Ann Arbor LDFA Looks to Extend Its Life

Ann Arbor Local Development Finance Authority board meeting (June 17, 2014): The LDFA board’s meeting convened around 8:20 a.m. – about seven hours after the city council’s meeting adjourned the previous evening. And the council’s meeting was the topic of small talk among LDFA board members as they waited for their meeting to convene.

The council’s meeting was of more than just passing interest to the LDFA board members – because the council voted at that meeting to table a $75,000 contract for business development services with Ann Arbor SPARK, a local nonprofit economic development agency. Ann Arbor SPARK is also the LDFA’s contractor – but not for the same kind of services that SPARK delivers under its contract with the city. The council will likely take up its contract with SPARK again at a future meeting, possibly as soon as July 7.

The city’s annual contract with SPARK, which is paid for with general fund money, is meant to cover the attraction and retention of mature companies to the Ann Arbor area. In contrast, the LDFA contracts with SPARK for entrepreneurial support services – for companies that are in some phase of starting up.

On the LDFA board’s June 17 agenda was the annual contract with Ann Arbor SPARK for entrepreneurial support services – which the board voted to approve. This year that contract is worth nearly $2 million – $1,891,000 to be exact.

An unsuccessful bid by councilmembers made during the city’s FY 2015 budget deliberations would have reduced the total LDFA expenditures by $165,379. The goal of that expenditure reduction would have been to increase the fund balance that was available for infrastructure improvements in the LDFA district – specifically, for high-speed telecommunications. At the LDFA’s June 17 meeting, city CFO Tom Crawford indicated that sometime in the FY 2015 fiscal year, the city would be making a proposal to install fiber throughout Ann Arbor.

The contract between the LDFA and SPARK covers a range of items, with the top two line items consisting of staffing for the business incubator ($420,000) and provision of services to start-up companies in Phase III of their development ($550,000). SPARK classifies its engagement with companies in terms of phases: preliminary screenings (Phase I); due diligence (Phase II); intensive advising (Phase III); and accelerating opportunities (Phase IV). [.pdf of FY 2015 budget line items] [.pdf of LDFA-SPARK FY 2015 contract]

At its June 17 meeting, the LDFA board also approved a routine annual $42,600 contract with the city of Ann Arbor – for administrative support services. Those include items like the preparation of meeting minutes, stewardship of public documents, and preparation of budgetary analyses. [.pdf of FY 2015 LDFA contract with city of Ann Arbor]

The final voting item for the board was approval of its meeting schedule for the next fiscal year. The LDFA board meets in eight out of 12 months, with the next meeting taking place on July 15, 2014, starting at 8:15 a.m. in the city council chambers. [.pdf of 2014-2015 meeting schedule]

These voting items did not, however, generate the majority of the board’s discussion at its June 17 meeting.

The board focused most of its discussion on issues surrounding its application for an extension of the LDFA past its current 15-year lifespan, which ends in 2018. Legislation passed in 2012 allowed for either a 5-year or a 15-year extension – with different criteria for those time periods. The 15-year extension requires an agreement with a satellite LDFA, with two communities currently under consideration to partner with Ann Arbor’s LDFA: Brighton and Adrian. Flint had also been a possibility, but is no longer on the table.

With an extension, the LDFA would continue to capture school operating millage money, which would otherwise go to the state’s School Aid Fund. At least some of the school taxes subject to capture by LDFAs statewide are required to be reimbursed to the School Aid Fund by the state. Questions about how that applies to Ann Arbor’s LDFA have been raised – and a review of the state statute appears to support the conclusion that the key clause requiring reimbursement is inapplicable to the Ann Arbor SmartZone LDFA. That understanding was confirmed to The Chronicle by the Michigan Dept. of Treasury communications staff in a telephone interview on June 23.

The exact nature of that tax capture arrangement and possible reimbursement was also the subject of LDFA board discussion on June 17 – because the LDFA board is being pressed by city councilmembers to account for how the LDFA tax capture impacts the state’s School Aid Fund. Board member Stephen Rapundalo expressed some frustration about that – based on his perception that this material had been well explained in the past: “What’s it take – for them to understand unambiguously how that works? I mean, we have told them. Why is the onus on the LDFA to have to show them that?”

Besides the tax capture mechanism, two other issues raised by city councilmembers are factoring into the LDFA board’s approach to seeking an extension of its term. Board chair Carrie Leahy told her colleagues that she took away two main messages from recent appearances in front of the Ann Arbor city council. Some councilmembers, she said, would like to see: (1) an independent audit of job creation numbers; and (2) a provision for infrastructure investments as part of an LDFA extension.

