DDA: Parking, Excess Taxes Still Not Done

Ann Arbor Downtown Development Authority special board meeting (May 20, 2011): A special meeting held by the board of the DDA on Friday was meant to give some final resolution to the DDA’s side of a new contract under which it would continue to operate the city’s public parking system.

It was also intended to settle the matter of excess capture of TIF (tax increment finance) revenue in the DDA district – an issue raised by the city of Ann Arbor just before the DDA board had originally planned to vote on the new parking contract on May 2.

The board did vote on Friday to affirm a calculation by DDA staff that roughly $473,000 of excess TIF capture since 2004 would be divided among the following taxing authorities, which have a portion of their tax revenues captured in the DDA TIF district: Washtenaw County; Washtenaw Community College; and the Ann Arbor District Library.

Based on a representation at the special meeting by mayor John Hieftje – who has a statutory seat on the DDA board – the city of Ann Arbor is likely to agree to “forgive” the $711,767 in excess TIF capture that would be due to the city. More than that amount has effectively already been returned to the city, in the form of a roughly $0.5 million annual grant to the city to help make bond payments on its new municipal center, and a $1 million expenditure to demolish the old YMCA building, as well as other grants. In total, around $7.5 million has gone to the city, according to the DDA.

At Friday’s special meeting, the DDA board also voted to ratify its side of a new contract under which it would continue to operate the city’s public parking system. Among other features, the new contract would obligate the city of Ann Arbor to report regularly on how it is using public parking system revenues for street repair in the downtown, and how it is enforcing parking regulations downtown.

More controversially, the new contract would allow the DDA to set parking rates. Currently, the DDA forwards proposed rate changes to the city council, which can then veto the DDA’s proposal if it acts within 60 days. If the council does not act to block the rate change, the change is enacted. Although Hieftje said at the DDA board meeting he felt there was adequate support on the council to approve such a contract, there are currently at least five likely no votes on the 11-member council.

Also controversial is the exact percentage of gross revenues the city would receive from the public parking system. Before the issue of the excess TIF capture arose, the DDA board was poised to ratify a parking contract that would transfer 17% of gross parking revenues to the city of Ann Arbor’s general fund. At Friday’s special meeting, the resolution before the board dropped that number to 16%. Hieftje proposed an amendment to raise the figure to 17%. That amendment was attached to a contingency that the city council would provide a plan amendable to the DDA in which the city would “underwrite” the DDA’s fund balances. It was the 17% with a contingency that the DDA board passed.

So the special DDA board meeting did not settle with finality either the issue of the excess TIF capture or the DDA’s side of the parking contract. For the TIF capture issue, the relevant taxing authorities – especially the city of Ann Arbor – will need to affirm the solution that the DDA board approved.

For the parking contract issue, the DDA’s contingency means that the city council’s Monday, May 23 meeting – which is a continuation of its May 16 meeting, when it was supposed to approve the FY 2012 budget – will likely be recessed and continued again on May 31.

One possibility for how events would unfold is this: (1) May 23 – the city council ratifies the city’s side of the parking contract and provides the plan for underwriting DDA fund balances; city council also deliberates and amends FY 2012 budget but does not take a final vote on it; (2) May 24-27 – DDA schedules a special meeting to accept the parking contract contingency; and (3) May 31 – city council resumes the meeting started May 16 and previously continued on May 23, and approves FY 2012 budget. [.pdf of draft parking contract]

Historical Background: May 2, 2011

Board chair Joan Lowenstein led off with a confirmation from Joe Morehouse, the DDA’s deputy director, that the special meeting had been properly noticed to the public under the Open Meetings Act. Morehouse indicated that a paper notice had been posted at city hall, and the meeting had been added to the city’s online Legistar scheduling system, and posted to the DDA’s website calendar.

Lowenstein began by reviewing where things had stood before the May 2, 2011 DDA board meeting. The DDA board had been poised to ratify its side of a new parking contract under which it would continue to operate the city’s public parking system.

By way of background, the DDA has already transferred $2 million more to the city from the public parking revenue than the current contract with the city requires. The decision last year to transfer an additional $2 million of parking revenue to the city was made at a board meeting last April, over strong objections of some board members. [Chronicle coverage: "DDA OKs $2 Million Over Strong Dissent"]

The details of the new parking contract have been negotiated at public meetings between so-called “mutually beneficial” committees of the city council and the DDA board for nearly a year, starting in June 2010. Before that, a “working group” of councilmembers and DDA board members had worked out of public view since early 2010 to establish a term sheet as the basis of the negotiations.

Last summer, as the two committees finally emerged into public view to start the negotiations, their stated goal was a ratified new contract by Oct. 31, 2010. That goal was not met.

