Column: Let’s Take Time on Ann Arbor Budget

On the evening of May 21, the Ann Arbor city council will start its second meeting in May. I’d like to suggest not ending Monday’s meeting on Monday.

That’s right, I’d like to “kick the can down the road.” I suppose it’s a pretty big can. But it’s a short road – only one week.

Letting that meeting continue past Monday will be a benefit to the council and Ann Arbor residents, as well as to other public bodies like the Ann Arbor District Library, Washtenaw County, Washtenaw Community College and the Ann Arbor Downtown Development Authority (DDA).

The city charter requires that by the end of that meeting, the council must approve the city budget for fiscal year 2013 – which begins on July 1, 2012. If the council does not act on the budget before the end of the meeting, then according to the city charter, the budget proposed by the city administrator on April 16, 2012 will automatically take effect. Last year, the “second meeting in May” was conducted over the course of sessions on three separate days, and did not end until May 31, 2011.

Last year’s extension of that second meeting in May – achieved  by recessing and reconvening on subsequent days – stemmed from the council’s desire to achieve clarity about issues related to the DDA. The issue centered around tax increment finance (TIF) capture, as well as the contract under which the DDA operates the city’s public parking system.

This year, one of the amendments that’s almost certain to be proposed on Monday – by Stephen Kunselman (Ward 3) – revisits the issue of the DDA’s TIF capture, and provides a recurring revenue source for the city to fund two firefighter positions this year, and perhaps more in subsequent years. Kunselman’s amendment calls for the kind of interpretation of the city’s ordinance on DDA TIF capture for which I’ve previously advocated. [See "Column: Tax Capture is a Varsity Sport"]

So this year, I’d like to suggest that city councilmembers plan now to take advantage of the parliamentary option of recessing their May 21 meeting until May 28 – so that they and the public can give thorough consideration to at least nine other budget amendments (in addition to Kunselman’s DDA/firefighter amendment) that could be brought forward on Monday.

The formal public hearing on the budget was already held and closed on May 7, 2012. It enjoyed the participation of just three Ann Arbor residents. By establishing the May 21 session as an occasion to sketch out the intent and the mechanics of proposed budget amendments, the council would better serve the public’s interest in being able to advocate for or against the various proposed amendments to the budget.

I’d also like to use the occasion of this column to lay out the content of some of the fire protection amendments, and to single out Kunselman’s amendment as one that I think especially deserves the entire council’s support.  

Budget Principle: Recurring versus Non-Recurring

When the city’s chief financial officer, Tom Crawford, talks about the city budget he doesn’t talk only about expenses and revenues. He always bases the conversation on this notion: Are these expenses and revenues recurring or non-recurring?

A simple example of recurring revenue is money from taxes – the city levies taxes every year in a recurrent way. The exact amount might vary based on the economy, but the city’s tax levy will reliably generate money in a way that can be reasonably estimated each year into the future. A simple example of a recurring expense is an employee’s salary. When the city hires someone to do a job – like arrest criminals, or put out fires, or review proposed new buildings – our basic expectation is that we’ll have a recurring need to pay that person’s salary each year.

A simple example of  non-recurring revenue is proceeds from the sale of land. When the city receives a $90,000 payment from the Ann Arbor Transportation Authority for a strip of land in downtown Ann Arbor, the city cannot reliably expect every year in the future that it will have an available strip of land it can sell and that someone actually wants to buy for $90,000. On the expense side, an example of a non-recurring item would be a payment made to induce a police officer to retire earlier than that officer would have otherwise retired. The following year, that payment would not need to recur – because the employee has already retired.

If asked on Monday night to comment during deliberations, one basic principle that Crawford will likely apply to any proposed budget amendment is this: Pay for additional recurring expenses only out of additional recurring revenues.

By way of example, suppose a councilmember were to propose a budget amendment that funds an extra firefighter position (which would cost roughly $80,000) from the proceeds of the land sale to the AATA ($90,000). One way to phrase an argument against that proposed amendment would be simply to say: That’s an attempt to fund a recurring expense from non-recurring revenue.

To be clear, no one on the Ann Arbor city council has proposed funding a firefighter position from the land sale to the AATA. However, at least three different councilmembers have drafted modifications to the FY 2013 budget that would add firefighter positions: Stephen Kunselman (Ward 3), Jane Lumm (Ward 2) and Margie Teall (Ward 4).