On the infrastructure side, the LDFA board’s discussion focused on the existing TIF (tax increment finance)/development plan, which provides for investments in high-speed telecommunications (fiber) networks, but not for projects like street construction, sewer construction and streetlight installation. The question was raised as to whether the LDFA could use its school tax capture to pay for a fiber network in the whole geographic district of the LDFA – or if school taxes could only be used to fund a fiber network to an business incubator.

The Ann Arbor LDFA’s district covers the geographic areas of the Ann Arbor and Ypsilanti downtown development authorities – although Ypsilanti’s DDA area does not generate any LDFA tax capture. As a consequence, money captured by the LDFA is not spent in the Ypsilanti portion of the district. But that could change under an extension of the LDFA – based on board discussion at the June 17 meeting.

On the job creation numbers audit, the June 17 board discussion indicated that the LDFA will now be looking possibly to incorporate a job numbers audit as part of an upcoming financial audit. The financial auditing firm will be asked to provide some explanation of how it might be able to incorporate a jobs audit as part of its scope of work for the upcoming financial audit. The board appears to understand that some type of jobs audit would be important for winning ultimate city council support for a 15-year extension of the LDFA.

The city council’s representative to the LDFA board, Sally Petersen, made that explicit more than once during the June 17 meeting, saying that “taking the lead on establishing an independent audit would go a long way towards getting city council support for an extension.”

The LDFA’s deliberations and other agenda items are reported in more detail below.

Ann Arbor SPARK’s Two Roles

Some of the political chaffing surrounding Ann Arbor SPARK involves a lack of clarity about roles played by SPARK – which are, from SPARK’s perspective, clearly separate and distinct: (1) a somewhat conventional economic and business development agency that attempts to retain mature companies in the Ann Arbor area, and also to attract mature companies to locate in this area; and (2) an organization that provides entrepreneurial services to start-up companies and nurtures them toward commercialization. It’s this second role for which the LDFA contracts with SPARK.

At one point during the June 17 LDFA board meeting, Luke Bonner – SPARK’s vice president of business development – sought to clarify these two distinct roles. Bonner heads up SPARK’s efforts to retain and attract new fully-formed companies. Bonner got clarification that Ann Arbor city council’s discussion the previous evening had centered on the $75,000 business services contract between the city of Ann Arbor and SPARK.

The business development team at Ann Arbor SPARK – of which Bonner is a part – is not under contract with the LDFA, he pointed out. Instead, SPARK’s business development team is under contract with Washtenaw County, the city of Ann Arbor, various other municipalities in Washtenaw County, and Livingston County – in addition to all of the private funding received by Ann Arbor SPARK.

Bonner stressed that the business development and the entrepreneurial services teams operate in two different worlds. Bill Mayer, SPARK’s vice president for entrepreneurial services, followed up Bonner’s observation by pointing out that the kind of companies that Bonner deals with are too big for him to be able to help under the SmartZone (LDFA) guidelines. Mayer described the situation at Ann Arbor SPARK as two separate paths, but under one banner.

Mayer stressed that reports required by the Michigan Economic Development Corp. (MEDC) entail reporting different kinds of numbers. The issue of these different numbers from different reports has been raised as a concern by some members of the public, as well as by some councilmembers.

For outside observers, including some councilmembers, SPARK’s two distinct roles are not as self-evidently separate – because they both fly under the same banner of Ann Arbor SPARK.

The $75,000 contract to which Bonner referred was between the city of Ann Arbor and SPARK for its role as an agency that attracts and retains mature companies.  At the council’s June 16 meeting, the parliamentary motion used to deal with the contract was to “table” the question, which is not debatable under Robert’s Rule of order – so the council voted on the tabling motion, without additional deliberations. That vote came out 6-5 in favor of tabling. With that the council moved along on its agenda.

But at the end of the June 16 council meeting, Ward 1 councilmember Sabra Briere brought up the issue during the council communications time, saying that Ann Arbor SPARK CEO Paul Krutko had expected to be asked questions and respond to councilmembers’ concerns – but that had not happened. Briere alluded to the fact that the issue might come back before the council “sooner rather than later,”  but she wanted Krutko to be able answer some questions at that time – as he had remained in the council chambers until that point.

In the course of the back and forth, Ward 2 councilmember Jane Lumm told Krutko that she would have preferred to postpone it. But in talking to her colleagues during the break, Lumm said, there was greater interest in tabling the resolution.

The back-and-forth between the council and Krutko ultimately did not result in a motion by any councilmember to take up the resolution off the table for a vote. It appears likely that the council will consider the question at its July 7 meeting.

Some of the disparity of jobs numbers in SPARK’s reporting, as claimed by SPARK’s critics, appears to be due to reports that cover different activities: SPARK’s overall business development impact, as opposed to reports made to the state legislature and related to various state grants. [Ann Arbor SPARK 2013 annual report] and [21st Century Jobs Trust Fund 2013 Annual Report]

Contributing to the lack of definiteness on the numbers reported by SPARK is the fact that SPARK uses self-reported company figures for projected jobs – as opposed to independently verifying the creation of actual jobs. That independent verification is not necessarily straightforward, because SPARK may not be able to compel a company to disclose records that would allow such independent verification of a company’s self-reported jobs claims.

