Ann Arbor Library Board Briefed on Tax Issue

Ann Arbor District Library board meeting (Sept. 19, 2011): Much of Monday’s 20-minute public meeting was spent discussing the possible repeal of the state’s personal property tax – a move that would take an estimated $637,000 out of the library’s roughly $12 million annual budget.

Josie Parker briefed the board during her director’s report, saying she wanted trustees to be aware of the issue and of its potential impact on the library’s finances. Legislation has been introduced, but it’s not yet clear whether lawmakers will decided to eliminate the tax completely or simply reduce it. Also unclear is what – if any – options would be available to taxing authorities to replace that lost revenue. Parker noted that when Pfizer closed its Ann Arbor operation several years ago, the library also took a hit. Pfizer had been the city’s largest taxpayer.

Parker’s report also included news about a lawsuit brought by Herrick District Library against the Library of Michigan. The state library has decided not to appeal an August court of appeals decision, which ruled in favor of Herrick’s position. Herrick had challenged new rules that would have changed how public libraries qualify for state aid. The changes were seen as a threat to local control, by taking away certain decision-making authority from local libraries. AADL was the only individual library in the state to file an amicus curiae brief in support of Herrick.

There was no board discussion about a potential response to the Ann Arbor Downtown Development Authority’s excess tax capture decision. At issue is the interpretation of a city ordinance about tax increment finance (TIF) capture in the DDA’s downtown district. In July, the DDA board passed a resolution stating its opinion that the city’s ordinance does not require the DDA to return any money to taxing authorities in its TIF district – despite the fact that the DDA had already returned excess TIF revenue earlier this year.

The AADL is a taxing authority in the DDA’s TIF district and has been consulting with its legal counsel over the implications of that decision, as well as a possible response. Queried by The Chronicle after Monday’s meeting, Parker said the AADL has made no decision yet on the issue. [For background and analysis of the excess tax capture, see Chronicle columns: “Taxing Math Needs Another Look” and “TIF Capture is a Varsity Sport.”]

Director’s Report

AADL director Josie Parker told the board that it’s important to understand the implications of the possible elimination of the state’s personal property tax, which is being discussed by Gov. Rick Snyder’s administration and state legislators. The business tax is levied on non-permanent items like computers, industrial equipment and furniture. It contrasts with the state’s real property tax, which is levied on land and buildings.

The library has a dedicated millage, and would be among the taxing authorities affected by any reduction or elimination of the tax. The AADL is authorized to levy up to 1.92 mills. Its current budget includes a levy of 1.55 mills, unchanged from the previous year.

If the tax were eliminated, the library would lose an estimated $637,000 in revenue, Parker said.

It’s possible that the tax could be phased out over a period of several years, or that other revenue sources would be proposed by the state to replace it. But with an estimated $1.2 billion in tax revenue loss statewide, Parker said it’s slowly dawning on communities that if the personal property tax is eliminated, it would likely mean a loss of services too – ranging from police and fire services, to libraries. That’s especially true for municipalities and other taxing entities where the personal property tax makes up a large share of their total revenues, Parker said – in some cases, as much as 50%. Some libraries in the state have told the Michigan Library Association that they’d have to close completely, she said.

Earlier this month, David Zin, chief economist for the Michigan Senate Fiscal Agency, issued a memo summarizing an analysis of the legislation – Senate Bill 34 and Senate Bill 142. He writes: “Individual local units’ reliance on personal property taxes varies significantly, with smaller and more rural local units generally less reliant on personal property taxes than more developed urban areas.” [.pdf of Zin's memo]

It’s a complicated issue, Parker said, but one that the board needs to be aware of.

At Monday’s meeting, trustee Ed Surovell acknowledged that there are problems with the tax, though he indicated it is not onerous. He said his accountant complains that the depreciation schedules are difficult – requiring, for example, that computers be depreciated over 10 years, which is far longer than the computer’s life cycle. His business, Edward Surovell Realtors, pays about $16,000 to $18,000 in personal property taxes, he said. Large manufacturers like GM, with factories in which the equipment is far more valuable than the buildings, would pay significantly more.

