On July 7, 2011 at the Michigan League on the University of Michigan campus, representatives of “The Varsity at Ann Arbor” hosted a gathering of citizens to introduce them to the planned 13-story building. The project is proposed for Washington Street, between the 411 Lofts building and the First Baptist Church, and will be purpose-built to house 418 students in 173 rental units.
To me, the highlight of that meeting had nothing to do with the site plan or the building design – which has evolved somewhat since The Varsity’s review on June 22 by the city’s newly created design review board.
Instead, I think the most exciting play of the citizen participation game was a kind of Hail Mary forward pass flung down the field by John Floyd, a former candidate for city council. The ball was snagged out of the air, just before it hit the turf, by Tom Heywood, executive director of the State Street Area Association.
I don’t think Floyd and Heywood play for the same team – nobody was wearing numbered jerseys at the meeting – so that might count as an interception, not a completed forward pass.
Floyd’s Hail Mary was this question: What is the benefit to Ann Arbor’s bottom line, if the new taxable value from The Varsity is subject to “capture” through the Ann Arbor Downtown Development Authority’s TIF district?
Heywood then provided a description of how the TIF (tax increment finance) works: the DDA capture is only on the initial increment – the difference between the property’s initial value, and the value after a site is developed – not on its later appreciation. What made it highlight reel material was the run-after-the-catch: Heywood went on to describe how a recently-discovered stipulation in the city’s DDA ordinance (Chapter 7) actually limits the amount of taxes the DDA captures.
Heywood’s explanation of how the limit works was accurate, based on the interpretation of Chapter 7 that has been used by the DDA and accepted by the city of Ann Arbor. That interpretation – a year-to-year calculation of excess tax capture – resulted in a repayment earlier this year of roughly $473,000 from the DDA to the Ann Arbor District Library, the Washtenaw Community College, and Washtenaw County for excess taxes that the DDA had collected. The city of Ann Arbor chose to waive its $712,000 share of the calculated excess.
On the year-to-year interpretation of excess, Heywood was correct when he said that the DDA’s capture depends in part on which projects are added to the tax rolls in a given year. If new projects are spread over multiple years, the Chapter 7 limit does not have as great an impact as it would if they are all completed in a given year.
The tax capture issue, of course, is not within the control of The Varsity’s developer. Its discussion at the citizen participation meeting might be fairly characterized as playing football on a baseball field. I think the response of The Varsity’s development team to the tax issue was the right call: They said they’ll pay the tax bill, and if you’re not happy with the way that taxes are captured and distributed, then you should take it up with your local elected officials.
So after writing a column over a month ago, before that meeting – “Taxing Math Needs a Closer Look” – I’m taking it up, again, with Chronicle readers and my elected officials.
The year-to-year approach to the calculations is, I think, simply not defensible as correct, based on the language of the Chapter 7 ordinance. I think the correct way to calculate excess is based on comparing the total valuation in the district against the forecasted valuation – a cumulative method.
It turns out that I think I dropped the ball on one of the calculations in that previous column. But even factoring in a revised formula, the amount of excess taxes captured in the DDA district since 2003 appears to be around $2 million, instead of the roughly $1.2 million that the DDA and the city of Ann Arbor calculated as the excess.
In this column, I want to discuss briefly the corrected formula. It’s a way to remind elected officials of other taxing authorities – the library board, the county’s board of commissioners, and the community college’s board of trustees – that a significant number of tax dollars are in play for them, not just now, but into the future.
Hurry-Up Offense Style Review
For more detail and historical background, I’d invite readers to begin with the column from early June: “Taxing Math Needs a Closer Look.” Here, I just want to provide enough of an overview to make a revised formula from that column understandable.
Review: Chapter 7
Chapter 7 of Ann Arbor’s city code lays out how the tax capture of the Ann Arbor DDA is limited, or capped. The mechanism used to cap the amount of captured tax is the projected value of the increment in the TIF district, as laid out in the DDA TIF plan. The TIF plan is a required document under the state enabling legislation for DDAs (Act 197 of 1975). From Chapter 7 [emphasis and extra emphasis added]:
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 the DDA]
Historically, the Chapter 7 provision has not been applied. But it was noticed this year by city of Ann Arbor financial staff and brought to the DDA’s attention. The result was a repayment of roughly $473,000 from the DDA to the Ann Arbor District Library, the Washtenaw Community College and Washtenaw County. The city of Ann Arbor chose to waive its $712,000 share of the calculated excess.
One major issue is how to understand “growth” as specified in Chapter 7. The city of Ann Arbor and the DDA have used a year-to-year method of defining excess. I think that’s not correct. Instead, I think that the correct way is to use a cumulative method.
Review: Year-to-Year versus Cumulative Approach
In Chart C, the blue bars represent the forecasted valuation of the tax increment on which the DDA tax capture will be based. (The forecasted valuation is included in the DDA TIF plan.) The red line reflects the actual valuation of the tax increment in the district. For future years, the red line reflects the DDA’s current 10-year budget planning document.