SPARK as LDFA Contractor

The LDFA board deals with Ann Arbor SPARK as its contractor for entrepreneurial services – not as an attractor and retainer of companies in the area. And the June 17 LDFA board meeting reflected that. On the agenda were three items related to that specific function of SPARK – the treasurer’s report, the report from SPARK, and the annual contract between the LDFA and SPARK.

SPARK as LDFA Contractor: Treasurer’s Report

Eric Jacobson gave the treasurer’s report. As of the end of May, he could report that spending by the LDFA’s contractor, Ann Arbor SPARK, was well below the amount budgeted for the year. There was an overall positive variance of about $76,000.

He noted that Ann Arbor SPARK had exceeded its budget in two categories – but in both categories the amount by which it had exceeded budget is well below the threshold constrained by the contract.

That meant that SPARK could spend up to a certain amount over budget in any line item – he thought it was a 5% variance. First, SPARK had overspent in the internship and entrepreneur-in-residence program. SPARK had also overspent the budget in the line items to cover expenses for administrative costs for the incubator facility at SPARK Central.

He reiterated that both of those variances were very minor, so he could report that – as SPARK has done historically – the agency is spending within its budget overall, as the last month of the fiscal year approached. The fiscal year ends on June 30.

SPARK as LDFA Contractor: Report from SPARK – Interns, Incubator

The report from the LDFA’s contractor was given by Skip Simms, Ann Arbor SPARK’s senior vice president for entrepreneurial services. Simms sits on the LDFA board in an ex officio, non-voting capacity.

Simms told the board that he did not have much report, beyond what the LDFA treasurer, Eric Jacobson, had just covered. Referring to the overspending on incubator expenses, Simms said that if they were going to overspend, that’s where they would want to be overspending. He explained that the CEO-in-residence program was a way to help retain executive talent – keeping CEOs in the community who might otherwise be inclined to leave the community and work someplace else. The CEO-in-residence program allowed someone to be retained and at the same time provide their experience and expertise to start-up companies in the community. The CEO-in-residence program, not the interns, had caused SPARK to exceed that line item.

The definition of interns was an issue that still needed to be resolved for next year, Simms said. The next cycle of interns would actually be employees of Ann Arbor SPARK, he explained. Simms pointed out that on a couple of other different line items, Ann Arbor SPARK was under budget. Money could be moved around so that it would be “a wash” when the board reviewed SPARK’s quarterly report next month.

Board chair Carrie Leahy asked about the occupancy of the SPARK Central business incubator [in the Michigan Square building adjacent to Liberty Plaza, at the corner of Division and Liberty]. Simms responded by saying that SPARK Central on the lower level had more than 90% occupancy. There was an opening for perhaps one additional company, and there were some companies in line for that space. The third floor of the incubator is filling up, he said. On the third floor, there is perhaps room for one additional company, he said.

The third floor space, Simms continued, is finally breaking even on rent compared to expenses, so he expressed some optimism about that. More importantly, Simms said, companies on the third floor are growing and expanding. As an example, he gave Seelio, which has been acquired. The company is staying in Ann Arbor, Simms reported, and they are probably going to add five more people by the end of the year. The company is going to be squeezed for space, he said, so he was not sure if they were planning to move. If they moved, there would be quite a few seats that would need to be filled in the third floor space, he said. There were some companies in line for that space, however.

Simms then described the incubator environment in the community as a whole as growing. There are a couple of new incubators in town, he said, and the space they’re offering seems to be getting absorbed quickly: As soon as space becomes available, start-ups and early-stage companies are moving in. That was a good indicator for the future, he concluded. It reinforced the need for the LDFA to continue to have the kind of facility that Ann Arbor SPARK has created at 330 E. Liberty, Simms concluded.

Leahy ventured that the newest incubator was associated with University of Michigan. Skip Simms indicated that the incubator to which Leahy was referring was still in the works. Ann Arbor SPARK is in dialogue with the university on that. One of the reasons that Ann Arbor SPARK in dialogue with the university about that incubator, he explained, is that SPARK wants to have a clear understanding of what the goals and objectives are of that new incubator, and what kind capacity they are planning for. Because it would be operated by the University of Michigan, access would be limited, Simms said: Some kind of university relationship will be required to use the incubator, which would eliminate about 60% of the market.

Still, Simms ventured that there could be a partnership opportunity there. One possibility is that companies that started in the university’s incubator could be handed off to SPARK as they got closer to commercialization. He was not sure how far the university was planning to take companies in their evolution toward commercialization.

