Extra City Revenue Based on Optimism

Ann Arbor City Council Sunday caucus (May 16, 2010): On Monday night, the city council will deliberate on several amendments to the proposed city administrator’s budget that, if approved, would significantly alter the assumed revenue picture for that proposed budget. [Chronicle coverage: "Ann Arbor Budget Deliberations Preview"]

The city council’s regular Sunday night caucus, which again enjoyed only sparse attendance – from four out of eleven councilmembers – gave a glimpse into how part of the city council is thinking of the possible changes in revenue items. One of those changes to revenue items is certain – the DDA agreed at its May 3 meeting to pay the city $2 million to help cover general expenses at the city.

Two other revenue changes are based on projections, not payments – an additional $625,000 in parking fine revenues, plus almost $1 million in statutory state shared revenues. The additional state shared revenue is an amount that the city administrator assumed for his budget would not be forthcoming from the state.

During the Sunday caucus, mayor John Hieftje attributed the difference in outlook on state shared revenues to a difference in political perspective. He said that Roger Fraser, the city administrator, is “not as plugged in” to the political considerations in Lansing as he and the rest of the city council are.

Questions were raised among residents about the certainty of the extra $625,000 in parking fine revenues. Those questions were raised in the context of the DDA’s interest – as expressed in the term sheet produced recently by a “working group” of city councilmembers and DDA board members – in moving towards a parking enforcement system managed by the DDA and designed to reduce the number of parking tickets.

The revenue items are key to budget amendments that would result in eliminating five firefighter positions – instead of the 20 firefighters and 15 police officers that the city administrator’s budget calls for.

At the caucus, Stephen Kunselman (Ward 3) gave some insight into an amendment he’ll be bringing forward to reduce the tax administration fee from 1% to .81%. When the fee was increased from .81% to 1% in 2007 for the FY 2008 budget, explained Kunselman, it had not come as a request in the administrator’s budget. The increase, he concluded, had not been made in order cover costs of administering the property tax – they were already covered.

Councilmembers at caucus had no information on the possibility of moving maintenance costs for Argo Dam out of the city’s water fund. Indications from city official on multiple occasions through the fall of 2009 and winter of 2010 were that those maintenance costs would be moved from the water fund to the parks fund.

Parking Fine Revenue and DDA

By way of background, the increase of $625,000 in parking fine revenues is estimated to result from an increased fine schedule that the council is expected to authorize on Monday night. When the revised fine schedule was first introduced to the city council at a Nov. 9, 2009 working session, city treasurer Matthew Horning projected that the revised schedule would generate an extra $875,287. [Chronicle coverage: "Parking Fines to Increase in Ann Arbor?"]

The new parking fine schedule has been on the council’s agenda twice before and postponed each time – first at the council’s Jan. 19 meeting and again at the April 19 meeting. When the most recent year’s fine collections were calculated into the estimates, the amount of projected extra revenue had been revised downward to $625,000. In January, the council’s postponement was motivated by the fact that the council had called on the DDA to submit a parking plan to the council by April 19 – Sandi Smith (Ward 1) had wanted to evaluate any possible fine increases in the context of that plan.

The revised schedule features an increase in expired meter fines from $15 to $20, but keeps the discounted rate of early payment the same, at $10.

At the Sunday caucus, resident Brad Mikus – who had contemplated a run in the Democratic primary for Christopher Taylor’s Ward 3 council seat but did not submit petitions – questioned how realistic the parking fine revenue assumption is. He asked specifically how the term sheet, which is supposed to serve as a basis for future negotiations between the DDA and the city on a parking agreement, addressed revenues and expenditures [.pdf of term sheet] [Chronicle coverage: "DDA OKs $2 million Over Strong Dissent" and "DDA to Tie $2 million to Public Process"]

Mikus wondered if the term sheet – if implemented as currently formulated – foresaw part of the increase in revenues from parking fines going to the DDA, not the city, thus amounting to a “double counting” of the $2 million and the $625,000. The $2 million payment assumes that the city and the DDA will use the term sheet as a basis for renegotiating the parking agreement.

In relevant part, the language from the term sheet reads:

Citation revenue related to Parking Code enforcement will go to DDA. DDA will hold the City harmless for net revenue lost due to DDA’s capture of Parking Code citation revenue. The parties acknowledge that the DDA proposes to emphasize parking-related compliance revenues rather than parking-related enforcement revenues.

Mikus’ question could be recast as follows: What is the baseline for the city to be “held harmless” on parking violation revenues? At the Sunday caucus, mayor John Hieftje indicated that from the city’s point of view, the baseline would include the revenue increases after the increased fine schedule was approved.

Hieftje also said he’d heard reports about the DDA’s recent partnerships committee meeting [on May 12] that DDA board members were thinking of the DDA as a “pass through for revenues” from the parking system. In that case, the DDA would retain only those revenues sufficient for managing the parking system – it would manage the system on an “at cost” basis.