As a private citizen, Surovell said, he’s concerned about how the tax might be replaced. However, he said he didn’t think legislators will repeal it because they’re not smart enough to figure out how to replace it. If you don’t want to tax businesses, he added, you’ll have to tax citizens. “I don’t think the current legislature will want to do that.”

Parker reported that lobbyists are being told that taxes would have to be raised locally, to replace the state personal property tax. This might be done by raising the current caps on the amount that local taxing authorities can levy. Parker said there seems to be no real recognition that the communities hit hardest will have the least ability to impose higher taxes on residents.

Parker said there are voices in Lansing that are clearly comfortable with saying that no matter how much pain it causes, these steps are necessary to achieve their goals. In Ann Arbor, those opinions aren’t often heard, she said, but it’s important to know what people in other parts of the state – including legislators – are saying.

Barbara Murphy wondered what the intent was behind repealing the tax. Rebecca Head said the rationale being used is that the personal property tax is not conducive to job growth. Surovell expressed skepticism: “That’s a great statement because it’s not arguable – it’s not grounded on anything.”

Several groups have mobilized on the issue. The Michigan Library Association (MLA) has joined a raft of other organizations in the Replace Don’t Erase Personal Property Tax Coalition. Other groups in the coalition include the Michigan Municipal League, Michigan Association of Counties, Michigan Association of School Administrators, Michigan Association of School Boards, Michigan Association of Chiefs of Police and the Michigan Professional Fire Fighters Union.

Parker is chair of the MLA’s legislative committee, which has made the issue its top priority, according to a statement on the association’s website.

On Sept. 20, the day after AADL’s board meeting, Governmental Consultant Services Inc. – the Lansing firm led by Kirk Profit that serves as a lobbyist for the MLA and other entities, including the city of Ann Arbor and Washtenaw County – issued a legislative briefing that addressed this issue. The document, authored by GCSI staff Erik Hingst and Nell Kuhnmuench, was sent to the MLA’s legislative committee. From that briefing:

As we have discussed, Senator Mike Nofs (R-Battle Creek) introduced Senate Bill 34 back in January that would eliminate the collection of Personal Property Taxes (PPT) in Michigan. Now that the Legislature has returned from the summer recess, the conversation regarding the outright repeal or phase out of PPT is beginning to escalate.

Clearly, the estimated $1 billion in projected revenue losses to local units of government would have a catastrophic impact on their operations and the state. While it would appear that the Administration is leaning toward replacing a portion of local revenues, an outright alternative dollar for dollar funding stream does not seem to be a priority for those advising the Governor.

The Michigan Municipal League, Michigan Townships Association and direct local units of government (through their respective Mayors and their elected and appointed officers) continue to call for a complete, constitutional replacement of any and all revenue. To date, neither the Senate nor the House has had any meaningful committee hearings on the issue. However, the likelihood of the legislature approving a replacement to be placed on the ballot would in our estimation be remote at this time.

The more likely scenario will be for the legislature to embrace the utilization of increased revenue the state estimates receiving from the replacement of the Michigan Business Tax with the new Corporate Income Tax and the elimination of a number of credits (advance manufacturing and the battery credits) that resulted from the adoption of the new corporate tax. The legislature could also establish a form of a local option for PPT through the expansion of local millage caps.

Regardless of the final product, the library community will have to be engaged in the conversation throughout the process. While the Association’s participation in the press conference calling for the replacement of revenue was an important first step, educating the members of the Senate and the House on the impact changes in this specific revenue stream will have on libraries will be critical! It will also be important for lawmakers to understand that District Libraries (and their specific, direct millages) will be in particular jeopardy.

We have begun our efforts on behalf of the Association with direct communication with Lieutenant Governor Brian Calley (the point person from the Administration on the issue) and his staff. Specifically, we have asked that they not forget District Libraries in particular when they draft their definition of “local units of government” so that they are equally eligible with other local units of government for whatever replacement revenue stream may be utilized.

We cannot stress enough the importance of the entire library community reaching out to their respective Senate and House members to emphasize the importance of replacing PPT revenue with a meaningful, reliable alternative!