Responding to a question from Leahy, Simms indicated that university’s incubator concept was for relatively early-stage companies. Leahy said she heard the university was planning to take a percentage of ownership of the companies. Simms thought that was still under discussion. They are looking at a model that does take equity, he said. The university is freer to take that approach than the LDFA is, Simms said.

SPARK as LDFA Contractor: FY 2015 Contract

Board chair Carrie Leahy explained that the LDFA board’s contract committee had reviewed the contract – after Ann Arbor SPARK had reviewed it and proposed updates. A revised draft had then been proposed by the contract committee. That draft was now in front of the LDFA board for its approval, she explained. [.pdf of LDFA-SPARK FY 2015 contract]

Leahy called everyone’s attention to a section that was enclosed in brackets and bolded:

[The reports shall include, as applicable, and only at such times as required, information required to be reported in connection with an extension of the LDFA's term.]

She felt that the bracketed sentence was intended to be included as part of the contract – so it was not meant to actually be in brackets and bold. She checked with Simms to see if it was okay to simply include it. She wasn’t sure if Ann Arbor SPARK had had a chance to comment on the added language. The point of the added language, she explained, was that if the LDFA was awarded an extended term, the required reporting would already be expressed in the contract. She felt that the reporting that was described in the added language was already being done, in any case.

The new contract, Leahy explained, includes updates to the specified years and budget numbers. Another update the contract covers is how the internship program will work, she said. Leahy explained the changes to the internship program. Interns that are being deployed to people now will actually be Ann Arbor SPARK employees, she said. The contract between the LDFA and SPARK is been updated to reflect that arrangement, which has been approved by the MEDC, she said.

Outcome: The LDFA board voted to approve the updated contract with Ann Arbor SPARK.

City of Ann Arbor as LDFA Contractor: Administrative Services

The LDFA does not employ a staff – so it contracts with the city of Ann Arbor for administrative support services. Those include items like the preparation of meeting minutes, stewardship of public documents, and preparation of budgetary analyses. [.pdf of FY 2015 LDFA contract with city of Ann Arbor]

When the board reached the item on its agenda, board chair Carrie Leahy ventured that under the first bullet point, under “services,” the intended word was likely not “secretariat” but rather “secretarial.” There was some lighthearted commentary to the effect that the language had been like that for about 10 years and no one had noticed. [The intended word was, in fact, likely "secretariat" – in the sense of an administrative office or department, especially a governmental one.]

Leahy checked with board treasurer Eric Jacobson that he was OK with the numbers that were included at the end of the contract, and he was. She characterized the contract as the same as in years past, covering administrative support by the city of Ann Arbor for the board of the LDFA.

Outcome: The board approved the administrative services contract with the city of Ann Arbor for support of the LDFA board.

LDFA Extension

At its June 2, 2014 meeting, the Ann Arbor city council had approved a resolution expressing city council support of the local development finance authority’s application to the Michigan Economic Development Corp. to extend the life of the tax capture arrangement for up to 15 years. The MEDC is described on its website as the “state’s marketing arm and lead advocate for business development, talent and jobs, tourism, film, and digital media incentives, arts and cultural grants, and overall economic growth.”

Without an extension, Ann Arbor’s LDFA would end in 2018.

Under a 2012 amendment to the state’s LDFA statute [Act 281 of 1986], the MEDC is empowered to approve extensions of LDFAs for 5 or 15 years. Both extension options would require a greater explicit commitment to greater regional collaboration. But the 15-year option requires the creation of an additional “satellite” geographic area for tax capture:

In addition, upon approval of the state treasurer and the president of the Michigan economic development corporation, if a municipality that has created a certified technology park that has entered into an agreement with another authority that does not contain a certified technology park to designate a distinct geographic area under section 12b, that authority that has created the certified technology park and the associated distinct geographic area may both capture under this sub-subparagraph for an additional period of 15 years as determined by the state treasurer and the president of the Michigan economic development corporation.

The council’s resolution approved on June 2 stated that if the MEDC approves the extension, the city of Ann Arbor will work with the LDFA and the city of Ypsilanti to identify another LDFA – called the “Satellite SmartZone LDFA.” The arrangement will allow the satellite SmartZone LDFA to capture local taxes in its own distinct geographic area for the maximum 15 years allowed by statute.

What is it that would be extended? Ann Arbor’s local development finance authority is funded through a tax increment finance (TIF) district, as a “certified technology park” described under Act 281 of 1986. The MEDC solicited proposals for that designation back in 2000. The Ann Arbor/Ypsilanti “technology park” is one of about a dozen across the state of Michigan, which are branded by the MEDC as “SmartZones.”