Fire Protection – Use of Fund Balance

The two budget amendments drafted by Lumm and Teall are similar, in that they would bring the budgeted number of firefighters from 82 to 88 – for an addition of six, compared to the city administrator’s proposed budgeted levels.  They’re also similar in their approach to paying for the additional firefighter positions. Teall’s resolution stipulates the combination of a federal grant – for which the city has applied through a FEMA program called Staffing For Adequate Fire & Emergency Response Grants (SAFER) – and possible increases in the state of Michigan’s fire protection allocation to municipalities that are home to state-owned institutions.

The state fire protection grant program is based on the fact that state-owned institutions do not generate property tax revenues to the municipalities that must provide those state-owned institutions with fire protection. In Ann Arbor’s case, it’s the University of Michigan that generates no direct property taxes; but Ann Arbor provides fire protection for UM.

However, Teall’s resolution essentially provides direction to the city administration to tap the city’s fund balance reserve –  if a SAFER grant or additional funding from the state is not available or is insufficient. From a draft of Teall’s resolved clause:

RESOLVED, the City increase the General Fund Fire Services Unit FTEs by six, and funding for the positions totaling $477,594 ($79,599 per FTE) be added to the adopted budget, funded from the receipt of additional Fire Protection monies from the State, potential Grant Funds and the use of fund balance, as needed, from the General Fund.

Lumm’s resolution is similar:

RESOLVED, the Administrator’s proposed budget be amended to add six FTEs to the fire department FTE budget (88 FTE total) and $477,594 be added to the fire department GF expenditure budget to fund the expected cost of the six additional FTEs

RESOLVED,  the additional $477,594 in FY 13 GF expenditures be funded in the following priority order: (1) Revenues from the SAFER Grant (2) Revenues from the increase over the Administrator’s budgeted amount in the State Fire Protection Grant  …

Lumm’s draft amendment continues with contingencies for this year based on reducing funds from a possible High Speed Rail Local Match allocation; but it also includes the possibility of drawing on the general fund reserve.

It’s fair, I think, to describe the strategies of Lumm and Teall for funding additional firefighter positions (SAFER grant and increased fire protection grants from the state) as depending on revenues that might be recurring, but that are not yet in hand, and that currently have some uncertainty attached. Their amendments have in common a willingness to backstop that hoped-for revenue with use of the fund balance.

Otherwise put, their amendments have a backstop that would use non-recurring revenue to pay for recurring expenses. In contrast, Kunselman’s fire protection amendment does not depend on the general fund reserve as a backstop.

Fire Protection – Use of Recurring Revenue

In terms of the number of firefighters, Kunselman’s fire protection amendment is less ambitious. It seeks to add just two firefighter positions. However, his amendment identifies a recurring revenue source – the additional revenue that would be distributed to the city of Ann Arbor, if the city’s ordinance regulating the DDA’s TIF capture were interpreted in a particular way.

By way of background, in broad simple strokes, the DDA “captures” taxes that are levied in its downtown district by other taxing jurisdictions. But the DDA does not capture all the taxes levied. It captures only the taxes on the increment between the baseline value of a property and the value of built improvements on a property. And the Ann Arbor DDA captures taxes 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. In this way, it captures taxes that would otherwise go to the Ann Arbor District Library, Washtenaw County, Washtenaw Community College and the city of Ann Arbor.

The city’s ordinance on DDA tax capture appears to limit how much tax can be captured, based on the actual increase in value of property in the district, compared with the projected value in the DDA’s official TIF plan. From the relevant clause from Chapter 7 of the city code [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]

Last year, the impact of Chapter 7 was pointed out for the first time by city financial staff. It resulted in a combined refund of roughly $473,000 from the DDA to the Ann Arbor District Library, Washtenaw Community College and Washtenaw County. The city of Ann Arbor chose to waive its $712,000 share of the calculated excess. I argued in a column last year that the method of calculation for the excess was wrong, and that the amount returned should have been even greater. [See "Column: Tax Capture is a Varsity Sport"]

Subsequently, the DDA reversed its legal position and contended that no money should have been returned at all. The DDA’s position is based on the following clause of Chapter 7:

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.

Without delving into the details of how these TIF calculations work, Kunselman’s budget amendment calls for a Chapter 7 interpretation that is essentially consistent with the one I’ve argued for in the past. It results this year in roughly $200,000 more for the city’s general fund, which Kunselman proposes to use to fund two firefighter positions. From Kunselman’s draft resolution:

RESOLVED, That City Council directs the DDA to interpret and apply Chapter 7 of City Code using:

• both real and personal property,
• the “realistic” capture projection from the 2003 DDA Tax Increment Financing (TIF) Plan,
• a cumulative comparison of projected capture to actual capture; and
• consideration of only debt service payments for TIF related projects (i.e. exclude all debt service for the construction, maintenance, and management of the City’s parking system).