Based on The Chronicle’s attendance at that partnerships committee meeting, there was not anything like a consensus for that view. However, the question was floated of whether the DDA should include administration of the parking system as part of its activities: Should the Ann Arbor DDA be a parking authority or focus its attention on being a downtown development authority?

That focus on being a downtown development authority is reflected in the last item of the term sheet between the city and the DDA [emphasis added]:

The working group envisions that the DDA would serve as a visioning, initiation and implementation engine for development of City-owned property within the DDA district. The nature and extent of this role will be discussed, considered and, if approved, implemented in parallel to any omnibus agreement, but would not be part of that agreement.

The DDA currently has an “at cost” contractual arrangement with Republic Parking to operate the parking system. Asked at caucus why the DDA would be interested in continuing to function as manager of the parking system “at cost” when the city could simply contract directly with Republic Parking, Sabra Briere (Ward 1) – putting herself in the position of the DDA – chimed in: “I’d quit!”

Stephen Kunselman (Ward 3) said he was not convinced that the DDA’s proposed approach of reducing parking citations with a customer service focus was a good one.  For one thing, he said, he felt that the community standards officers at the city already did a good job exercising appropriate discretion in handing out tickets.

The idea of the city taking over the parking system entirely, leaving the DDA to focus on development of downtown property, was met with a fair amount of enthusiasm at the caucus from Kunselman. He indicated that he thought the DDA should take a leading role in developing the Library Lot and other parcels downtown, and that they didn’t necessarily need any direction from the city council to do that. He did allow that ultimately the city council must approve site plans for development.

State Shared Revenue: Why So Optimistic?

A proposed amendment to the city budget assumes there will be almost $1 million more in state shared revenue coming to the city than had been estimated in the budget submitted on April 19 by city administrator Roger Fraser. Asked what had changed to cause councilmembers to think there will be an increase in estimated revenue from the state, Hieftje said that Fraser was not as “plugged in” to the political dynamics in the state legislature as he and some of the other councilmembers were.

For his part, Hieftje said, he was in regular communication with state Rep. Pam Byrnes, Rep. Rebekah Warren, and Sen. Liz Brater, and felt like there was an emerging appreciation in Lansing for the fact that cuts to state shared revenue were having direct impacts in cities across Michigan on their ability to maintain police and fire protection. He pointed out that the state House had proposed an increase in state revenue sharing, and said that the state Senate had proposed a 4% cut, which was “not that deep.” Hieftje also pointed out that sales tax revenues – out of which state shared revenues are paid – are starting to increase.

However, the pessimism expressed by Fraser in his budget assumptions was not based on the current legislature’s attitude. Instead it looked to the newly elected legislature in the fall, which could still undertake mid-year cuts to state shared revenue. From The Chronicle’s account of the city council’s April 19 meeting when Fraser presented his budget to the city council:

The assumption is that the state of Michigan will continue to struggle with its own budget deficit. That is compounded this year, Fraser said, by the fact that there will be a massive turnover at the state legislature with a number of people in the House and the Senate and in the governor’s office, who will not be seeking election this fall because of term limits. It is yet to be seen what the impacts will be in terms of their willingness and ability to make decisions affecting the future of the state, Fraser concluded. “We have not assumed a great deal of optimism about that,” Fraser cautioned.

Brater is term limited and is not seeking reelection. Both Byrnes and Warren are vying for Brater’s 18th District seat.

Asked what the “back up plan” would be if Fraser is right, Hieftje indicated that every city across the state is going to do the best it can to put together a budget, and that they’ll “cross their fingers.”

Argo Dam, Water Fund

Through the fall of 2009 and during the early 2010 budget meetings held by the council, councilmembers and staff gave indications that a change would be made – to fund the Argo Dam maintenance out of the city’s parks budget. The motivation behind the change is that the dam serves a recreational function, not a drinking water function.

From the Nov. 5, 2009 city council meeting:

Later in the meeting after [Ward 4 councilmember Margie] Teall arrived, she got clarification that the money for the attorney fees would be paid out of the fund that pays for maintenance and operation of the city’s dams – the water fund. Carsten Hohnke (Ward 5) asked where the money in the fund came from. City administrator Roger Fraser explained that it came from the sale of water – that is, from residents’ water bills.

Fraser indicated that while there’d been discussion of putting the maintenance and operation of Geddes and Argo dams into the parks and recreation budget instead of the water fund, at this time it was the water fund that currently supported those dams. The maintenance and operation of those dams is built into the fee structure for water, he said. In response to a question from Higgins, he allowed that changing the funding to the parks and recreation budget should have an effect – how much was hard to say – on calculating the water rate structure.