The geography of the LDFA’s TIF district – in which taxes are captured from another taxing jurisdiction – is the union of the TIF districts for the Ann Arbor and the Ypsilanti downtown development authorities (DDAs). It’s worth noting that the Ypsilanti portion of the LDFA’s TIF district does not generate any actual tax capture.

In FY 2013, the total amount captured by the Ann Arbor SmartZone LDFA was $1,546,577, and the current fiscal year forecast is for $2,017,835. About the same amount is forecast for FY 2015.

The LDFA captures Ann Arbor Public Schools (AAPS) operating millage, but those captured taxes don’t directly diminish the local school’s budget. That’s because in Michigan, local schools levy a millage, but the proceeds are not used directly by local districts. Rather, proceeds are first forwarded to the state of Michigan’s School Aid Fund, for redistribution among school districts statewide. That redistribution is based on a per-pupil formula as determined on a specified “count day.” And the state reimburses the School Aid Fund for the taxes captured by some SmartZones in the state.

However, the school taxes captured by the Ann Arbor SmartZone are not required to be reimbursed to the state School Aid Fund – which diminishes the amount of funding for public schools statewide. That’s a conclusion based on a reading of the LDFA statute and confirmed to The Chronicle by communications staff in the Dept. of Treasury and the MEDC.

According to the Dept. of Treasury, the Ann Arbor SmartZone LDFA was designated under subsection (8). From the LDFA statute [emphasis added]:

(13) Not including certified technology parks designated under subsection (8), but for certified technology parks designated under subsections (9) and (10) only, this state shall do all of the following: (a) Reimburse intermediate school districts each year for all tax revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation after October 3, 2002.
(b) Reimburse local school districts each year for all tax revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation after October 3, 2002.
(c) Reimburse the school aid fund from funds other than those appropriated in section 11 of the state school aid act of 1979, 1979 PA 94, MCL 388.1611, for an amount equal to the reimbursement calculations under subdivisions (a) and (b) and for all revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation after October 3, 2002. Foundation allowances calculated under section 20 of the state school aid act of 1979, 1979 PA 94, MCL 388.1620, shall not be reduced as a result of tax revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation under subsection (9) or (10) after October 3, 2002.

A 15-year extension is possible, according to the staff memo accompanying the June 2 city council resolution, “if, in addition to the above requirements, Ann Arbor and Ypsilanti, as the municipalities that created the SmartZone, enter into an agreement with another LDFA [a "Satellite SmartZone"] that did not contain a certified technology park to designate a distinct geographic area, as allowed under Section 12b of the Act…”

A key requirement for an LDFA SmartZone is “significant support from an institution of higher education, a private research-based institute, or a large, private corporate research and development center.” So the possibilities for an LDFA satellite for Ann Arbor’s SmartZone include not just a governmental unit, but also an institution of higher learning.

Currently under consideration for the satellite LDFA are Adrian (Adrian College) or Brighton and Livingston County (with Cleary University). The June 17 LDFA meeting included an update on where Adrian and Brighton are in the process – as they are competing to be the partner designated by the Ann Arbor LDFA.

Only one of the two communities would partner with the Ann Arbor LDFA SmartZone.

LDFA Extension: Board Discussion

Skip Simms of Ann Arbor SPARK gave an update on the status of other communities that are candidates for the satellite LDFA that would be required for the Ann Arbor/Ypsilanti SmartZone to receive an extension. Right now SPARK is talking to both Brighton and Adrian. Brighton would be a Brighton-Howell satellite. Adrian could turn out to be an Adrian-Tecumseh satellite, he said.

Both communities are rapidly moving forward to complete required tasks as communities and LDFAs to comply as satellites. Flint is off the table – because Flint took themselves off the table, he said, and made it clear that they were not interested. Both Adrian and Brighton are on a fast-track to try to beat each other to meet all the compliance for a satellite. Simms invited Ann Arbor SPARK’s Luke Bonner to walk the board through the details of what those communities need to do.

Bonner told the board that the city of Adrian had gone through the first step of the process to create an LDFA – which was that the city council approved a resolution expressing the intent to create an LDFA and set out the district boundaries. They are moving toward the first public hearing. Adrian should have its final approvals done, he believed, by the first week in September. So this would be a new LDFA, where the city of Adrian would be the lead governmental unit. Tecumseh is going to come in as a partner to Adrian after the LDFA is created, Bonner explained.

In the case of Brighton and Howell, Brighton already has an LDFA, so their approvals are pretty simple. They don’t have to go through the time-consuming process of creating the authority itself. Howell has an LDFA that was never actually kicked off – they don’t have board members or a district. It was just approved and left in limbo, he said. So Howell is going to wait until the process is completed in Brighton and then Howell will put its LDFA together for the sole purpose of being a partner to Brighton and of overseeing the school funds to run the incubator and accelerator program.

