer than just the week that has elapsed since Noah Hall's notification letter was sent. To clarify, a draft of that letter had been circulated two months prior.]

Hieftje’s candid revelation came when DDA board member John Mouat asked Hieftje to comment on the delay in the city’s seating of its own committee. Hieftje had begun his response by citing the council’s heavy current work load – they just passed the budget and are in the midst of a major re-zoning initiative.

Another part of some councilmembers’ discomfort in moving forward “at this time,” said Hieftje, was that Greff was perceived as having “a chip on her shoulder.”

With respect to the timing, Greff expressed her frustration that, in her view, there would be no city council committee appointed before she left the board. Her term expires this summer, and she would not be  reappointed, she said. [It is Hieftje who makes appointments to the DDA board, which are then confirmed by the city council.] For the mayor’s part, at the retreat, he told Greff that when he read [presumably here] that she was interested in being reappointed, it was news to him.

The mayor’s commentary on the DDA ad hoc committee led board chair Jennifer Hall to lay out the rationale for its membership. She’d appointed herself, she said, as board chair. Greff had been appointed because she’s the board’s treasurer. Roger Hewitt had been appointed, because he’s the chair of the DDA’s operations committee, which handles parking management – the focus of the future city-DDA discussions. And finally, Gary Boren had been appointed, Hall said, because of his legal expertise – he’s an attorney.

After the retreat, Jennifer Hall explained to The Chronicle that her own one-year term as chair of the board would be expiring soon – though her board appointment runs through July 2010. [The first DDA board meeting The Chronicle covered when the publication launched in fall 2008 was also the first meeting of the DDA board that Hall chaired.]

In any case, that means two of the DDA’s four-member committee could be different by the time the city identifies a mechanism for communicating with the DDA’s board about the parking agreement. The idea of adding board member Keith Orr to the DDA’s committee was briefly contemplated at the retreat, but ultimately not implemented. After the retreat, Greff told The Chronicle that the DDA’s committee would perhaps meet once more, and possibly disband, but would not continue to meet with itself, without a city council counterpart.

Whose $2 million Is It, Anyway?

Before Hieftje indicated the apparent strategy the city is taking – to wait until the DDA committee membership changes before entering into a conversation – Greff had given a powerpoint presentation on the history of the DDA, how it works, and what it has accomplished in the city of Ann Arbor.

The presentation had an certain amount of entertainment value. In highlighting the DDA’s work along the Washington Street corridor, the logos of establishments like Cafe Zola, Grizzly Peak, The Blue Nile, and Cafe Habana were added one by one to the screen – each accompanied by a “cha-ching” sound effect.

From that presentation it’s worth focusing on the elements that constrain the discussion between the DDA and the city about how the DDA can help the city deal with the next budget year, FY 2011. That budget is expected to be even more challenging than the one for FY 2010 adopted this past Monday night. At the retreat, Hieftje said the city needed to contemplate the possibility that all statutory state revenue sharing would be eliminated next year. That would mean an additional $3 million shortfall to the general fund, compared to past years.

Without regard to the DDA board’s willingness to help address the city’s budget challenges, Greff’s presentation made clear that the DDA has two sources of revenue that one might contemplate trying to tap: (i) property taxes captured on the tax-increment between the baseline level and additional value added through improvements – the DDA tax capture does not escalate due to inflation or property sales, as these taxable value increases are captured by other taxing authorities, and (ii) parking fee revenues.

Can the City Take Taxes Back from the DDA?

Given that the DDA is funded partly through property taxes that would otherwise go into the city of Ann Arbor’s general fund, it’s a fair question to ask, “Can’t the city just take those taxes back?” The city could take those taxes back through two different mechanisms: (i) through refund, and (ii) through dismantling the DDA.

According to the enabling legislation that allows for creation of the DDA, refund of  taxes to the city of Ann Arbor that are currently captured by the DDA would require a determination that there was a “surplus.” And the refund would apply not just to the city of Ann Arbor:

(2) … Surplus funds shall revert proportionately to the respective taxing bodies [emphasis added]. These revenues shall not be used to circumvent existing property tax limitations. The governing body of the municipality may abolish the tax increment financing plan when it finds that the purposes for which it was established are accomplished. However, the tax increment financing plan shall not be abolished until the principal of, and interest on, bonds issued pursuant to section 16 have been paid or funds sufficient to make the payment have been segregated.