RESOLVED, That City Council directs the City Treasurer to distribute future TIF revenue to the DDA only up to the amount that would be realized in the plan plus any increases that are permissible in Chapter 7;

RESOLVED, That City Council directs the City Treasurer to distribute the excess amounts of future TIF revenue to the taxing authorities from which they were captured; and

RESOLVED, That the increased revenue to the General Fund in the amount of $199,360 be utilized to increase the Fire Department expenditure authorization in FY 2013 and to increase the authorized number of Fire FTEs by 2 positions.

Based on this “cumulative” approach to Chapter 7, the amount of additional revenue will recur.

So it’s fair to think of Kunselman’s proposed Chapter 7 interpretation as roughly approximating the following: From this point forward, new development in the DDA district will directly benefit the district’s taxing jurisdictions – by an amount equal to half the TIF that the DDA would otherwise capture on that new development. Considering all jurisdictions that have their taxes captured by the DDA, the city of Ann Arbor’s rough proportional share (across all funds) is about 60%. So the city of Ann Arbor’s rough benefit from the future new development would be about 30% of the TIF that the DDA would otherwise capture.

Four major projects in downtown will be completed in the next year or two, resulting in additional recurring revenue that the city of Ann Arbor could budget. Those four projects are: the Landmark Building, The Varsity, City Apartments, and Zaragon West.

If Ann Arbor’s proportional share of captured taxes is 60%, what about that other 40% of the TIF?

Inter-Governmental Cooperation

Other than the city of Ann Arbor’s share, the other 40% of the taxes captured by the Ann Arbor DDA are levied by the Ann Arbor District Library, Washtenaw County, and Washtenaw Community College.

The way that the Chapter 7 interpretation played out last year did not serve the city of Ann Arbor’s long-term interests for collaboration and cooperation, in the context of the city’s natural regional partners. Last year, when the Chapter 7 issue arose, the issue should have been identified for all parties who had a stake in the issue. Then, a mutual understanding could have been reached – by the  Ann Arbor District Library, Washtenaw County, Washtenaw Community College, the city of Ann Arbor, and the Ann Arbor DDA – about the interpretation and method of calculation for excess TIF capture.

Instead, when the Chapter 7 issue was first identified, the method of calculating excess TIF was unilaterally decided by the DDA, with the implicit endorsement of the city of Ann Arbor. Also decided unilaterally was the subsequent interpretation of Chapter 7 by the DDA as not requiring any TIF to be returned – last year or in the future. At the time, Larry Whitworth, who was then president of Washtenaw Community College, told The Chronicle that he was disturbed by the DDA’s decision. As recently as March 19, 2012, Josie Parker – director of the Ann Arbor District Library – has expressed a willingness to have a conversation with the DDA about the issue, because she sees the TIF capture issue differently from the DDA.

If the city of Ann Arbor and the Ann Arbor DDA don’t want to invite the other taxing jurisdictions to the table to work out a mutually agreeable interpretation and method of calculating excess TIF capture, then Ann Arbor’s wisest long-term choice is to defend the interests of those not at the table.

What Kunselman’s amendment says to other taxing jurisdictions is this: You can trust Ann Arbor to defend your interests, when your interests depend on the city doing the right thing. Otherwise put: Ann Arbor knows how to be a good neighbor.

Recess, Reconvene

Of course, if the city council were simply to approve Kunselman’s amendment Monday night, they’d be doing that without giving the DDA a seat at the table. That’s partly why I think it’s reasonable for the council to allow the DDA sufficient time to present the city council with a revised 10-year budget plan (a tool the DDA uses for long-range planning) that factors in Kunselman’s proposed Chapter 7 interpretation and method of calculation.

That additional window of time could be achieved by recessing Monday’s council meeting and reconvening it a week later. The additional time would also allow the city council enough time to absorb the substance of Kunselman’s proposed amendment, and to satisfy itself that the DDA would still be able to meet all its financial obligations.

For some councilmembers, it will be difficult to see anything more in Kunselman’s amendment than a continued pattern on Kunselman’s part to use the DDA as a political punching bag, or as yet another way for the council to use the DDA as an ATM machine. As I’ve outlined in this column, I think the substance of Kunselman’s amendment deserves more than that kind of knee-jerk reaction.

In fact, it would not be unreasonable to hope that Teall, Kunselman and Lumm could use the additional time to sit down together and hammer out a fire protection budget amendment they could jointly present to the full council. Kunselman’s amendment could be a starting point for their conversation.

The council could also use the additional time to allow themselves and the public to get more familiar with the substance of at least nine other amendments that might eventually be voted on. [.pdf of set 1 of amendments] [.pdf of set 2 of amendments]

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