DDA Delays Parking Vote Amid TIF Questions

Ann Arbor Downtown Development Authority board meeting (May 2, 2011): At its Monday meeting, the DDA board was expected to ratify its side of a new contract under which the DDA would continue to operate the city of Ann Arbor’s public parking system.

Instead, the board received this news from the chair of its bricks and money committee: The city has raised the possibility that the DDA might need to return money to various taxing entities – including the city of Ann Arbor – from the taxes captured through the DDA’s tax increment finance district. The city communicated its concern to the DDA on Monday morning, the day of the noon meeting.

The issue concerns the DDA’s TIF plan, which was renewed in 2003, and language in the city’s ordinance establishing the DDA under the state’s enabling legislation. The TIF plan contains projections for the growth in taxable value of property (both real and personal) in the district. The city’s ordinance stipulates that if the actual “captured assessed valuation” grows at a rate faster than the expectation expressed in the TIF plan, then at least 50% of the additional amount must be returned proportionately to the taxing authorities from which the taxes were captured.

The vagueness of the ordinance language leaves several open questions that will require further review by the city attorney’s office and the DDA’s own legal counsel, as well as the financial staff from both organizations.

Those questions include: (1) What’s the relevant time period? (2) Which set of TIF plan estimates are applicable – the one labeled pessimistic, optimistic or realistic? (3) Who is the responsible party for adherence to the ordinance? (4) Does the ordinance language refer to real property only or also to personal 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?

After hearing the news, the board decided to table the resolution on its agenda that would have ratified the DDA’s side of a new parking contract under which it would continue to manage the city’s parking system. [Previous Chronicle coverage: "Column: Ann Arbor Parking – Share THIS!"]

Board members recognized that it would likely be necessary to convene a special meeting of the board, given the city’s need to approve its budget on May 16. Later the same day, on the evening of May 2, the city council struck from its agenda the item that would have ratified the city’s side of the new parking contract. The city council has not yet weighed in on the text of the contract, but did express its view on the financial terms at its April 19 meeting.

As DDA board members absorbed the news about the TIF question, they heard their usual set of reports from their committees and wrapped up the meeting is less than an hour – they had no further business to transact. Board member Russ Collins, who was prepared to call in to the meeting from Detroit, where he’d been summoned for federal jury duty, did not need to do that. 

TIF Question

To understand the news from the DDA’s meeting, it’s useful to start with some basic background.

TIF Question: Background

Ann Arbor’s Downtown Development Authority is established under the state’s enabling statute, which governs how such entities may be formed by local governments. [.pdf of state enabling legislation: Act 197 of 1975]. A DDA uses a tax increment finance (TIF) district as a way of focusing investment of tax revenues on a specific geographic area – the TIF district.

The DDA itself does not levy taxes within the district. Instead, a DDA “captures” property taxes that are already levied by other taxing entities. In the case of Ann Arbor’s DDA, the other taxing entities whose revenues are captured inside the district include: the city of Ann Arbor, Washtenaw County, the Ann Arbor Transportation Authority (AATA), Washtenaw Community College (WCC), and the Ann Arbor District Library.

For DDAs formed after 1994, other taxing authorities have had a chance to opt out of allowing their taxes to be captured. From the state statute:

125.1653 Sec. 3 (3) Not more than 60 days after a public hearing held after February 15, 1994, the governing body of a taxing jurisdiction levying ad valorem property taxes that would otherwise be subject to capture may exempt its taxes from capture by adopting a resolution to that effect and filing a copy with the clerk of the municipality proposing to create the authority.

Ann Arbor’s DDA was formed in 1982 for a 30-year period, but was renewed in 2003 to extend through 2033.

A standard part of any TIF capture, including that of Ann Arbor’s DDA, is that the tax capture is limited to those taxes on the difference between existing value of a property and a newly constructed property. This difference is the increment in “tax increment finance.”

Ann Arbor’s TIF capture is somewhat different from simple TIF in two ways, both of which have the effect of limiting the amount of taxes captured.

