Parking Money for City Budget Still Unclear

On Jan. 5, the Ann Arbor Downtown Development Authority board held a retreat to discuss current negotiations with the city of Ann Arbor about the agreement under which the DDA manages the city’s parking system. And this past Monday, the respective “mutually beneficial” committees of the city council and the DDA board met to continue their conversation on the parking contract – a dialogue that has taken place in public view since June 2010.

Two days later, at Wednesday’s meeting of the DDA partnerships committee, board member Gary Boren reported back to his colleagues about the conversation that had taken place at Monday’s mutually beneficial committee meeting. Boren was frank in his assessment that the city’s team appeared intransigent.

To Boren, it appeared that city representatives had staked out their position, and they saw anything less than that position as meaning the city was not receiving what it is properly owed. For his part, Boren considers the DDA to be in the driver’s seat, because the current contract runs through 2015, and would not require the additional payments the city is seeking for that period.

At the partnerships committee meeting, Susan Pollay – executive director of the DDA – drew attention to the fact that there will be an increasing sense of urgency to firm up the contract as both the city and the DDA put together their respective budgets for the next fiscal year. The city administrator will need firm numbers by March, she suggested.

In this report, we put Boren’s comments and the ensuing discussion by the DDA’s partnerships committee in the context of the DDA’s board retreat last week, when board chair Joan Lowenstein noted, “We’re not a savings bank. We’re supposed to spend money.”

The retreat included a discussion of the kinds of projects the DDA would like to undertake over the next 10 years, some of which would need to be deferred, depending on the amount of parking revenue the DDA passes through to the city. The DDA also appears ready to defer some of its scheduled maintenance to the parking decks, if the maintenance activity is of a more aesthetic or cosmetic nature.

It emerged during the retreat that the politics of parking contract negotiations include the city’s ability to fund public safety – firefighters and police. The speculation was floated at the retreat that it might actually help the city’s negotiating stance with its labor unions, if the DDA took a firmer approach to the parking contract.

DDA Board Retreat (Jan. 5, 2011)

At the regular board meeting that took place just before the board’s retreat, retiring management assistant Joan Lyke remarked that retreats are just extended board meetings. This one extended only through about 3 p.m. after starting a bit before 1 p.m.

DDA Retreat: Parking Contract, Development Plan – Brief Background

The current 10-year contract, under which the DDA manages the city of Ann Arbor’s parking system, runs from 2005 through 2015. It stipulates that the DDA will pay the city $1 million for each year of the contract, but provides the city with the option of requesting up to $2 million in any given year, as long as the total amount paid by the DDA for the 10-year term of the contract does not exceed $10 million. For each of the first five years of the contract, the city requested $2 million.

The idea of renegotiating of the parking contract was first floated publicly in the form of a city council resolution passed in January 2009. That resolution was prompted by the city’s financial plan for FY 2011, which included an additional $2 million payment by the DDA that was not required in the contract. The DDA board eventually approved what amounted to a unilateral revision to the parking contract in April 2010, by agreeing to pay the city $2 million not required in the original contract. [See Chronicle coverage, which includes more detailed background: "DDA Approves $2 Million Over Strong Dissent"]

Since June 2010, two committees – one from the city council and another from the DDA board – have been meeting in public view to discuss the renegotiation of the parking contract.

The parking contract discussions have taken place in parallel with a conversation about how the DDA might lead the development of downtown city-owned parking lots. Those conversations have now, to some extent, been decoupled, and are continuing on independent paths. At the DDA board’s regular meeting on Jan. 5, it passed a resolution urging the city council to pass a resolution of its own, authorizing the DDA to engage in the development of a parcel-by-parcel development plan for downtown. [Chronicle coverage: "DDA Embraces Concept of Development Plan"]

Discussions of the new parking contract began with a focus on providing the DDA with a role in the enforcement of parking codes. [From August 2010 Chronicle coverage: "DDA Parking Prospects Dim"]

The negotiations have evolved, however, to focus more on the structure and amount of the payments by the DDA to the city. Whereas the current contract sees the parking payments as “rent” for the use of city-owned facilities, the conversation is now centered on the idea of a percentage-of-gross parking revenues payment that the DDA would make to the city. A key question has become: At what level should that number be set?