Director’s Report: Herrick Lawsuit

Parker’s report also included news about a lawsuit brought by Herrick District Library against the Library of Michigan. The state librarian announced at a recent Library of Michigan board meeting that the state library won’t appeal a Court of Appeals decision, which was handed down in August and ruled in favor of Herrick. Rather than being appealed to the state Supreme Court, the lawsuit has ended, Parker said, and that’s good news. [.pdf of appeals court opinion]

By way of background, in 2008 the Library of Michigan announced new rules that would have changed how public libraries qualify for state aid. In 2009, Herrick District Library in Holland filed a lawsuit against the state library, challenging those new rules. Herrick argued that the state library has no authority to set these rules, and is taking away local control from district libraries.

From previous Chronicle coverage:

The lawsuit focused on rules requiring that a public library provide the same level of service to all areas it serves.

Libraries have the authority to contract with areas outside of its millage boundaries to provide varying levels of service. A contracting municipality, for example, could receive limited library services for its residents, and pay an amount lower than what’s levied by the library millage within the library district’s boundary. The new rules prohibit this approach – and if a library continued to provide contracted services at a lower level, it would not qualify for state aid.

Herrick’s lawsuit argues that the Library of Michigan and the state’s History, Arts and Library Department – which previously housed the state library but which has since been dissolved – lack statutory authority to set rules for determining how state aid is distributed to public libraries. The suit also argues that neither the state constitution nor the statutes that govern public libraries require that libraries deliver the same level of service to contracting jurisdictions. Finally, the lawsuit contends that because the new rules are vague and overly broad, they are unconstitutional.

At its December 2010 meeting, the AADL board voted to file an amicus curiae – or “friend of the court” – brief in support of the Herrick library’s position. Parker has provided previous updates on this lawsuit, including the board’s meetings in March 2011 and April 2011.

At Monday’s meeting, Parker noted that while four library cooperatives filed briefs in support of Herrick’s position, AADL was the only individual library to do so. She said she was proud that the board had stepped up and understood the issues. It’s clearly an historical decision with broad implications for other government agencies as well, she said.

Now, state aid will be distributed to libraries in compliance with the court of appeals ruling. More information about that method is expected to be communicated to libraries in October, Parker said.

Because of uncertainty associated with the status of state aid, AADL’s budgets for the past few years – including the budget for the current fiscal year, which the board approved in May – have not included any anticipated revenues from state aid. The library’s fiscal year runs from July 1 through June 30. [.pdf of 2011-12 budget] However, the library has continued to receive some state aid. In fiscal 2010-11, the library recorded $$67,562 in state aid, including $45,180 earmarked for the Washtenaw Library for the Blind and Physically Disabled, which AADL operates. That’s down from a total of $71,634 in FY 2009-10.

Finance Report

Ken Nieman – AADL’s associate director of finance, human resources and operations – gave a brief financial update during the meeting. Through the end of August, the library has received $7,060,073 in tax revenues, or about 63% of what’s budgeted for the fiscal year, which runs from July 1, 2011 through June 30, 2012.

The library’s unrestricted cash balance stands at $12,755,062.

Nieman noted that four line items are over budget: employee costs, purchased services, communications and postage. Those expenses are expected to come back in line with budgeted amounts by the end of the fiscal year. [.pdf of full finance report]

There were no comments or questions from board members about the report.

Board Meeting Date Change

The library board typically meets on the third Monday of each month. On the agenda for the Sept. 19 meeting was a resolution changing the meeting dates for October and November. In each case, the meetings were moved to the next day – Tuesday, Oct. 18 and Tuesday, Nov. 22.

Board members didn’t provide a reason for the change during the meeting. In a follow-up email to The Chronicle, board president Margaret Leary clarified that scheduling issues drove the decision – she would have been unable to attend the meetings on their regular dates, and asked that the meetings be shifted.

Outcome: The board voted unanimously to change the meeting dates in October and November.

Present: Rebecca Head, Nancy Kaplan, Margaret Leary, Barbara Murphy, Jan Barney Newman, Prue Rosenthal, Ed Surovell. Also AADL director Josie Parker.

Next meeting: Tuesday, Oct. 18, 2011 at 7 p.m. in the library’s fourth floor meeting room, 343 S. Fifth Ave. [confirm date]

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