First, once the increment is determined for the initial year of a newly constructed property, that increment stays constant for purposes of future capture. In other words, after a property is built and continues to appreciate in value over time, the taxes on additional value due to that appreciation are not captured by the Ann Arbor DDA. This is a point that DDA board member Leah Gunn reliably makes whenever the DDA’s TIF capture is discussed, and Monday’s meeting was no different.

The second way that Ann Arbor DDA TIF capture is different from simple TIF relates to projections that are included in the TIF plan for the DDA. A TIF plan is an element described in the state statute:

125.1664 Tax increment financing plan; preparation and contents; limitation; definition; public hearing; fiscal and economic implications; recommendations; agreements; modification of plan. Sec. 14. (1) When the authority determines that it is necessary for the achievement of the purposes of this act, the authority shall prepare and submit a tax increment financing plan to the governing body of the municipality …

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]

TIF Question: Breaking the News

The 50%-return condition specified in the city’s DDA ordinance is the issue that was raised at the DDA’s Monday meeting. It was Roger Hewitt who announced at the meeting that the question had been identified by the city of Ann Arbor. [The growth in TIF capture does, in fact, appear to have outpaced the growth anticipated in the plan.] Leah Gunn, who is the longest-serving member of the board, elicited from Hewitt that he’d received a rather concerned phone call from deputy DDA director, Joe Morehouse, at about 9:30 a.m. [The meeting started at noon.]

Mayor John Hieftje – who sits on the DDA board, serving a slot designated in the state enabling legislation – said the city had become aware of the issue late Friday, April 30. He said the city’s legal staff had worked over the weekend on the issue and would need additional time, working with the DDA, to sort things out. It was interesting that the language had been sitting there for some time, he said, and had not been addressed. He allowed that the language of the ordinance was not very clear.

The immediate consequence of the news was that the board did not vote on the new parking contract under which the DDA would continue to operate the public parking system. The proposed contract called for the city of Ann Arbor to receive 17% of gross parking revenues and would provide the DDA with the authority to set rates, without the possibility of a city council veto – the council currently has the power of veto. Hewitt said he felt it was imprudent to discuss the parking contract, when the potential financial impact on the DDA  – due to the TIF issue raised by the city – would be significant but uncertain.

Hieftje was keen to see the item formally moved and then formally tabled, to make clear what the status of the agenda item was.

Outcome: The board voted unanimously to table the resolution ratifying the parking contract.

TIF Question: Board Reaction

Sandi Smith, who serves on the Ann Arbor city council as well as the DDA board, was effusive in thanking the other members of the DDA’s “mutually beneficial” committee – Roger Hewitt, Russ Collins and Gary Boren – for their hard work on trying to reach an agreement on the new parking contract. They’ve been working for well over a year on the agreement. She noted that DDA board members are all volunteers who could be doing things other than holding 7 a.m. meetings.

[Smith was implicitly contrasting DDA board members with city councilmembers, who receive an annual salary of just under $16,000. She was referring to the early Monday morning meetings the two committees from the council and the DDA board have held over the last few months.]

DDA board chair Joan Lowenstein pointed out that the DDA has a current contract under which it manages the public parking system – the contract runs through 2015, and can be extended at the DDA’s option through 2018. That contract would allow the city of Ann Arbor to withdraw about $2 million less per year from the public parking system revenues than the contract that was on the DDA’s agenda for consideration.

Newcombe Clark wanted some clarification about the DDA’s May 2010 resolution that approved a transfer of $2 million to the city of Ann Arbor from the public parking system –  a transfer that was not required under the terms of the current parking contract. He wanted to know if the DDA would be able to meet the time frame specified in that resolution for completing a new parking contract.

At Smith’s urging, the exact language of that resolution was located not much later in the meeting. In relevant part, it reads:

RESOLVED, The DDA authorizes providing the City with $2 million in fiscal year 2010/11 with the following expectations:

• The DDA and City representatives who have developed the preliminary terms will continue to meet at least once a month to complete work on an agreement that will go to the DDA and City Council for approval, and these meetings will be open to the public.
• The DDA and City representatives will aim to conclude their work by October 31, 2010, but certainly no later than the end of the fiscal year 2010/11. [.pdf of DDA resolution of May 5, 2010 authorizing payment of $2 million to city of Ann Arbor]

Lowenstein concluded that if the DDA board reached a new agreement with the city on parking revenues by June 30, the end of FY 2011, the board would be abiding by the terms of its resolution.