At the council’s Nov. 16, 2009 meeting, a resolution to accept the Huron River Impoundment Management Plan was postponed to the Dec. 7 meeting. It included an explicit recommendation to move dam maintenance funding out of the water fund:

RESOLVED, The Ann Arbor City Council recommends that operation and maintenance of the recreational dams (Argo and Geddes) not be funded from the Drinking Water Enterprise Fund; and

RESOLVED, The Ann Arbor City Council recommends that funds currently used for the operation and maintenance of the recreational dams from the Drinking Water Enterprise Fund be reallocated to implement the Source Water Protection Plan to protect Ann Arbor’s Drinking Water.

The HRIMP report was ultimately remanded back to the city’s park advisory commission and the environmental commission at the council’s Dec. 7, 2009 meeting, but the resolution language on shifting funding of the dam maintenance out of the water fund was removed. From The Chronicle’s report [emphasis added]:

In the course of the meeting, when Hohnke’s amendment removed mention of the funding shift, mayor John Hieftje stressed that the intent to shift dam maintenance funding out of the water fund to parks and recreation was part of the budgeting plan for FY 2011. The reasons why it’s a potential legal problem to fund dam maintenance out of the drinking water fund were explored to some extent at the council’s caucus the night before.

The previous night’s caucus had included remarks from local attorney Scott Munzel. From The Chronicle’s report [emphasis added]:

Scott Munzel introduced himself as a Ward 5 resident of Ann Arbor, who also serves on the board of the [Huron River] watershed council. [...]

If the council decided to leave the dam in place, he said, he hoped that they would take seriously the question of how much it costs to maintain, which he said was around $50-60,000 per year. Currently, he said, that is paid out of the drinking water fund, which was not just inappropriate, but possibly even illegal, based on the Bolt v. City of Lansing case. That case involved a stormwater fee, which in the view of the court amounted to a tax. The court established criteria distinguishing a fee from a tax as follows [from the Michigan Municipal League summary]:

1. a user fee must serve a regulatory purpose rather than a revenue-raising purpose;
2. a user fee must be proportionate to the necessary costs of the service; and
3. a user fee must be voluntary – property owners must be able to refuse or limit their use of the commodity or service.

Responding to Munzel, mayor John Hieftje noted that the intention was to rectify the funding source issue when the next budget is prepared.

Then, on Feb. 8, 2010, at the second meeting of the city council devoted specifically to the budget, Jayne Miller, who was at the time the city’s community services area administrator, indicated that the dam maintenance funding needed to be shifted. From The Chronicle’s report:

Miller then put the question in the larger context of the Argo Dam. Its maintenance funding is currently in the city’s water fund, but needs to be moved out of that fund. [Roger Fraser has previously indicated that this is something that will be undertaken in the current budget cycle.]

At Sunday’s caucus, Hieftje indicated that he was not aware of any amendment that would change the way the dam maintenance is funded. Briere indicated that as it’s currently formulated, the administrator’s budget assumes that maintenance costs for Argo Dam will continue to be paid out of the city’s drinking water fund.

Tax Administration Fee

The General Property Tax Act 206 of 1893, as modified in 1982 by Public Act 503, allows for the “local property tax collecting unit” – in this case, the city of Ann Arbor – to impose a fee on taxpayers not more than 1% of the total tax bill for the parcel. [See Chronicle coverage: "Ann Arbor Budget Deliberations Preview"]

Stephen Kunselman (Ward 3) will be suggesting an amendment that would reduce the fee from 1% to .81%. At the Sunday caucus, when asked if he’d undertaken an analysis showing that the cost of collecting the taxes was equal to .81% and not 1%, Kunselman offered the following explanation.

In 2007, the city administrator’s FY 2008 budget had called for a .81% administration fee – presumably, Kunselman said, because that was an amount that was adequate to cover the cost of administering property taxes. He said he’d not seen the proposed amendment until the night the budget was to be adopted. [Kunselman served on the city council at the time.]

Because the city administrator had at the time proposed .81%, Kunselman took this to be a reflection of what the costs of administering the tax were. The 2007 amendment, he said, did not indicate any analysis of the costs of administering the tax.

After the caucus, Kunselman told The Chronicle he saw the the situation as “overflowing a bucket.” That is, the money goes into the finance and administrative services budget for administering the property tax, and because it’s more than adequate to cover costs, the surplus is allowed to spill over into whatever area of the budget the city wants to cover.

Security System Downgrade?

Mike Anglin (Ward 5), who also attended the caucus along with Hieftje, Briere, and Kunselman, discussed briefly the possibility of reducing the $975,000 expenditure for the security system in the police/courts building. One possibility he entertained would be to tap the building’s construction fund – at the city council’s last meeting focused on the budget, city administrator Roger Fraser had indicated that the $975,000 expenditure covered those items not actually built into the building.

Another possibility would be to reduce the cost of the system by opting for the minimum security standards – Anglin noted that the building was not meant to be a maximum security facility. It was not clear whether the $975,000 already reflected the minimum security standards for a police/court facility.