Key Features of New Parking Contract

Key new elements of the new parking agreement include a requirement that the city report to the DDA on its street maintenance activity in the downtown area, as well as its parking regulation enforcement activity. A standing committee composed of DDA and city staff would help ensure communication on enforcement issues. The term of the proposed contract would be 11 years, with a one-time renewal through 2033, which is the end of the DDA’s lifetime. [First established in 1982 for 30 years, and set to expire in 2012, the DDA was renewed by a city council resolution in 2003.]

More significantly, however, would be a new authority for the DDA to set parking rates independently of the city council. Currently, the DDA forwards proposed rate changes to the council, and those changes automatically take effect unless the council acts to veto them. The new contract would eliminate the city council veto power.

The financial component of the new parking contract reflects a significant conceptual change – moving from multiple categories of fixed payments to a percentage-of-gross approach. One example of a fixed payment in the current contract is for roughly $840,000 to be transferred from public parking revenue to the city’s street repair fund – an amount that is keyed to an inflationary escalator.

Another example of a fixed payment is the DDA’s payment of up to $2 million in “meter rent” – the current contract stipulates $1 million, with an option for the city of Ann Arbor to request $2 million in any one year, as long as the total amount of meter rent over the 10-year life of the contract (ending in 2015) does not exceed $10 million. Through the 2010 fiscal year, $10 million in meter rent had already been transferred to the city under the contract – which is why the additional $2 million transferred last year, for FY 2011, was controversial.

The exact figure for the percentage-of-gross payment had been a contentious issue, but on May 2 the DDA board was poised to ratify the contract at 17%.

At Friday’s special board meeting, Lowenstein reminded board members how on the morning of May 2, they’d been informed of the clause in the city’s ordinance on the DDA – contained in Chapter 7 – that limits the amount of TIF capture.

Briefly put, the mechanism of a tax increment finance (TIF) district allows an entity like the Ann Arbor DDA to “capture” a portion of the property taxes in a specific geographic area that would otherwise be collected by taxing authorities in the district.

Lowenstein set up the parking contract discussion by explaining how the DDA had an unexpected obligation to return $473,000 in excess TIF capture to taxing authorities in the district.

Deliberations: Parking Contract Percentage – The Case for 16%

Board deliberations on the financial conditions of the parking contract were intermingled with discussion of the return of excess TIF revenue, because of the impact on DDA fund balances of the one-time $473,000 payment to taxing authorities in the DDA’s TIF district.

Board chair Joan Lowenstein began the deliberations on the contract by saying that the whole point is to continue to partner with the city on management of the parking system. The reason the DDA board was considering re-opening the contract at all is that the city of Ann Arbor needs additional money, she said, and there will be a continuing need.

At the same time, Lowenstein cautioned, the DDA has a responsibility to maintain the city’s parking infrastructure, and a responsibility to maintain a fund balance. If projections for parking revenues are off by 1 or 2 percentage points, she said, that completely changes the DDA’s budget. If there’s a cost overrun for the Fifth Avenue underground parking structure that’s currently under construction, there needs to be a fund balance that could handle those eventualities and handle them quickly.

The return of $473,000 in excess TIF capture to taxing authorities in the district, Lowenstein said, had resulted in the resolution that the board was considering: a percentage-of-gross figure of 16% for the parking agreement, instead of the previously contemplated 17%. Even on a 16% scenario, she continued, there would be low combined fund balances for the DDA: FY 2012 – $3.08 million; FY 2013 – $2.17 million; FY 2014 – $2.33 million; FY 2015 $2.04 million; and a low in FY 2016 – $1.93 million. The $1.93 million was very low, she said, but the DDA was willing to endure that, in order to provide a fair parking revenue to the city.

DDA board member Russ Collins wanted to know what the future impact might be on DDA TIF revenues, as compared to the DDA’s 10-year plan, given that TIF capture would now be calculated correctly. Joe Morehouse, DDA deputy director, explained that in the next year, the TIF valuation is expected to drop. And the DDA’s 10-year plan uses an average projection of a 2% increase in TIF revenue per year, so the impact of the correct calculations in the future would be zero, Morehouse explained.

Board member Bob Guenzel asked for clarification of why the DDA fund balance will be less than previously anticipated. Morehouse explained that it’s due to the one-time payment the DDA will need to make to return excess TIF capture to the taxing authorities in the DDA TIF district.

Deliberations: Parking Contract Percentage – Reverting to 17%

Mayor John Hieftje asked Morehouse to provide the fund balance figures for the 17% scenario.

Year by year, here’s what those numbers looked like [the fund balance is expressed as a percentage of reserves in parens]: FY 2012 – $2.9 million (14.5%); FY 2013 – $1.8 million (8.7%); FY 2014 $1.8 million (8.2%); FY 2015 – $1.34 million (5.7%); FY 2016 – $1.03 million (4.3%); FY 2017 – $1.94 million (8%).