The initial, tentative number discussed by the two mutually beneficial committees was 17.5% per year. [Chronicle coverage: "Column: Impact of City-DDA Parking Deal"] By the time a draft of the proposal was presented to the city council and the DDA board in late 2010, that number had been revised downward to 16% in the first two years of a new 10-year contract – FY 2012 and FY 2013 – with 17.5% stipulated for each of the following eight years. [Chronicle coverage: "Wrangling on City-DDA Parking Details"]

DDA Retreat: The Numbers – General

The board’s retreat began with a video that board chair Joan Lowenstein had put together, which was intended to provide a lighthearted way to start the discussion. The moral of the tale – a conversation between two teddy bears – was that parking is not free and that you can’t pay for other services like park maintenance, just by raising parking rates.

Underpinning the substance of the board’s retreat discussion was a spreadsheet used by the DDA to evaluate its 10-year plan. That spreadsheet includes a number of variables and assumptions that can be adjusted on-the-fly to evaluate  the impact on the DDA’s financial condition. The retreat’s spreadsheet reflected a number of assumptions that were different from the spreadsheet discussed by the two mutually beneficial committees at their Nov. 8, 2010 meeting. [.xls of the 10-year spreadsheet as it stood at the conclusion of the board's retreat]

DDA Retreat: The Numbers – Payments from Parking Fund

One difference between the spreadsheets was this assumption at the board retreat: For the first four years worth of  bond payments required for the Fifth Avenue underground parking garage currently under construction, the DDA’s TIF (tax increment financing) fund will be used to make 100% of the payments. Previously, the parking fund would have been tapped for the bond payments. [The DDA's budget is divided into four funds: parking, parking maintenance, TIF, and housing.]

Making the bond payments from the TIF fund, instead of tapping the parking fund, would allow the parking fund to show a positive fund balance in all years of the 10-year plan. The previous version of the spreadsheet had shown negative fund balances for the parking fund for some years.

Board chair Joan Lowenstein remarked that the positive fund balance in the parking fund demonstrated that the TIF fund was not being used to pay for any revision to the parking contract.

Another key difference – necessary to allow the DDA’s parking fund now to show a positive balance in all years – would be the elimination in FY 2011 of the regular $2,093,605 transfer from the parking fund to the parking maintenance fund. There would also be a reduction of that transfer to $1,647,121 in FY 2013. However, the total transfers to the city’s maintenance fund over the 10-year planning period would still reflect an average contribution of a bit more than $2 million per year, by increasing those fund transfers in later years.

At the retreat, Susan Pollay, the DDA’s executive director, said that the parking maintenance fund transfers were informed by consultation with Carl Walker Inc., which is under contract with the DDA to inspect the parking structures on a regular basis and to develop a 20-year maintenance plan. [.pdf of Carl Walker parking maintenance plan] Carl Walker had been asked to identify items in the maintenance plan that are not as time sensitive, and to come up with numbers for a revised maintenance schedule. The intention is for any deferred maintenance activity to fall into the more cosmetic or aesthetic categories.

DDA Retreat: The Numbers – DDA Obligations

Among the numbers in the spreadsheet receiving scrutiny was the total amount of transfers from the DDA to the city. Newcombe Clark wanted to know if the $68,000 per year interest-only payment that the DDA makes for the surface lot at Fifth and William [the old YMCA lot] was included. It was not. Roger Hewitt told Clark that the issue would be raised with the city.

At Clark’s request, the DDA’s planning documents also now categorize as a grant the $508,608 annual payment the DDA makes to the city in connection with the city’s new municipal center. The transfer had previously been categorized as a bond payment.

Also in connection to DDA obligations to the city, Clark raised a point at the retreat that he’s previously made: The city charges the DDA overhead fees for bonds it issues on the DDA’s behalf. Roger Hewitt told Clark that the issue had been taken up with the city and that it had “fallen on deaf ears.”

DDA Retreat: The Numbers – DDA Initiatives

Another change from a previous version of the 10-year plan spreadsheet was an assumption that funding for alternative transportation, in the form of support for the go!pass program, would be extended through the 10-year period. Previously, the guiding philosophy for development of the DDA’s 10-year plan had been to include only board-approved expenditures. Funding for the go!pass program has received board approval only through FY 2013.

At the retreat, Roger Hewitt noted that while funding for the go!pass program has been included each year in the 10-year plan, it should be up for discussion. Hewitt has historically raised the question of the whether the go!pass program – which provides subsidized bus passes to employees of businesses located downtown – actually results in downtown commuters choosing the bus over driving their own cars, or if the program simply further subsidizes bus rides for downtown employees.