What are the “respective taxing bodies” to which the legislation refers? In the case of the Ann Arbor DDA, there are three other taxing authorities besides the city, whose taxes the DDA captures: Washtenaw County, Washtenaw Community College, and the Ann Arbor District Library. The rough breakdown of the 2009 numbers is: City of Ann Arbor, $1.9 million; Washtenaw County, $0.65 million; WCC, $0.40 million; AADL, $0.2 million.

Otherwise put, in 2009, the DDA captured $1.9 million in taxes that would have otherwise gone to the city of Ann Arbor – along with $1.2 million in taxes that would have otherwise gone to the other taxing bodies. It’s worth noting that this roughly $3 million total captured by the DDA from the four taxing bodies is on the increment, not the whole amount. So the total amount of taxes not captured by the DDA that still went to the four taxing bodies was around $6.5 million. The city of Ann Arbor share was about $4 million.

The $2 million that the city hopes to get from the DDA for its 2011 budget is almost equal to (slightly more than, actually) the total amount of tax captured by the DDA from the city in 2009. If $2 million were reverted to the city of Ann Arbor because it was determined that the DDA had a surplus, then the proportionate reversion required by the enabling legislation would entail a reversion of the total amount of tax captured by the DDA from the other taxing bodies as well.

Put differently, if the city takes $2 million from the DDA’s TIF (tax increment financing), that’s tantamount to eliminating all TIF revenue to the DDA. That’s the same outcome the city would get from dismantling the DDA entirely.

From the city of Ann Arbor’s perspective, one way to think about that scenario is this:  The $2 million in city property taxes captured by the DDA are really just city of Ann Arbor general fund dollars that the city has agreed to earmark for use in the downtown area. The benefit to the city of that earmark is that the funds are “matched” proportionately with funds from the three other taxing authorities – money that otherwise would not necessarily be invested anywhere inside the city of Ann Arbor. If the $2 million earmark for downtown is eliminated, so too is the additional $1.2 million “match.”

While all of the other three taxing bodies would benefit from a reversion of tax dollars now captured by the DDA, it’s Washtenwaw County that needs additional dollars the most. The $0.65 million that would revert to the county would amount to about 5% of the anticipated shortfall for the county’s next budget year.

In weighing the likelihood that Ann Arbor’s city council would scrap the DDA, it’s worth pointing out that the DDA’s TIF plan was renewed just recently – in 2003 – for another 30 years.

What About Parking Revenues?

The recent discussion about the DDA helping to shore up the city of Ann Arbor’s budget has not included reverting taxes that are captured or dismantling the DDA. The resolution passed by the city council in January 2009  indicates that the city is looking at the DDA’s parking revenues as a source of additional funds – by asking the DDA to open a conversation about restructuring the arrangement between the city and the DDA concerning its parking meters.

In 1992, the DDA took over from the city the management of off-street parking in the downtown (structures and lots).  It was in 2002 that the DDA assumed management of metered parking too. The deal included a rent payment for the metered surface lots of around $100,000 a year. Then, in 2005 the DDA and the city restructured the agreement so that beginning in 2006, the rent payment the DDA would make to the city would be $1 million per year.

The rationale for redoing the deal was provided in an amendment to the resolution the DDA passed on March 2, 2005. The following language was suggested by then board member Bob Gillett and adopted as a part of the resolution:

Whereas, The City is facing a funding crisis [emphasis added] and has asked the DDA to significantly increase its payments under this Agreement in order to help the City address this crisis;

The term of the 2005 deal was 10 years, and provided for the possibility that the city could draw up to two years rent in any given year, provided that the total amount did not exceed $10 million over the period from 2005 to 2015. The $2 million in the city’s FY 2010 budget, passed on May 18, 2009, includes the fifth payment of $2 million made under the 2005 deal.

In order for the DDA to make the $2 million payment that the city has included in its FY 2011 budget plan – which was introduced at the same time the budget proposal was made for Fy 2010 – the city is proposing a second restructuring of the parking meter agreement.