Hieftje said he wanted to ask the DDA to consider that the city is ultimately responsible if the DDA defaults on its obligations. And the city would be willing to “backstop” the DDA for the years when the DDA was concerned about the fund balance being low. It was much more important to put the parking contract in place so that the city would have the yearly income, he said. He felt the DDA could live with those fund balances. He did not think it made sense to plan a long-term agreement on the basis of just avoiding a low fund balance in a specific year.

DDA board member John Mouat noted that the DDA had not been in negotiation mode for a while – the resolution before them was the DDA’s “best take” on the situation, and then it would go to the city council. Lowenstein confirmed that back on May 2, the DDA had effectively concluded negotiations through its mutually beneficial committee. The only change to the situation has been the impact of returning excess TIF.

Guenzel then asked Hieftje if he thought he had enough support on the council for the new parking contract, if the percentage of gross were set at 17%. Hieftje replied that he felt there would be sufficient votes. Guenzel noted that there’s no way to predict for sure. Hieftje allowed that there is discomfort among some councilmembers about the provision in the contract that would allow the DDA to set parking rates. He characterized their concern as not wanting to be seen as using the DDA as a buffer between themselves and voters.

Hieftje went on to say that the city’s CFO and acting interim administrator, Tom Crawford, had said that if the percentage of gross is 16%, then the city would need to make an additional $250,000-300,000 reduction to its general fund budget this year and next. The city was currently doing everything it could to save police and fire positions. He noted that some on the DDA board had asked why that’s the DDA’s problem. [Newcombe Clark, who was absent from Friday's special meeting, has articulated that sentiment, for example.] Hieftje said that it’s all of our problem.

Hieftje then offered an amendment to the resolution, changing the amount to 17%. Guenzel seconded the amendment. Leading off discussion of the amendment, Sandi Smith, who sits on the city council as well as the DDA board, said that if it’s important to maintain a fund balance, then there are other strategies the DDA can explore. In the DDA’s 10-year plan, for example, a contribution to the housing fund, which has been paused this year, resumes in 2013. Eliminating that would start to change the picture. Smith also pointed out that the DDA had set aside $500,000 to support the go!pass program, which subsidizes bus passes for downtown employees. If there’s a concern not to drop the fund balance down to 4.3%, then there are ways to change that. Smith said none of the decisions are easy.

Smith went on to say that the city of Ann Arbor is planning to dip into the general fund reserve balance for around $1 million, which is not a position the city wants to be in. But back when the DDA was planning to build the underground parking garage currently under construction, the city’s CFO, Tom Crawford, had cautioned the DDA about maintaining a fund balance of around 15%, and she had taken that to heart. She said she was “tormented” about the issue, but was willing to hear the arguments of others on the board.

Gary Boren clarified that they were currently debating just the amendment to change the number from 16% to 17%. With all due respect, he said – responding to Smith’s suggestion of cutting housing fund transfers or alternative transportation grants – those are elements of the DDA’s core mission. Those go to the heart of what the DDA does, and affects what the DDA will be able to do in the future.

Lowenstein added that in order to accommodate the city of Ann Arbor’s need for additional revenue, the DDA’s budget already includes deferring some maintenance on the parking structures.

Hieftje said that what he’d heard for a while reported back from the city’s negotiating committee was a concern about the DDA’s fund balance, based on Crawford’s comments. He contended that Crawford remembered his remarks about fund balances a little differently from what Smith had portrayed.

Hieftje suggested an additional meeting of the two negotiating committees to give the DDA some comfort with respect to the city’s assurance that it would backstop the DDA’s fund balances. That way, if there were a problem with a construction overrun or a drop-off in parking demand, the DDA would have some assurance that the city would step in and fill the gap. It’s certainly not in the city’s interest to see the DDA fail to meet its financial obligations, Hieftje said. “We can make that good,” he told his DDA board colleagues. He pointed out that it’s the city’s general fund reserve that matters for bond ratings. If the DDA needed the money, Hieftje said, it would be there.

Board member Russ Collins asked if the sentiment that Hieftje had expressed could be added to the amendment adjusting the amount from 16% to 17%. Hieftje then suggested that he’d asked councilmembers to add time on May 31 to their calendars for another meeting. The two negotiating committees could meet, then let the city council make a decision on the parking contract on May 23, when council’s meeting – begun on May 16 – resumed.

Smith asked Hieftje to provide some information about what was happening in the state legislature with respect to health care benefits for public employees. Hieftje allowed that the legislation had the potential to have a good impact on local governments because it would require some public employees to contribute 20% of their health care costs. But he said that would be too far down the road for it to have an immediate impact.