The easiest way to see the difference between the year-to-year method and the cumulative method is in year 2012. The actual valuation (red line) in 2012 drops compared to 2011. So on the year-to-year method, there can be no excess for that year – no matter what the forecast (blue bars) is. That outcome arises because the year-to-year method incorrectly re-sets the benchmark for calculating the growth rate to the immediately previous year.
The cumulative method, on the other hand, would determine that there is an excess for 2012. Even though the valuation dips from 2011 to 2012, the red line is still clearly higher than the blue bars.
This also highlights the fact that the year-to-year method does not impose an actual cap on the total TIF capture by the DDA for the period of the DDA’s existence. It only imposes a cap on the capture in any given year – which is defined relative to just the preceding year.
If the valuation of the increment spikes in the district, then in the first year of the spike, the year-to-year method calculates an excess valuation due to that spike. But after that spike levels off, the year-to-year method determines there is no excess. And even if an upward growth trend continues, the year-to-year method does not carry forward the excess from previous years in the same way that the cumulative method does.
So Tom Heywood’s comments at the citizen participation meeting for The Varsity were an accurate depiction of the way the city and the DDA have chosen to interpret Chapter 7 – on that interpretation, the timing of new development is significant.
Doubling the Score
If the cumulative interpretation of the Chapter 7 language is correct – and I think it is – then we still have to make a specific interpretation of the part of the ordinance that reads: “If the captured assessed valuation derived from new construction grows at a rate of over twice that anticipated in the plan, …”
It’s especially important because if the condition set forth in the if-statement is satisfied, the consequence is that all of that excess – not just 50% of it – must be divided among the other taxing authorities instead of being captured by the DDA.
I think if we adopt the cumulative interpretation of the ordinance, then the “twice that” clause can be paraphrased as follows: “If the actual valuation in the district is more than twice what the valuation was forecast by the TIF plan to be …”
In Chart C, that means: “If the red line is twice as high as the blue bars.” In spreadsheet terms (link are below), that’s “If Column C is more than twice as much as G …”
The point is, the condition has not yet been met that would trigger the “twice that” clause in the ordinance. But on the formula I used in the previous column to calculate excess, the “twice that” clause was triggered, and had an impact on the calculations. Replacing the formula with the correct one shows a less dire, but still significant impact.
On the original calculations in the previous column, the total amount of excess taxes that had been captured since 2003 worked out to roughly $3 million – as contrasted with the roughly $1.2 that the city and the DDA calculated. The revised calculation, with a correct implementation of the “twice that” clause, works out to $2.05 million. Even if the city of Ann Arbor were to waive its share, that would still work out to an additional $400,000 to be returned to other taxing authorities in the short term: Google spreadsheet: Cumulative Realistic (Revised)
More significant than the short-term picture is the roughly $600,000 a year that would in the future be divided among other taxing authorities instead of being captured in the DDA district. The city of Ann Arbor’s share of that is roughly 60%, or $360,000. Measured in numbers of city staff – whether they’re police officers or planning specialists or field services employees – that works out to almost four full-time employees.
Playing on the Varsity Squad
So what’s the actual answer to John Floyd’s question about possible benefit to the average citizen from The Varsity at Ann Arbor? Well, the current total valuation of the increment in the DDA district is far greater than the forecast in the DDA TIF plan. So a correctly interpreted Chapter 7 would ensure that future projects would effectively add at least half their valuation to the city’s tax base. That means at least half of the taxable value added by The Varsity to the city’s base would effectively be taxed by the city of Ann Arbor – just as properties outside the DDA district are taxed.
A correctly interpreted Chapter 7 would mean that Floyd’s standard critique of new downtown development – that it doesn’t add directly to the city’s general fund – is only half right. A correctly interpreted Chapter 7 would help make a case for increased development in the downtown area – half the added value of that development would go to the taxing authorities that levy taxes, instead of to the DDA.
In the nearly three years that I’ve covered the DDA for The Chronicle, I’ve developed some expectations of how its board and staff might handle certain situations based on past performance. When the Chapter 7 issue was raised by the city of Ann Arbor’s financial staff earlier this year, the DDA handled the calculation of excess in a way that was counter to my expectation, based on past observation.
It was like watching former Michigan football QB Tom Brady taking a snap from center and then tripping over his own feet as he dropped back to pass, then fumbling the ball. But Tom Brady wouldn’t just lie there on the ground and cry like some kind of scrimmage-squad Rudy. He’d scramble after that ball. And that’s what I think the DDA will do now.
It’s certainly what the DDA and the city of Ann Arbor need to do now – recover their own fumble. It’s the difference between playing for the scrimmage squad and playing for the varsity. It means acknowledging the correct way to calculate past excess TIF capture, making other taxing authorities whole, and making clear that the excess will be calculated correctly in the future.
If they don’t do that, a loose ball will still be bouncing around on the field. It could become a political football – and someone else might pick it up and run for a touchdown.
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