Ann Arbor DDA: No Redistribution Required

Ann Arbor Downtown Development Authority special board meeting (July 27, 2011): At a special meeting, the Ann Arbor Downtown Development Authority board passed a resolution stating that it was accepting the general guidance of its legal counsel, Jerry Lax: The DDA does not believe that any redistribution of captured taxes to relevant taxing authorities is required.

At issue is the interpretation of a city ordinance about tax increment finance (TIF) capture in the DDA’s downtown district.

The decision at the special meeting, which was unanimously approved by the nine board members present, came after a closed session with Lax that lasted nearly an hour. The language of the resolution is somewhat vague, citing the city’s ordinance only in general terms and stating that “no redistribution to relevant taxing authorities is required.”

In separate phone interviews with The Chronicle following the meeting, three board members confirmed that the DDA’s position, as expressed in the resolution, is that the city’s ordinance does not require the DDA to redistribute TIF money to other taxing authorities. The DDA’s interpretation would render moot any argument about the method used in calculating that redistribution.

Earlier this year, the DDA had calculated that the city of Ann Arbor – as one of the taxing authorities – was owed $711,767, but the city waived payment of that amount. The DDA did return a total of $473,000 to Washtenaw County, Washtenaw Community College, and the Ann Arbor District Library. The resolution passed at Wednesday’s special meeting is consistent with the DDA’s position that the return of that money was not actually required.

Executives from the library and WCC, in phone interviews with The Chronicle following Wednesday’s meeting, indicated that they’ll be following up with a response to the DDA board’s decision.

Brief Background on Excess TIF

By way of background, at its May 2, 2011 meeting, was poised to ratify a new contract with the city of Ann Arbor, under which the DDA would continue to manage the city’s public parking system.  The DDA board was informed that day of a previously unnoticed provision in the city’s DDA ordinance – Chapter 7 of the city code. Chapter 7 appears to limit the amount of taxes the DDA can capture in its TIF district. Excess TIF capture is to be divided among the taxing authorities in the district.

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. The tax capture is only on the increment in valuation – the difference between the value of property when the district was established, and the value resulting from improvements made to the property.

At a May 20, 2011 meeting, the DDA board voted to accept a method of excess TIF calculation that amounted to roughly $473,000 of excess TIF capture since 2004, to 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. At its May 30 session, the Ann Arbor city council voted to waive the $711,767 in excess TIF capture that was owed to the city of Ann Arbor based on that method of calculation.

The Chronicle has published two op-ed pieces on the subject, arguing that the method the DDA used to calculate the excess TIF is not accurate: “Taxing Math Needs Another Look” and “TIF Capture is a Varsity Sport.”

However, the resolution passed by the board at Wednesday’s special meeting appears to express the position that no calculations of any kind are required, because the DDA is not required to redistribute TIF capture to other taxing authorities. In its entirety, the resolution reads:

Resolution Regarding DDA TIF Distribution

Whereas, the city has an ordinance on tax increment financing,

Resolved, the DDA accepts the general guidance of its DDA attorney regarding the tax increment financing distribution, and based on the city ordinance, no redistribution to relevant taxing authorities is required.

In separate phone interviews with The Chronicle following the meeting, DDA board chair Gary Boren and board members Newcombe Clark and Joan Lowenstein indicated that, based on their current interpretation of the city ordinance, the DDA would not have returned the $473,000 to the other taxing authorities earlier this year.

Ann Arbor’s DDA Ordinance

What does Ann Arbor’s DDA ordinance say about tax capture? From Chapter 7 of the city code [emphasis added]:

(2) Tax increment financing: If the downtown development authority proposes a tax increment financing plan, it shall only plan the use of that portion of the captured assessed value that is due to new construction and improvements to existing buildings after December 31, 1981 to implement the downtown plan and any amendments thereto.

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.

After the then earliest dated bond issue of the downtown development authority is retired, the captured assessed valuation prior to the date of sale for that issue shall be returned to the rolls on the next succeeding tax levy.

Tax funds that are paid to the downtown development authority due to the captured assessed value shall first be used to pay the required amounts into the bond and interest redemption funds and the required reserves thereto. Thereafter, the funds shall be distributed as set forth above or shall be divided among the taxing units in relation to their proportion of the current tax levies.