Lowenstein clarified that if it were to be necessary that the DDA required support from the city to meet its obligations, then any expenditure over a certain amount would need city council approval. Hieftje allowed that he couldn’t guarantee that the council would approve such an expenditure, but he thinks there would be strong support for it. It’s not in the interest of the city to see the DDA default on its obligations, Hieftje said.

Guenzel said the issue with percentages is really tough. Having worked in an organization where the goal was an 8-12% reserve, it’s very important. [Before retiring in May 2010, Guenzel had served as Washtenaw County administrator.] He said he might disagree with Crawford that 15-20% should be a goal, but said that 8-12% is necessary. He had a concern that with 16% and 17% as a percentage of gross in the parking contract, there’s a difference in the fund balance levels. He noted that the future could look better than what the DDA was forecasting – these are projections.

Guenzel said he liked the idea of the city stepping up and making a statement. The question is whether it could bind a future council. He stressed that the DDA did not want the city to take over its assets – the DDA is a separate entity. But if they were talking about a partnership, then if the city is willing to consider making some kind of an assurance on the DDA’s fund balances, he’d vote for 17%.

Roger Hewitt expressed concern about the fund balance – it would not be above $2 million again until 2017, he observed. He said he was interested in seeing what the city would be willing to offer in the way of an assurance. But on the 17% scenario, it left the DDA with a pretty slim balance, he said, especially with a $50-million construction project currently being built. The DDA’s deputy director, Joe Morehouse, who handles financial matters for the DDA, had suggested $3.5 million as the cash balance needed for the organization, Hewitt said.

Hewitt said he was willing to attend one more negotiating committee meeting, but without some assurance from the city to guarantee the DDA’s fund balances, he was not comfortable with 17%.

Picking up on Hewitt’s point about ongoing construction projects, Smith pointed out that soon the amount would reach $60 million, because of the construction on the parking deck that’s part of the City Apartments project to be built by Village Green at the First and Washington lot. The DDA is committed to supporting that parking deck with $9 million in bonds, when the project is completed.

Collins said he’s likely to follow Guenzel’s analysis. To be blunt, he said, when you’re talking about several million dollars, the difference between $1 million and $2 million in reserves isn’t much. He said the committees had worked hard to come up with something that is “equally annoying” to both the city and the DDA, and he felt they’d arrived at that point. [Collins is a member of the DDA's negotiating committee, along with Smith, Hewitt and Boren.] He said he shared an interest in seeing the city chime in with something that would provide some underpinning.

Collins then expressed some general frustration about how the DDA is perceived in the broader community. He said he served on the DDA board to try to do good things for the city, and the downtown in particular. But the word on the street is that the DDA is “up to something.” He said as the DDA tries to accomplish something good for the city, that’s not the word on the street – it’s not in the media that way, and it’s not accepted that way in the hearts and minds of the city council.

Collins said he hoped the new parking contract would help change that perception. He noted that people who sit on the board to try to do something positive are volunteers. He said he would support the 17% contract with that positive tone, even though some people might call him foolish for doing so.

Mouat said his concern is that despite two years of conversation, the city and the DDA are still negotiating. He said he tended to agree with Hewitt, that they are not done yet. His tendency would be to put out the 16% offer and then look for the city to provide something to give the DDA more confidence. He was more comfortable with the resolution at 16%.

Smith said that without having a specific “trigger” identified, she could not vote for a contract with 17%. She wanted to either vote down the amendment, or table the resolution. The more she looked at the numbers, the 4.3% fund balance is pretty slim, she said.

Lowenstein said she felt it’s cumbersome and difficult to think about having an additional committee meeting, having the committees make a recommendation, coming back to the DDA for a special meeting, and then having the matter go back to the city council. She also observed that the DDA had been negotiating against itself for a long time. In principle, she’d be in favor of 17% as Hieftje had represented it. One scenario would be to approve the contract at 16%. And if the council is serious about making some kind of pledge in exchange for 17%, then the DDA would only need one more special meeting in order to approve that. That would limit the number of times they have to get a whole bunch of people together, Lowenstein suggested.

Deliberations: Parking Contract Percentage – City Guarantee

Hieftje then offered an additional phrase to his amendment changing the percentage of gross to 17%. The alteration of the amendment made the DDA approval “contingent” on city council approval of a plan acceptable to the DDA to backstop the DDA fund balance in certain years. Collins suggested the word “underwrite” instead of “backstop,” and with that, the altered amendment was under discussion.

DDA board member John Splitt said that with the additional language about the city’s guarantee, he would support 17% as the percentage of gross figure.

Smith said that one concern she had with this scenario is that a future city council would be making decisions about whether the DDA needed to do maintenance on parking structures. She did not want it to be the case that a future city council might choose not to do some preventative maintenance on parking structures, in order to keep the fund balance high.