In the interest of trying to estimate what kinds of financial resources the DDA would need in order to undertake initiatives central to its mission, DDA board member Sandi Smith had designed a dot-voting exercise for the retreat. Each board member was given one red dot to assign to a project they’d like to see done in the short term, two yellow dots for medium-term projects, and three green dots for longer-term projects [photograph of  the dot-voting result].

The projects receiving votes ranged from a proposed reconfiguration and extension of sidewalks along State Street, to Huron Street improvements. The Huron Street improvements were added to the original list by board member Newcombe Clark. The State Street improvements, which would expand the opportunities for sidewalk dining, have been mentioned by mayor John Hieftje at recent meetings of the DDA board.

However, the  goal of the exercise was not to select projects but rather to get a ballpark idea of the amount of money that the DDA might like to invest from its TIF fund over the next 10 years. An initial ballpark estimate, based on the dot-voting, was $0.5 million per year over the first five years of the planning period, and $1 million per year over the final five years. Board member John Splitt remarked that he did not think $1 million per year would be adequate.

When DDA deputy director Joe Morehouse plugged the ballpark estimates into the spreadsheet, board members saw the impact on fund balances projected on the screen. So the board reduced the numbers in the first five years to $200,000 for the first two years, and $400,000 for the third and fourth years.

DDA Retreat: The Numbers – Board Deliberations (Fund Balances)

The discussion of an appropriate percentage-of-gross parking revenues figure for the DDA to transfer to the city was framed in terms of the impact on the DDA’s fund balances. Assuming no additional projects would be undertaken by the DDA, the overall fund balances in the spreadsheet, expressed in terms of percentage of operating expenses, were: 19.3% (FY 2012); 15.4% (FY 2013); 18% (FY 2014); 18% (FY 2015); 18.6% (FY 2016); 29.6% (FY 2017); 42.6% (FY 2018); 52.7% (FY 2019); and 72.2% (FY 2020).

Assuming some level of DDA project activity, as reflected in the dot-voting, the DDA fund balances would be diminished in the initial years of the plan as follows: 19.1% (FY 2012); 15.1% (FY 2013); 16.3% (FY 2014); 15.4% (FY 2015); 9.6% (FY 2016); and 12.3.6% (FY 2017).

The concern for low fund balances as expressed as a percentage of operating expenses was driven by the assumption of 18% as a minimum reserve goal.

Mayor John Hieftje questioned the need for fund balances that high. Susan Pollay indicated that the 18% figure had come from the city of Ann Arbor’s chief financial officer, Tom Crawford, and that he is pushing for the city to increase its reserve balances to that level as well.

Pollay’s contention is supported by Crawford’s remarks made at the Feb. 17, 2009 city council meeting, when the city council authorized the financing for the Fifth Avenue underground parking structure – after reducing its scope due to concerns about the DDA’s ability to finance the project. From The Chronicle’s report of the Feb. 17, 2009 council meeting:

Crawford reported that on looking at the DDA’s financial picture, he noticed that they don’t have a minimum reserve policy. He said he generally used 15-20% as a minimum reserve. In light of the need to maintain adequate reserves, he said that in his view the project is “not affordable with the plans they have.”

In the context of the city’s general fund budget, Crawford has also often mentioned smaller reserve amounts, generally in the range of 8-12%. From The Chronicle’s report of the Oct. 18, 2010 city council meeting:

Crawford noted that the expenditures – because they modify the budget – require eight votes on the 11-member council. He also noted that the currently projected fund balance is around $10.8 million, or around 13% of expenditures. He compared that with the minimum range of 8-12%, where they generally like to operate.

However, the reserve policy recommended by Crawford is not as simple as a percentage to be achieved in a given year. In the wake of discussions in 2009 about the scaling back of the Fifth Avenue underground parking structure’s size, due to DDA fund balances that Crawford had felt were too low, DDA board members had questioned whether the city itself had a minimum reserve policy. Writing to DDA board members in an email dated March 7, 2009, then-city councilmember Leigh Greden offered:

I understand there has been some discussion at the DDA that the City does not have a minimum reserve policy similar to the one Tom Crawford has been recommending for the DDA. In fact, the City DOES have a minimum reserve policy, and has had such a policy — in writing – for years. The policy has been printed in the City’s Budget for years, and reads as follows: The City shall “maintain an undesignated General Fund balance with a minimum range of 8% to 12%; provided that when necessary use of these funds occurs, subsequent budgets will be planned for additions to fund balance to maintain this standard over a rolling five-year average.” Tom Crawford has repeatedly urged the City to exceed this policy by maintaining an undesignated General Fund reserve of 15%. Consistent with Tom’s recommendations, the City has exceeded our policy by maintaining an undesignated General Fund reserve of 15-20%.