Lowenstein suggested that once the legal interpretation of the ordinance was agreed on by the DDA and the city, there should be an independent audit to determine the amount of any money that needed to be divided up.

Leah Gunn noted that the DDA’s legal counsel, Jerry Lax with Bodman, would be unavailable beginning the next day, so she hoped the attorneys on the DDA board would be able to pitch in – they include Lownenstein, Bob Guenzel, and Gary Boren.

Smith asked for a proportionate breakdown of the TIF taxing entities. Hewitt said that the DDA’s TIF revenue is roughly 60% from the city of Ann Arbor and the remaining 40% from the Ann Arbor Transportation Authority, Washtenaw Community College, Washtenaw County and the Ann Arbor District Library. Josie Parker, director of the AADL, attended the meeting – she often attends meetings of the DDA board and its committees.

Hewitt noted that given the city’s need to have its budget approved by May 16, he expected the DDA board would need to convene a special meeting sometime before then. The city’s budget assumes roughly $2 million more in revenue from the public parking system than the current contract specifies.

TIF Question: Material Issues

In connection with the city’s DDA ordinance, which stipulates the minimum 50% return of TIF capture in excess of TIF plan estimates, an immediate question is whether the TIF capture has, in fact, outpaced the plan’s estimates.

An initial look at the numbers indicates that the taxable values subject to capture have increased faster than the TIF plan projections. Here’s a snapshot of numbers since the 2003 renewal of the Ann Arbor DDA. [Close-of-roll numbers in the left column come from the city of Ann Arbor treasurer's office. Estimates in columns 2-4 are from the DDA TIF plan Appendix C]

                                TIF PLAN ESTIMATES
Actual Valuation        "Realistic" "Optimistic"  "Pessimistic" 

2004    $76,955,174     $71,836,326  $72,658,263  $71,021,758
2005    $78,671,971     $73,937,930  $75,209,080  $72,683,949
2006    $81,877,369     $76,101,112  $77,849,585  $74,385,101
2007    $92,998,789     $78,327,678  $80,582,937  $76,126,129
2008    $92,204,889     $80,619,488  $83,412,404  $77,907,969
2009   $113,460,032     $82,978,457  $86,341,373  $79,731,579
2010   $140,612,435     $85,406,555  $89,373,346  $81,597,939
2011   $137,800,186     $87,905,812  $92,511,951  $83,508,054

-

In FY 2010, the amount of taxes generated for the DDA’s TIF district – based on the actual valuation – was $3,537,939. The DDA has budgeted $3,935,790 in TIF revenue for the current fiscal year, FY 2011. But currently the DDA anticipates this number to be closer to $3.7 million.

Given the apparent excess valuation compared to the TIF plan – even on the “optimistic” estimates – several questions arise when it comes to calculating a possible return of TIF capture to various taxing entities under the city’s DDA ordinance. Some of these questions were floated at the DDA’s board meeting. Others were identified in subsequent conversations between board members and The Chronicle:

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.
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.
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?
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 a 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.
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 a part of the municipal center finance plan as covering any amount owed to the city of Ann Arbor.

Given the various open questions about the calculations, it’s not possible to say with great precision how much money might be at stake. Back-of-the napkin calculations by The Chronicle indicate since 2004, on the high side it could be in the range of $3 million total that may have been erroneously transferred to the DDA. Of that amount, the city of Ann Arbor’s share would be a bit less than $2 million. After the city council meeting on May 2, Tom Crawford, the city’s CFO, told The Chronicle that the city’s preliminary estimate was a bit lower – more in the range of $2 million total.

Communications, Committee Reports, Commentary

The board’s meeting included the usual range of reports from its standing committees and the Downtown Citizens Advisory Council. Every board meeting also includes two opportunities for public commentary – one near the start of the meeting and the other at its conclusion.