Hieftje reiterated the sentiment that it’s certainly not in the city’s interest to see the DDA struggle to pay bills or do maintenance. Mouat said it felt to him like board members were hovering around the same concept – they could ponder and ponder, but the devil is in the details. He wondered at what point it would not be the DDA board that would be overseeing DDA funds, but rather the city council. The DDA really needs the city council to be more clear, he said. It’s hard to pass a resolution without knowing exactly how it’s going to work.

Hewitt said he shared the same sentiment as Mouat – he did not want the city council to be performing the function of the DDA board. He said he could support the resolution as amended, but would look very critically as the language eventually proposed by the city council.

Splitt asked Hewitt if the two negotiating committees could work out such language. Collins noted that the DDA’s legal counsel, Jerry Lax is available again – he’s “walking around now.” [Lax underwent a knee replacement.] Hieftje said he could appreciate the discomfort of board members. But he said if the contract with the amendment is not approved by the city council, “the same thing will happen at 16%.” In any event, he suggested that the DDA keep a meeting slot open. He’d told councilmembers to reserve a time on May 31 to which the council could continue its budget meeting – the one already begun on May 16.

Smith asked to review some of the hybrid solutions she’d proposed in the past – scenarios where the percentage-of-gross parking revenues to be transferred would change after a certain number of years. Although Morehouse adjusted the parameters to show DDA board members onscreen what those solutions would look like, there seemed to be little traction on the board for pursuing any of them.

Collins said the DDA needs to remember that some folks at the city were initially looking for 20%. So it’s important to recognize the difficulty of negotiation from the city’s point of view. What they want to do is get this resolved and move on, Collins said. He said the DDA would have the opportunity to manage itself toward better fund balances. Politics is the “art of the possible,” he said. The 17% is hard from the city’s point of view.

Collins allowed that it’s a tremendously small fund balance for a large value of capital assets. As executive director of the Michigan Theater, he said, their aspirations are to have $1-2 million in reserve for a $2.5 million annual budget and a capital asset worth around $10 million. Collins said that $100,000 one way or another isn’t important, but the city’s backing is important.

Guenzel said that under either scenario it’s not enough, so the city’s promise is important. There is a mutual benefit in the new contract, he contended, because it clears up ambiguities. The board needs to get the thing done, he said. He was willing to live with the amendment and pass it that way. He reported that a friend of his had asked him why the DDA is not just turning over all the money to the city. Downtown Ann Arbor is dependent on a thriving city government, he said.

Mouat noted that the DDA was going at the issue yet again at a board meeting – “It’s a hell of a way to do this,” he said. It felt like they were doing the same thing they’d done before. He asked Hewitt and Hieftje if would it make any sense to see if there’s any other key folks on the city council who might participate in drafting the specific language of the city’s underwriting assurance.

Collins stressed that he felt the DDA was already at a decision point. Responding to Mouat’s frustration that the DDA was engaged in the same exercise, he said that progress had been made in the last six months. The board is at the decision point now. It feels the same, but it isn’t, he concluded.

Hieftje asked for confirmation that the projections for future DDA fund balances included TIF revenue from the 601 S. Forest and Zaragon II projects. Morehouse confirmed that the projections did include those amounts. Hieftje said he could not tell the DDA board for sure that council would approve the contract, but he could assure them that he would take it to council. Ultimately, he said, it is a partnership. Responding to comments about the community’s perception of the DDA, there are some pretty staunch defenders of the DDA on the city council, Hieftje assured them.

Splitt said he did not want to delay. He felt that a deal could be made at 17% but not at 16%.

Outcome on amendment: The DDA board voted 8-1 to approve the amendment to change the percentage to 17%, which included a contingency that the city would provide some kind of underwriting language that is satisfactory to the DDA. Dissenting was Gary Boren.

Deliberations: Parking Contract – DDA Rate Setting

Smith proposed an amendment to the contract that addressed the ability of the city to establish parking areas for its employees. The amended language, which was unanimously approved, made it clear that those facilities might also be used for public parking.

But the main concern in the non-financial aspect of the parking contract was for the provision that allowed the DDA to exercise final authority on parking rate changes.

Hieftje noted that some councilmembers have discomfort with the idea that the DDA would have sole authority to set parking rates. He thought there were a majority who would support the contract with that provision, but he felt that a larger majority could be achieved. If there were an annual review one year later after a rate change, where the council could decide if it wanted to take action, that would provide a lot of comfort for some councilmembers, he said.