At the DDA’s Jan. 5 board retreat, Newcombe Clark said that if 18-20% is recommended as a minimum balance, then 12% is too low. Asked by board members at the retreat for comment, DDA deputy director Joe Morehouse indicated that the percentage of operating expenses is one way to look at fund balances, but that the actual amount of cash on hand is also important.

Morehouse put cash on hand in the context of the current year, when the DDA is writing checks for the Fifth Avenue underground construction project that are in the $2.5-million range. He expressed concern about how to deal with hypothetically possible construction overages. Susan Pollay added that some of the parking decks are very old, implying that even with the systematic maintenance program, there could be unanticipated expenditures. Morehouse indicated that independent of a percentage figure, he felt more comfortable with a fund balance of around $3.5 million than the $2.5 million corresponding to the projected 9.6% in FY 2016.

The newest DDA board member, Bob Guenzel, reminded the board that the idea behind expressing a reserve balance as a percentage of operating expenses is to gauge how long an organization can continue to meet its financial obligations if all revenue were to cease.

In trying to give direction to its mutually beneficial committee as their conversation with the city’s committee moves forward, the DDA board reached a consensus that what the DDA’s committee should convey to the city council’s committee were two key points: (1) the fund balances that the DDA board wanted to see were 12% minimum and ideally 15%; and (2) cash on hand should not go below $3.5 million. In terms of percentage-of-gross parking revenues to be transferred to the city, those principles translate to a number that is closer to 15% than the 16-17.5% that the city has discussed.

For his part, Hieftje was adamant that he was not a part of the DDA board’s consensus. He suggested that the response of the council’s mutually beneficial committee would be: “What the hell happened?”

DDA Retreat: The Numbers – Board Deliberations (Politics of Saying No)

In response to the possibility that the city might not get the amount of money from the DDA that it’s received historically, Hieftje indicated that the impact would be police and firefighter layoffs – there is no other place in the budget to look, Hiefjtje contended. By way of background, the budget for FY 2011 that city administrator Roger Fraser proposed last year included police and firefighter layoffs, most of which were avoided, when the DDA decided to unilaterally alter the parking contract and make an extra $2 million payment to the city.

Clark’s response to Hieftje: “Why is that on our backs?”

Hieftje answered by telling Clark that “the DDA is an arm of the city.” Clark’s response: “That’s not what we’re volunteering our time for.”

By way of background, at the July 12, 2010 meeting of the two mutually beneficial committees, DDA board member Roger Hewitt had stated his assumption in working on the DDA’s committee was that the DDA was not an “arm of the city.” From Chronicle coverage of that meeting:

Hewitt weighed in on the contractual aspect of the agreement by saying that if the view of the city was that the DDA was merely an arm of the city, as opposed to an entity that could enter into contracts with the city, then the committees were wasting their time.

DDA board chair Joan Lowenstein ventured that as the city tries to work with its labor unions, it might actually help the city if the DDA were to make only transfers that still would allow it to maintain higher fund balances. If the DDA acts as an ATM for the city, there is no shared sacrifice between the city and its unions, she said.

Hieftje expressed skepticism that this would be relevant, given that bargaining with the public safety unions is subject to Act 312 arbitration.

Partnerships Committee (Jan. 12, 2011)

By way of general background, the DDA board divides its work among committees: partnerships; bricks and money; economic development and communications; and transportation. The committees meet once a month, and Wednesday was the regular meeting of the DDA’s partnerships committee.

The partnerships committee spent its first hour discussing the DDA’s energy savings grant program. Executive director Susan Pollay stressed the importance of recording the potential future financial liabilities of the program – the 50% match, up to a cap of $20,000 per project – as figures that participants might ask for, not as amounts that the DDA had committed. The program includes an audit phase and an implementation phase, but not every participant in the audit phase necessarily makes installations based on the recommendations of the audit. Pollay’s point was that the amount that participants could claim as DDA matches exceeds the amount the DDA has budgeted – but it’s a first-in program.

The need to stress this fact to program participants is particularly important, Pollay said, as the DDA begins to operate in a climate where it has less financial flexibility than in the past.