In both cases, Bonner said, the communities have an educational institution as a partner. Adrian is working with Adrian College, which has established a business incubator program. They have built a facility and dedicated funds, and personnel are working on that program. In Livingston County, in Brighton, Cleary University is the educational institutional partner. Cleary University has an existing business incubator program that they are continuing to scale up, Bonner explained. So there are university partners in both communities.

Board chair Carrie Leahy asked how the process that Brighton and Adrian are undergoing would integrate into the timing of the Ann Arbor/Ypsilanti SmartZone LDFA extension application. In the case of Adrian, Bonner explained, they will make sure that the very first LDFA board meeting happens immediately following the establishment of the authority. The satellite LDFA has to approve the contract with the host LDFA. So the first order of business for the LDFA in Adrian will be to approve its bylaws and then move right into the approval of the agreement. That should be done by the first week in September, he said.

In the case of Brighton, they are looking at doing some informational sessions with the LDFA and the city council in July. And they look to be taking action sometime at the end of August. So the two candidate satellite LDFAs will be completing their work in roughly the same two-week timeframe.

Bonner explained that Brighton has a couple of other issues with its LDFA because it is “underwater” – as its tax capture is not at the point where it can cover debt service. It falls short by about $5,000-$6,000 annually, he said. That issue will have to be addressed, he said. They’re waiting to see what happens with the personal property tax law in the August election. That will also affect how Brighton does business with its LDFA. Leahy ventured that there could be a situation where both communities form an LDFA. Yes, Bonner confirmed.

Leahy invited attorney Jerry Lax to walk the board through the Ann Arbor/Ypsilanti SmartZone LDFA’s next steps. She knew there was a two-page summary that needed to be submitted to the MEDC. She asked Lax what else needed to be submitted.

Lax told Leahy that the only thing that needed to be submitted to the MEDC promptly by June 30 was the two-page summary. The MEDC guidelines provide that the two-page summary be emailed by June 30. That two-page summary has already been drafted, he said. Leahy told Lax she was not sure if board resolutions needed to be attached to the state summary. The guidelines don’t say so, Lax replied.

Lax continued by noting that the two city councils (Ann Arbor and Ypsilanti) have already passed resolutions supporting a 5-year extension and supporting the contemplation of creating satellites in anticipation of a potential 15-year extension. But with regard to the 5-year extension, the next thing that has to be done is for the cities to amend the existing TIF plan to accommodate a higher degree of regional cooperation. And both city councils have passed resolutions committing to engage in those discussions, he said.

The requirement is that by March of 2015, the amended TIF plan be available for submission to the MEDC, Lax explained. So the first step is just submitting a two-page summary – and everything is all set to do that, he said. And hopefully, once the LDFA is notified that the MEDC has approved the proposed 5-year extension, the next step for the 5-year extension would be the amendment of the TIF plan, he said.

Lax reported that he has communicated with Mary Fales of the Ann Arbor city attorney’s office and also John Barr, who is the city of Ypsilanti attorney – and both of them are on board with jumping into the process and meeting promptly and dealing with potential amendments to the TIF plan. Both of the city councils will have to attend to those details.

Leahy asked Lax what he meant by “attending to the details.” She asked, “What are we proposing to amend in the TIF plan?”

Lax called that a policy question for the city councils. He did not know how much attention the councils had given to the details of what exactly would need to be amended. Tom Crawford, the city of Ann Arbor’s CFO, ventured that procedurally it would be appropriate for the LDFA board to make a recommendation to the city council and then for the council to consider it. Based on his conversations with Fales and with Lax, Crawford felt that the next step would be for the LDFA to articulate changes, by providing a document with tracked changes that the councils would vote on.

Lax agreed with Crawford that it was entirely appropriate for the initial proposal to come from the LDFA board. But then it would need to be discussed by both councils – because it would involve amendments that the councils need to approve. Leahy got clarification from Lax that the TIF plan and the development plan were combined as one document.

Some back-and-forth unfolded about whether an MS Word copy of the TIF plan still existed. Leahy ventured that it could be scanned in and then cleaned up, prompting Skip Simms to observe that Adobe had improved. Steve Rapundalo said he thought he might have some old documents. Leahy ventured that probably the first order of business was to just get their hands on a copy of the old MS Word document.

A question was raised by an LDFA board member about whether the board needed to wait until the MEDC approved the two-page summary before working on amendments to the TIF plan. Lax ventured that if the MEDC did not approve the two-page summary, then any effort the LDFA board put into revising the TIF plan would be wasted.

But on the other hand, even though it looks like March 2015 is a long way off, he thought it made a lot of sense to give prompt attention to amending the TIF plan. He did not know how soon they could expect the MEDC to approve the two-page summary. Leahy wanted to know if Lax knew of any guidelines the MEDC had provided for the kind of amendments to the TIF plan that they would be looking for.