Smith felt that would undermine a fair amount of what she found mutually beneficial about the contract. Hewitt noted that the DDA is undertaking some fairly dramatic financial commitments, and without the ability to set rates, the DDA couldn’t be confident it can meet those commitments. It’s one of the only things in the contract that the DDA doesn’t already have, he said. With the implementation of a program of transportation demand management, there’ll be a number of different rates, varying with geographic area, time of day, and day of week. He did not want to try to get into a discussion with the city council about some specific rate in a particular location.

Mouat wondered if there were a risk of politicizing rates in different areas, depending on the council ward. Hewitt explained that the idea of transportation demand management is based on where the demand is, not based on what the DDA would like to charge. It’s about what you’re trying to achieve, he said: Do you want someone to park there for two hours or eight hours?

Collins said he thought the DDA could invite the city council to review and comment, just as the DDA invited review and comment from the public. That kind of language could be added. Boren noted that kind of language was already included. The board then agreed to add “city council” explicitly to the list of entities to be consulted before undertaking rate changes [inserted text in italics]:

2. Operational Powers and Responsibilities Within DDA Parking Area.

k. Subject to Article 8, applicable law, and City permitting regulations, and after consultation with the City Administrator, city council and downtown stakeholders, which may from time to time be identified by either the City or the DDA, the DDA shall determine the rates and hours of parking in the Municipal Parking System and file such rates and hours with the City Clerk and otherwise publish such rates in the same manner as City ordinances, which rates and hours shall take effect thirty (30) days after said filing.

Hieftje said he thought the amendment moved in a good direction. Lowenstein pointed out that the council also has representation on the DDA board. [Hieftje and Smith serve on both the city council and DDA board.]

Outcome on amendment: The board voted unanimously to add the city council as one of the entities with which the DDA needed to consult before enacting parking rate changes.

Deliberations: Parking Contract – Parking Rates as Tax

Boren began the deliberations on the main motion to approve the contract by saying, “We don’t have to put our ear to the rail to figure out the direction the train is moving in.” He said there are two issues. One of those is a misperception of what the DDA is all about. A big problem is that the DDA is like Rodney Dangerfield – it gets no respect.

A second issue, Boren said, is that the city was taking a public service like parking and turning it in to a for-profit venture. That approach is at least marginally going to cause business and residential tenants to try Briarwood Mall instead, he cautioned. Some shoppers will decide to buy shoes at Arborland instead of downtown. When you charge people more to park than it takes to provide the service, he said, it’s effectively a tax. And that pushes people out of downtown. Boren said he sees that as directly in opposition to the DDA’s mission. In the future, he said, the DDA needs to make clearer to the city council the benefits of supporting the downtown. The parking agreement puts downtown money in the neighborhoods, so he’d be opposing it, Boren concluded.

Mouat said he’d struggled for a while with the issue. It’s a tough situation, he said. DDA board members aren’t elected officials, but their job is to represent downtown, and they’re looking out for the community as a whole. If the community is not healthy, then downtown isn’t healthy. He said he was hopeful that when the DDA and the city get past the contract, they can have some fruitful conversations. He said he’d support the contract, but with a little bit of a bad taste in his mouth. He agreed with a lot of what Boren had said.

Collins said he’d support the contract. He recalled the history of the DDA’s stewardship of the parking system. The DDA had taken a negative amenity, and turned it into a much more positive amenity. The DDA had made a decision that the parking infrastructure is a key way it wants to enhance the downtown – that’s the DDA’s legacy, he said. However, he said no positive karma comes from operating a parking system. That’s because you’re charging a fee for something that some people think should be free.

The DDA had tried its best to turn parking into a positive, Collins continued – it’s a burden the DDA carries for the city. In the future, as the DDA considers how it wants to affect the downtown positively, other projects may get lost in the dialogue about parking.

Boren said there were ways the parking contract could have been structured that could have gotten his support: pegging the parking revenues to downtown services. Instead, he said, last year the DDA had given the city $2 million for the right to negotiate, and it was not pegged to the benefit of the downtown. If the DDA must consume itself for the benefit of the city, he said, then it’s not a symbiotic relationship, but rather a a parasitic relationship. The DDA needs to be true to its mission, he said.

As a benefit to the contract, Lowenstein pointed to the reporting that would be required on how the street maintenance money is being spent. Previously, the DDA had been transferring close to $1 million to the city for street maintenance in the downtown, with absolutely no accountability about how it was being spent. In the new contract, there’s a reporting system for what’s being done. There’s also a standing committee on enforcement of parking regulations.

Hewitt said he also agreed with Boren – the contract is far from perfect, from the DDA’s standpoint. There are a few advantages in the new contract, but also some significant disadvantages. He was “not real happy with it.” Looking at the parking system, he said, the DDA was the victim of its own success. For him, Hewitt said, the issue reduces to whether it’s better to run the parking system under this agreement or give system back to the city. His personal conclusion is that it’s better to have the agreement.