Partnerships: Taking a Haircut

In reporting to the partnerships committee about the conversations that had taken place on Monday, Jan. 10, Gary Boren said they’d presented as problematic the 16-17% figure as the percentage-of-gross parking revenues to be transferred to the city. The DDA’s committee, Boren said, had expressed concern about the DDA fund balances. Boren reported that they’d conveyed to the council’s committee that a percentage-of-gross in the range of 14-15% should be more palatable.

Boren said that Christopher Taylor (Ward 3), who serves on the council’s committee, had responded with a suggestion that Boren wished he himself had thought of: If the DDA’s concern was its fund balances, then the city could insure it. However, Boren wondered what an “insurable event” would be. The idea left a lot of details to be worked out. You can’t guaranteed the vote of a future council as far as what might fall within a risk guarantee, he concluded.

And as Boren’s report to the partnerships committee continued, mayor John Hieftje’s remarks at the Jan. 5 retreat proved prescient – Hieftje had ventured that the city council’s mutually beneficial committee would react to the lower percentage-of-gross by saying, “What the hell happened?”

To Boren, it appeared that the city’s position is intransigent. He pointed to Taylor’s characterization of the lower, 14-15% figure as a percentage-of-gross transfer as the city “taking a haircut.” In fact, said Boren, “nothing is in the bag,” but the city’s original position is all they’ll accept. [By way of background, "taking a haircut" is a phrase sometimes used in the world of finance to characterize a situation where the holder of a loan is willing to accept a lesser amount than is actually owed.]

Boren indicated that on Monday, the DDA committee has told the city council committee that for the majority of the DDA board, the 16-17% figure is unacceptable, because of the impact it would have on fund balances in the context of projects the DDA would like to undertake that are within its mission.

The city council is refusing to lay out for the DDA what they actually need for their budget, Boren said, but the council appears to be saying: Give us this much, or else. Boren called it a bad attitude for a potential business partner. And what is the “else”? Boren wondered.

Sandi Smith, a DDA board member who also serves on city council, gave Boren a possible answer: The city takes responsibility for the public parking away from the DDA, and shoulders that responsibility itself. Smith quipped that the “nuclear option” had evolved from the dismantling of the DDA, to simply taking away the public parking system. [Smith was alluding to the very briefly mentioned idea of dismantling the DDA, that had come at a 2009 city council budget retreat.]

Boren appeared content that the city might take back responsibility for the parking system, saying that the DDA would have five years to plan. [There are now actually only four years remaining in the contract.]

Susan Pollay reminded the partnerships committee of the timetable for setting the budget: the council must approve it in May; the city administrator must submit it in April; the city administrator needs numbers by March. In that context, she said, there would, from now forward, be an increased sense of urgency. She cautioned that the best work and thinking was not always done in the context of urgency. She reminded the committee that in addition to the percentage-of-gross figure, other aspects of the parking contract still need to be worked out, including the definition of the parking district boundaries and the rate-setting powers.

Keith Orr repeated a sentiment he’s expressed at previous board meetings, that compared the situation faced by the city and the DDA to labor negotiations. When there’s a request to a union to re-open a contract before it expires, the union response is typically, OK, show us your numbers. And the city had not shown the DDA its numbers, he said. Perhaps now was a time to be proactive, he said, and present a proposal for the percentage-of-gross figure and for the other contract details. That would perhaps get the two parties to the proposal-counter-proposal stage.

Pollay asked what option the DDA might have if the city continued to say, No, no, no. Smith ventured: “What if the DDA said, No?” Answered Boren, “That would be great!” At one point Boren suggested that the DDA should simply say: “Here’s what you get: 14%. I think they should be happy.”

Joan Lowenstein picked up on Orr’s idea that what the DDA would like to see are the city’s numbers: Why does the city need the specific amount it wants? She suggested that now, as the city departments are working on their budget numbers, would be a convenient time to extract those figures. The DDA would need help from councilmembers to make those requests, she suggested.

Two city councilmembers were in the room for the partnerships committee meeting: Sandi Smith (Ward 1) who also serves on the DDA board; and Tony Derezinski (Ward 2), a city council representative to the DDA’s partnerships committee.

What’s Next? (Jan. 18, 2011 City Council Meeting)

The city council’s Jan. 18 agenda includes the city council resolution authorizing the DDA to develop a parcel-by-parcel plan for the city’s downtown surface parking lots. Although the parking contract and the development plan have been decoupled in the city-DDA conversation, any city council debate on the resolution could provide some insight into city council attitudes towards the DDA.