The first italicized chunk of the ordinance (on calculations) has been the focus of previous public discussion and Chronicle analysis. It relates to how calculations are to be performed.

But the resolution approved at the DDA board’s special meeting expresses the view that no redistribution of TIF captured revenue is necessary. Following the meeting in a phone interview with The Chronicle, recently-elected DDA board chair Gary Boren said it’s important not to try to interpret the city ordinance by looking narrowly at a single sentence – the section on calculations – without the context of the entire ordinance.

According to DDA board member Joan Lowenstein, in a phone interview following the meeting, a crucial piece of that context is the second italicized chunk. She said it establishes that first-in-line to be paid is the debt owed by the DDA and other DDA projects, as planned by the DDA. After those payments are made, she explained, any TIF money left is to be redistributed “as set forth above” – that is, according to the first italicized chunk of text.

Lowenstein cited the state’s enabling legislation, which articulates the basic idea that DDA’s are not meant to be able to amass a “war chest” of funds. The state statute reads in relevant part:

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.

The DDA is interpreting the Ann Arbor city ordinance, said Lowenstein, in the same spirit of those concepts laid out in the state enabling statute.

Reaction from Other Taxing Authorities

Among the other taxing authorities that have their taxes captured by the Ann Arbor DDA are the Ann Arbor District Library, the Washtenaw Community College, and Washtenaw County.

Josie Parker, executive director of the Ann Arbor District Library, attended the special meeting on July 27. In a follow-up phone interview with The Chronicle, she said the library would be working with its own legal counsel, Hooper Hathaway, in preparing a response to the DDA’s decision made at the special meeting. AADL board member Nancy Kaplan also attended the meeting.

Larry Whitworth, president of Washtenaw Community College, told The Chronicle by phone that he was disappointed by the DDA board’s decision made at the special meeting, and that WCC would be responding to that decision.

Question of Interpretation

Leaving aside the method of calculation, the issue over which the Ann Arbor DDA and the other taxing jurisdictions might still disagree is this: What is the purpose of the calculations section of the ordinance (the first italicized chunk)? The Ann Arbor DDA sees that section as only applying when there are surplus funds – otherwise put, if there’s TIF capture revenue that’s not required for the DDA’s set of projects. And the DDA position essentially is that there are no surplus funds, so there’s no need to perform calculations to determine how that surplus is divided among the other taxing authorities.

Other taxing authorities might continue to see the purpose of that section in the same way that the DDA and most other observers interpreted it initially: It determines how much tax the Ann Arbor DDA is supposed to capture in the first place. That is, the library and other taxing authorities might see that section as comparable to the Scio Township DDA’s TIF capture, which is set up with the stipulation that only 50% of the eligible TIF capture goes to the Scio Township DDA. From the Scio Township DDA Development and Tax Increment Financing Plan:

The Authority proposes that per the current sharing agreement with the taxing jurisdictions, 50% of the eligible non-debt taxes levied on the captured assessed value within the Development Area be used by the Authority. (This sharing agreement will remain in effect unless the Authority reaches a mutual agreement with one or more of the other taxing jurisdictions to apply a different formula for a specified period of time. Any revision of the formula must not jeopardize the Authority’s ability to repay its debt obligations.)

Scio Township supervisor Spaulding Clark explained to The Chronicle in a phone interview on Wednesday that the 50% capture is achieved in actual practice by first distributing 100% of the allowable capture to the Scio Township DDA. Then the Scio Township DDA writes checks for 50% of that amount back to the relevant taxing authorities. The return of that 50%, said Clark, is not contingent on outstanding debt or other obligations of the Scio Township DDA.

Meeting Logistics

The special meeting was called to order by Gary Boren, who was recently elected chair of the DDA board. He described the provision of the Michigan Open Meetings Act under which the board would be entering a closed session – to discuss an attorney-client privileged legal opinion. The DDA’s legal counsel, Jerry Lax, now with Pear Sperling Eggan and Daniels PC, joined the board in their closed session.

After about an hour, the board emerged from its closed session. Board member Joan Lowenstein read the resolution aloud and the board voted unanimously to approve it, without deliberation. The board then immediately adjourned the meeting.

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

Absent: Bob Guenzel, Russ Collins, Sandi Smith

Next board meeting: Noon on Wednesday, Sept. 7, 2011, at the DDA offices, 150 S. Fifth Ave., Suite 301. [confirm date]