Comm/Comm: Bricks and Money Committee – Third Quarter

Roger Hewitt gave an update on the third-quarter financials for the DDA’s 2011 fiscal year. The TIF revenue drew some discussion. The DDA had budgeted $3,935,790 in TIF revenue, but now anticipates that revenues will be closer to $3.7 million. The difference was attributed to the overall loss in commercial property value, which balanced out the addition of new projects.

Sandi Smith said the newest figures she’d seen showed another 2% loss.

Parking revenues are a part of every report out from the bricks and money committee. Hewitt noted that revenues were up, but not by as high a percent as the rate increase that had been implemented.

John Hieftje asked for someone to explain the jump in hourly parking patrons in March. Hewitt indicated that it’s a “slippery” number – it indicates people who park, but who don’t have monthly passes. There’s no accounting for the length of time they stayed. Hieftje pressed again, asking if there had been a big promotion or something during the month.

By way of partial explanation, Joan Lowenstein noted that last year, construction workers who had been working on the University of Michigan North Quad dormitory had been parking at the Maynard Street structure – using permits. Their spaces are now used by hourly patrons. The number was up by 13,000, said Hieftje, which is about one-third – it’s a big jump and it had caught his eye, he said. Hewitt said it takes a while for people to realize that the spaces are available again.

Comm/Comm: Bricks and Money Committee – Construction

Reporting out from the “bricks” part of the bricks and money committee, John Splitt gave an update on the Fifth and Division streetscape improvement project. He reported that Eastlund Concrete would be starting up work again very shortly, if they have not already started. Leah Gunn chimed in to say that the construction barrels have been set out.

On the Fifth Avenue underground parking garage, Splitt reported that progress continues on the east leg near Division Street – walls are being poured in that part of the garage. The decks in the east leg are already poured. He reported that SME, the company that designed the earth retention system, has finished inspections of the earth retention system on the north side of the site and have moved to the west side. All necessary repairs have been accomplished on the north side.

[The inspections and repairs came as a result of a breach in the earth retention system that took place in late March.] Splitt said he’s hoping to schedule a tour of the site for the next meeting of the bricks and money committee. He indicated that a staircase on the east side of the garage will likely be completed by then. Details will be firmed up by the time of the next committee meeting.

Comm/Comm: Economic Development

Reporting out from the DDA’s communications and economic development committee, Joan Lowenstein said that Ann Arbor SPARK‘s director for research and business information, Donna Shirilla, had briefed the committee at its last meeting. Shirilla had said it’s clear that the IT sector is a prevalent part of the Ann Arbor downtown mix of businesses. One-third of the downtown businesses are in the IT sector, and 15% of the county’s IT employment is downtown. Small businesses like the atmosphere of downtown – the ambiance of downtown is what they’re looking for.

Shirilla said that higher rents don’t seem to be a deterrent to smaller IT businesses. Life sciences and the automotive industry are also represented, but they would typically need a larger floorplate. Once they reach a certain size, they leave. Downtown Ann Arbor offers lots of small spaces, but not much in the way of larger spaces, Shirilla reported.

Lowenstein said that in discussing possible DDA-SPARK collaboration, one idea the committee floated would be to jointly host a roundtable discussion with IT firms about available space and talent. The committee discussed information on housing and other amenities that would help SPARK recruit companies. The committee also talked about improvements to the DDA website. They decided they would not go to the time and expense of a complete redesign, but talked about reorganization of the information that’s presented on the website.

Comm/Comm: Partnerships Committee – Energy

Reporting out from the partnerships committee, Sandi Smith quipped that the co-chair of the committee, Russ Collins, goes to great lengths to avoid giving the report – he’d been called for jury duty in federal court in Detroit. [Another board member, Keith Orr, had been called for jury duty in the 15th District Court, but it turned out that no trial needed to be held in Judge Chris Easthope's court that day.]