At the retreat, Greff characterized the first restructuring as a mistake, and stressed that she felt that the city would keep coming back year after year with additional requests from the DDA, not in the spirit of a mutually beneficial arrangement, but just to get the DDA to “cough up the cash.” At one point, in the context of her expectation not to be reappointed to the board, she said that she hoped that someone would “channel her” and stand up for the independence of the DDA as a separate body and to keep the board from simply writing blank checks to the city  year after year.

The reference to “channeling” alluded to a board meeting a few months ago at which Greff spoke of channeling Dave DeVarti, when she adopted a position on affordable housing that DeVarti himself would have taken. DeVarti, a former DDA board member, was not reappointed to the board.

In expressing concern that the city would not be content with another $2 million for its FY 2011 budget and that it would come back to the DDA with additional requests, Greff could be seen to have been channeling former board member Rob Aldrich, who raised the same concern in 2005. From the board minutes of the March 2, 2005 meeting:

Mr. Aldrich asked if it would be possible for the City to draw the full $10 million in the first 5 years; Mr. Solo said yes. Mr. Aldrich asked what would happen in year six, which is to say, would the City be satisfied to receive no further rent for the remaining five years. There was no response to this question.

In the city’s fiscal year terms, FY 2011 is “year six.” At that meeting, representing the city was councilmember Leigh Greden (Ward 3) who was filling in for Hieftje, who sits on the DDA board as mayor.

Greff’s presentation showed the $2 million rent payments as expenses within the metered part of the parking system. After showing net income of around $1 million in both 2004 and 2005, the metered system showed net losses of around $500,000 in 2006, $350,00 in 2007, and $250,000 in 2008.

The impact on the whole system of the rent payments can be seen partly in the DDA’s parking reserve fund balance. Greff’s presentation showed it dropping from almost $9 million in 2004 to $5.5 million in 2007.

What Would They Talk About?

At whatever point the city and the DDA enter into the $2 million conversation, there are two approaches that might be taken. One way is that the DDA could reduce the city’s costs by $2 million by taking over services currently provided to the downtown area by the city. This is the approach that Roger Hewitt seemed to suggest, when he encouraged his colleagues to reflect on all the things things the city provides downtown and ask what the DDA could do instead. Snow removal was one example.

The other way might be for the DDA to simply increase its rent payments. If this approach is taken, the discussion is likely to center on whether additional payments from the DDA would allow it to maintain adequate reserves in the parking fund reserve balance to allow for repairs and maintenance of the existing parking structures, some of which are relatively old.

Leigh Greden is city council’s representative to the DDA partnerships committee and a member of city council’s budget and labor committee. He would almost certainly be a candidate to participate on the city’s side in the conversations with the DDA, if those talks begin sometime in the late spring or summer 2009. His participation is somewhat less certain after the fall elections, because Greden faces a primary challenge in Ward 3 from former councilmember Stephen Kunselman.

During deliberations on the city’s FY 2010 budget last Monday, Greden meted out a harsh critique of the suggestion that the one-time $6.7 million payment from the city’s reserve fund – which the city is using to finance an early-retirement incentive for police officers – could instead be spent for items that are operations. That’s a path to bankruptcy, he said.

From the DDA’s perspective, then, a persuasive argument to renegotiate the parking agreement would likely be based on an analysis of the parking reserve fund – what the potential liabilities are that the fund is there to cover, and what an adquate reserve level is.

It’s also possible that on the city’s side there would be encouragement for the DDA to modify its position that parking fees should be adequate to sustain the system and to reserve adequately for maintenance, repair and new construction, but that fees should not be set so high that the parking system is a “cash cow.” Resistance to the idea of generating more revenue than necessary to sustain the system was reflected in Greff’s presentation with a statement that bore an asterisk denoting that it was her opinion:

Overcharging for parking in order to generate revenues for the city’s general fund places an undue burden and an unfair tax on the residents, business owners, and customers who use our downtown and runs counter to the mission of this organization.

Board member Leah Gunn objected to the characterization of the rates that the DDA sets as “overcharging” for parking. At least one person agrees with Gunn. On Friday, May 22, 2009, Andrew Rosenthal Twittered: “Leaving Univ of Michigan campus. Ann Arbor parking ‘ain’t like Philly – just 40 cents per half hour.”