Lax said he was not aware of any additional guidelines beyond the guidelines in the statute that talk about a higher degree of regional collaboration. Even for just a 5-year extension, this higher degree of regional collaboration is something the MEDC is looking for, he said. Leahy asked Skip Simms if there was anything he recalled from his discussions with the MEDC by way of guidelines. Simms said the key point that the MEDC is looking for had been described by Lax – broader regional collaboration.

The other thing the MEDC has said, Simms added, is that this is an opportunity for the LDFA to make changes to elements of the TIF plan that might have been too restrictive. It would be an opportunity to look at the TIF plan and the development plan with a clean slate and change anything and everything that they would like to see changed, he said. You can start with the core document if you’re happy with most of it, he allowed, but this is the opportunity to make changes.

Once the TIF plan has been changed, it’s unlikely that it would be changed again for another 15 years, Simms ventured. So now would be a good time to take the opportunity to insert everything that they wanted to put into a new TIF plan that might have been missed 15 years ago, he concluded.

Rapundalo suggested that the LDFA board, or a subgroup of the board, go through the TIF plan line-by-line from a conceptual viewpoint and ask about everything that’s included: Is this still valid today? If it is, then leave it in – if not, then take it out and perhaps replace it with something else.

A consensus that seemed to evolve from the board discussion was that the LDFA board’s contract committee would be a suitable group to take up the task of reviewing the TIF plan. Leahy said the issue of infrastructure would be a good topic to review in the TIF plan – because the Ann Arbor city council is suggesting it would like to see infrastructure projects undertaken, but there are certain kinds of infrastructure projects that the LDFA cannot undertake, because they are not in the plan.

Rapundalo suggested it would be useful to collect some best practices from other SmartZones in the state as well as other communities with high-tech concentrations, and try to incorporate some of that into the new plan. Leahy asked Lax if he could inquire with Roslyn Zator at the MEDC to get some direction about what the MEDC would like to see in the TIF plan amendments. Leahy also asked Skip Simms which other SmartZones he thought would be good to look at, as far as best practices – Traverse City, Houghton, Grand Rapids?

Simms said that what he heard from everyone else is that they are modeling everything after Ann Arbor SPARK. Nobody is saying they are doing it better than Ann Arbor SPARK is doing it, he said. Nonetheless, Simms allowed, it would still be important to reach out.

Simms said that Grand Rapids was undergoing a revision, so it would be good to contact Grand Rapids. Rapundalo agreed with Simms’ point about Grand Rapids, saying that Grand Rapids is making changes to their SmartZone that would set them apart structurally from other SmartZones. He thought it would be important to take a look at that and see why Grand Rapids is making those changes.

Simms pointed out that Grand Rapids is also considering applying for a 15-year extension of its LDFA. In terms of out-of-state organizations, Simms suggested taking a look at TechColumbus. Leahy asked Simms to see if he could get a copy of the TechColumbus development plan.

Lax circled back to the idea that the LDFA board should make the first proposal to the city councils about the needed changes to the TIF plan. But he also pointed out that the Ann Arbor city council had expressed interest in seeing greater attention paid to issues like infrastructure. He suggested that the LDFA take into account anything the councils might be interested in seeing at the outset. That way, whatever is ultimately proposed would stand a greater likelihood of being approved by the city councils.

At that point, Lax noted that March 2015 seems like a long way off, but given the potential complexity, it creeps up rather quickly. So the discussion should take place sooner rather than later. He suggested getting some clarity about what people may think they want to know, and what topics they have not known enough about up until now. That would help focus the discussion on what information is available, he said.

Although there are different timelines for requirements to apply for a 5-year extension of the LDFA compared to a 15-year extension, the consensus that evolved at the June 17 LDFA board discussion was that they should be handled pretty much simultaneously. Lax pointed out that the 15-year plan would involve a satellite and there would be some coordination among the various municipalities involved, but some room could be left in the 5-year plan extension to accommodate the addition of a satellite LDFA. Jacobson ventured the right approach would be to redline an amended TIF plan for both a 5-year plan and the 15-year plan.

Bonner suggested that everything be done, based on the idea of a 15-year agreement, with language incorporated into the documents to include satellite LDFAs. Then, if it turns out that only the 5-year extension is approved, the additional language due to the 15-year plan can simply be eliminated through an administrative amendment. The idea would be that it would be convertible to a 5-year plan in relatively short order. Lax agreed that much of the content would be the same in either case – 5-year plan compared to 15-year plan. Lax reiterated that he felt it made sense to think of it all as a unified project.

Crawford pointed out that after an amendment is prepared, you have to go through a process of notifications and public hearings – and it was undesirable to have the document change significantly during that process. Lax suggested that the 15-year component of the plan could be separated out as an “add on.”