Outcome: The board voted 8-1 to approve the new parking contract, with the contingency on a city council assurance on fund balances. Gary Boren voted against the contract.

Return of Excess TIF: Background

The DDA’s tax increment finance district (TIF) by definition captures a portion of taxes in a specific geographic region in downtown Ann Arbor – taxes that would otherwise go to taxing authorities like the city of Ann Arbor (including the Ann Arbor Transportation Authority), Washtenaw County, Washtenaw Community College, and the Ann Arbor District Library.

Only a portion of the taxes are subject to capture – namely, the difference (i.e., the increment) between the baseline property value when the DDA was formed, and the value of improvements made to the property. Increased value of property due to inflation/appreciation after an improvement is made is not subject to capture under the Ann Arbor DDA’s TIF plan. In principle, if no improvements are made to a property within a TIF district that result in an increase in value, no taxes are captured. An example of that is Manchester’s DDA, which was formed fairly recently, in 2005, and there has been no tax capture since then.

The combination of the Ann Arbor DDA’s TIF plan and the Ann Arbor DDA ordinance effectively limit the amount of taxes that can be captured.

The complete Ann Arbor DDA TIF plan is available on the DDA’s website. The TIF plan includes estimates of the year-to-year increase in new taxable value in the district.

Here’s how the DDA’s TIF capture is limited by the TIF plan: If the growth rate of the TIF capture exceeds the amount estimated in the plan, then the excess is supposed to be returned to the various taxing authorities. From the city’s DDA ordinance:

If the captured assessed valuation derived from new construction, and increase in value of property newly constructed or existing property improved subsequent thereto, grows at a rate faster than that anticipated in the tax increment plan, at least 50% of such additional amounts shall be divided among the taxing units in relation to their proportion of the current tax levies. If the captured assessed valuation derived from new construction grows at a rate of over twice that anticipated in the plan, all of such excess amounts over twice that anticipated shall be divided among the taxing units. Only after approval of the governmental units may these restrictions be removed. [.pdf of Ann Arbor city ordinance establishing DDA]

It’s worth noting that the excess TIF capture to be returned to taxing authorities under the Ann Arbor ordinance appears to apply independently of the state statutory requirement that any “surplus” TIF that’s not expended according to the TIF plan be returned to the taxing authorities from which it was captured:

125.1665 Transmitting and expending tax increments revenues; reversion of surplus funds; abolition of tax increment financing plan; conditions; annual report on status of tax increment financing account; contents; publication. Sec. 15. … (2) The authority shall expend the tax increment revenues received for the development program only pursuant to the tax increment financing plan. Surplus funds shall revert proportionately to the respective taxing bodies. …

In previous reporting, The Chronicle identified several questions that would need to be answered in order to calculate the excess TIF capture. Here we add the answers on which DDA calculations of excess were based, from the board discussion on Friday [.pdf of table showing calculations in detail]:

1. What’s the relevant time period? The ordinance identifies the “rate” of growth, which entails comparing valuations over some period of time. Interpretation A would be that each year when the tax rolls are closed (after the Board of Review has handled all appeals), that year’s valuation is compared with the previous year’s, and the percentage difference is calculated. That percentage is compared with the percentage growth forecast by the TIF plan between those two years. Interpretation B would compare a given year’s valuation against the valuation in the first year of the plan (not the previous year) and compute the percentage difference between them. That percentage difference would then be compared against the percentage growth forecast by the TIF plan from the beginning of the plan to the current year. DDA answer: Interpretation A. Note that the span of time in question is since 2003, when the DDA was renewed. Before that, according to board chair Joan Lowenstein, the TIF plan estimates were “wildly optimistic” and the conditions of the ordinance were not met.
2. Which set of TIF plan estimates are applicable – the one labeled pessimistic, optimistic or realistic? The ordinance language refers to “anticipated” growth, without specifying whether that means the “realistic,” “optimistic,” or “pessimistic” estimates. Arguments for either the “optimistic” estimate or the “pessimistic” estimate would be susceptible to the criticism it is not “realistic.” Initial ballpark calculations done by the city have been based on the “realistic” estimates. DDA answer: Use the optimistic forecast.
3. Who is the responsible party for adherence to the ordinance?The taxes captured by the DDA’s TIF district are administered not by the DDA staff, but rather by the city assessor’s office, just as they are for all taxing entities. The city receives an administrative fee for this work equal to 1% of the tax bill – it’s labeled ADMIN FEE on the bill. [When the city council passed last year's budget, Stephen Kunselman (Ward 3) proposed a budget amendment to reduce the administrative fee, but it received little traction and did not pass.] So it’s the city that transfers the DDA’s TIF taxes to the DDA. For other taxing entities, like the Ann Arbor District Library, it’s not completely clear what their avenue of complaint is, if they are owed money that was erroneously captured – through the city of Ann Arbor or through the DDA? DDA answer: Here the calculations do not appear to be affected, but at Friday’s meeting, board chair Lowenstein was not eager to assign blame to any particular person or entity, saying that no one had paid appropriate attention and that it was an “honest mistake.”
4. Does the ordinance language refer to real property only, or also to personal property? The valuations included in this article lump together valuations of real property and personal property. Real property refers to building and land. Personal property refers to pieces of equipment. A specific example of personal property [but from outside the DDA TIF district] would be the planned acquisition by Sakti3 of battery cycling equipment and thermal chambers as part of the firm’s expanded operations. Based on the DDA TIF plan, through 2003 personal property in the DDA district accounted for roughly 25% of TIF capture. DDA answer: The language refers both to personal and to real property.
5. Do payments already made by the DDA to the city of Ann Arbor out of the TIF for the new municipal center count towards any sum that might need to be returned? In May 2008, the DDA board pledged up to $540,000 annually from its TIF capture to help finance the city’s new municipal center. [.pdf of May 7, 2008 DDA board meeting minutes] If it’s determined that too much money has been transferred to the DDA for its TIF capture, then the DDA might point to the money pledged as part of the municipal center finance plan as covering any amount owed to the city of Ann Arbor. DDA answer: Yes, the money previously granted to the city of Ann Arbor out of the TIF fund for various projects – which totals around $7.5 million, according the DDA – should count as already returned under the ordinance.