Smith began by giving an update on the DDA’s energy saving grant program – it pays for energy audits and then matches business owner investments up to a cap of $20,000. She characterized the $650,000 spent on the program to date as a remarkable investment in buildings. It’s a good example of the DDA leveraging its investments to encourage private investment. Smith indicated that the next committee meeting will include a discussion about how to allocate a smaller amount annually [$100,000 compared to $200,000]. Strategies include making the grants smaller, focusing on just audits or possibly focusing just on matching grants. Another question, Smith said, is whether to focus on smaller or larger businesses.

Responding to comments made by Smith, mayor John Hieftje continued a theme he’s begun in connection with the reduction in funding the DDA has needed to make in the energy saving grant program because of increased financial pressure. That theme is to highlight the city’s PACE (property assessed clean energy) program, which is being funded with a federal grant. Hieftje indicated that the city has hired a staff person to work on PACE, and part of her mission is to engage with other groups. Most of the pieces of the program are in place, he said. It would help if the DDA would help roll out PACE.

Smith noted that PACE is designed for much bigger property owners. The beneficiaries of the DDA’s energy saving grant program, like Vicki’s Wash and Wear Haircuts, are small businesses. For the re-lamping project that owner Vicki Honeyman had undertaken, the matching grant was a huge factor in allowing her to do that, Smith said.

Comm/Comm: Partnerships Committee – RFP Processes

Smith reported that the committee had had an interesting discussion with David di Rita of the Roxbury Group, which had served as the consultant for the Library Lot RFP (request for proposals) process. That process was terminated by the city council at its April 4, 2011 meeting. Di Rita had told the committee that some RFP processes he’d been involved with have worked well and others have not. The key is to have a vision and be clear in your RFP, he said. RFPs that are obscure and cast a wide net don’t typically go anywhere. Something that reflects a clear community vision tends to do better, he told the committee. [For Chronicle coverage that mentions that partnerships committee meeting: "Balancing Ann Arbor, Detroit and a Vision"]

Smith noted that in the city of Ann Arbor, RFPs are issued that are not clear and then people are surprised when proposals come back and it’s not what they want. Smith noted that Jesse Bernstein (chair of the Ann Arbor Transportation Authority board) and Josie Parker (director of the Ann Arbor District Library) also attended the committee meeting. The two had talked about long-term visioning – not just five or 10 years, but 30 years.

Comm/Comm: Transportation Committee

John Mouat reported out on the spring walk-around by the transportation committee. They’d looked at outskirt areas where people enter the downtown, he said. They’d considered what can be done in the short term with limited dollars. Areas they’d identified were on the west side where roads cross the railroad tracks. There are trip hazards near Main Street. Near Kerrytown they identified sidewalk improvements that could be undertaken. Other categories identified include: downtown bike sharrows – the new markings have been added by the city, but there are gaps in their placement, he said.

The committee took a look at countdown pedestrian signals – do they help or hurt? Mouat said there’d been a good response to the plantings added around the parking structures. The next step will be to put prices on items to make decisions on where to focus investment.

Comm/Comm: Scheduling – DCAC

For the first time in The Chronicle’s memory, Ray Detter did not deliver a report to the DDA board on the downtown citizens advisory council’s most recent meeting, which is typically held the Tuesday evening before the Wednesday when the DDA board meets. The board meeting had been shifted to Monday, in order to facilitate greater board member attendance for an anticipated parking contract vote.

During the board meeting, Detter was leading one of several tours of the downtown historical markers. The tours have been spotted in the wild on two occasions in the last week. [Occasion 1] [Occasion 2]

Comm/Comm: Scheduling – Open Meetings

Given the shifted scheduling of the meeting, at the start of the meeting Sandi Smith asked for confirmation that it had been properly noticed to the public. Joe Morehouse, deputy director of the DDA, indicated that the paper notice had been posted at the city hall building and at the DDA offices, and that it had been included in the city’s Legistar scheduling system.

Comm/Comm: Comment

No one addressed the board during either of the times on the agenda set aside for public commentary.

Present: Gary Boren, Newcombe Clark, Bob Guenzel, Roger Hewitt, John Hieftje, John Splitt, Sandi Smith, Leah Gunn, Keith Orr, Joan Lowenstein, John Mouat

Absent: Russ Collins

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