Return of Excess TIF: Deliberations

During deliberations on the parking contract, DDA board member Gary Boren noted that in the calculation of the excess TIF capture to be returned to taxing authorities in the district, the city of Ann Arbor was anticipated to be willing to “offset” the amount that would have otherwise been returned to the city as a taxing authority in the district – around $712,000. That offset was due to the amount of TIF revenue that had been granted back to the city since 2003.

Boren wanted clarification about by how much the $712,000 had been “overshot.” Board member Roger Hewitt reviewed the figure from the PowerPoint slide Lowenstein had presented in her introduction: $7.5 million. The $7.5 million in TIF that the city of Ann Arbor has received from the DDA since 2003 came in the form of funding for: the Calthorpe project; interest payments on the old YMCA lot; LED streetlights; a sanitary sewer study; municipal center LEED certification; and a municipal center bond payment of $500,000 per year.

So Boren suggested that if an excess in TIF capture were ever to happen again, the DDA would have leverage to justify not returning excess to the city of Ann Arbor – because it had already been returned.

When the board arrived at the second item on the special meeting agenda – the TIF excess capture – it was Bob Guezel who led off the discussion.

He asked DDA deputy director Joe Morehouse if he’d verified the numbers. Morehouse indicated that he had, and they’d been forwarded to the taxing units to which the excess would be returned. The DDA had not received a response from them, however. Guenzel ventured that if they disagree, they’ll let the DDA know. Lowenstein said she’d talked to Josie Parker, director of the Ann Arbor District Library, and they’d agreed to sit down and go over it. Lowenstein said the resolution states that this is the DDA’s calculation. The DDA is willing to go over the figures, she said.

John Hieftje asked that the language in one of the “whereas” clauses be modified – he did not want anyone to be alarmed, but he said that it could not yet be said that the city has agreed to waive the return of the excess that would be due to the city. He suggested that instead it should say something like “is likely to forgive.”

Boren clarified that this is an obligation the DDA has to return the excess – the board is approving the calculation, not the obligation. Russ Collins wondered if it would be more appropriate to check the calculations with the different taxing units, before passing the resolution.

Morehouse suggested that what the resolution was doing is affirming the method the DDA is using to interpret the city’s DDA ordinance.

Boren noted that it was only in the DDA’s interest that board members be aware of the issue of the excess TIF capture issue before they had voted on the parking contract, so he thanked the mayor for bringing it to the DDA’s attention, because it was the right thing to do. Hieftje contended that it was “a head-scratching moment” when the city’s financial staff realized that the clause of the DDA ordinance existed.

Lowenstein ventured that the situation shows you should go back and read your ordinances, and maintained that there was nothing underhanded or nefarious about it.

Outcome: The board voted unanimously to approve the calculations on return of excess TIF.

Present: Gary Boren, Bob Guenzel, Roger Hewitt, John Hieftje, John Splitt, Sandi Smith, Russ Collins, Joan Lowenstein, John Mouat

Absent: Newcombe Clark, Keith Orr, Leah Gunn

Next regular board meeting: Noon on Wednesday, June 1, 2011 at the DDA offices, 150 S. Fifth Ave., Suite 301. [confirm date]

Special meeting: TBD at the DDA offices, 150 S. Fifth Ave., Suite 301. [confirm date]