Jacobson ventured that they need to think it through so that they have two different versions in their back pocket – that can be pulled out, based on what the MEDC approves. Lax also suggested having prompt discussions with the MEDC about other plans that could be used a model. The MEDC might have some guidance about how complex the amendments to the TIF plan might be, related to a 5-year extension, if a community is also contemplating a 15-year extension.

Simms pointed out that the MEDC review would happen after the council action. Lax allowed that was true, but ventured that the MEDC might have something useful to say in advance of that.

The question was raised about whether Houghton had pursued both types of extension simultaneously – but Simms thought that Houghton had pursued a 15-year extension from the get-go. Simms was not sure if everything had been completed in Houghton, but things have been completed in Marquette, which is supposed to be the satellite. He thought that the current status of that 15-year extension was: Discussions are taking place about the agreement between the satellite LDFA, the host LDFA and the MEDC. He pointed out that that was a whole additional agreement that would need to be amended and addressed.

About the timing, Simms said here’s what “your contractor [Ann Arbor SPARK] is prepared to do: We are prepared to have this dialogue with the LDFA relative to the amendments and changes to the TIF/development plan through the summer.” In September 2014, it will be known whether Brighton or Adrian or both are “real.” And they will know by Sept. 30 whether there’s a legitimate 15-year proposal to submit to the MEDC.

At that point, everything could already be in place for either the 5-year extension or the 15-year extension. Then in early October, “Bang, we go forward with either the 5-year plan or 15-year plan, because it will be clear which one it is,” Simms said. By the end of October, there could be a proposal to give to the two city councils for approval.

Jacobson ventured that it would also be clear from the state at that point which option could move forward – the 5-year or the 15-year option. Lax asked Simms if he knew when the MEDC was likely to give a reaction to the two-page executive summary, as related to a 5-year extension. No, Simms told Lax. But as a point of reference, Simms said the MEDC had responded to Houghton’s application very quickly.

Given the relationship between Ann Arbor and the MEDC historically, Simms had no doubt that MEDC would respond quickly. [The MEDC's current CEO, Michael Finney, is the former CEO of Ann Arbor SPARK.] The MEDC recognizes the importance to all parties – including the MEDC – to making this happen as quickly as possible for everybody, he said. So he was confident that the MEDC would respond rapidly. Leahy said she could get the two-page executive summary submitted that very day when she returned to her office.

Jacobson asked if Simms was suggesting that the contract committee wait until September or October to start reviewing the TIF plan amendments. Not at all, Simms replied. Simms thought the LDFA board’s contract committee ought to meet within the next three weeks and begin this process – because the majority of it is relevant, whether it is a 5- or 15-year extension.

Jacobson asked a question on the 15-year extension, which related to some feedback he thought the MEDC had given to the Ann Arbor/Ypsilanti SmartZone LDFA. At one point the MEDC had given the Ann Arbor/Ypsilanti SmartZone feedback, he thought, that in order to include a satellite that is subsidized by a third-party like a university, the MEDC would expect Ann Arbor to funnel 10% of the expenditures to Ypsilanti. He thought that had been presented as an idea by the MEDC, he said. Is that a requirement that should be considered when the LDFA prepares the 15-year application? Jacobson asked.

Simms said it was something that needed to be looked at and discussed, adding that the LDFA probably needed to go back to the MEDC to get some definitive language.

The idea of funneling money to Ypsilanti had come up in a discussion between the two CEOs – Ann Arbor SPARK CEO Paul Krutko and MEDC CEO Michael Finney, Simms said. Whether that would be a firm position or not has not been clarified. Jacobson wondered if that would be clarified before a 15-year proposal would be submitted. Yes, Simms said, that will be clear. The other thing that MEDC is pushing is the idea of collaboration.

Ypsilanti has been in the Ann Arbor/Ypsilanti SmartZone all along, Simms said, but “Ypsilanti has gotten squat.” Collaboration would mean that it’s a way to get something, he said. What the LDFA has been providing needs to extend outside the city limits, Simms said. So that needs to be considered in thinking about the modified development plan, he said.

The overwhelming benefit at the end of the day, Simms continued, is a significant sum of money that is coming to benefit the city of Ann Arbor that would not be coming at all – not a dime of it – if the LDFA did not get the 15-year extension. The benefit to the city is still enormous, Simms said. So to extend a little bit of that to Ypsilanti seems like a reasonable action, he concluded.

Leahy came back to the point that the next step is to submit the two-page executive summary to the MEDC. She told her board colleagues that she would submit that to Roslyn Zator. The next steps would be for city of Ann Arbor financial services staffer Ken Bogan and Ann Arbor SPARK – as well as Stephen Rapundalo – to look for the MS Word version of the TIF/development plan.

In the next three weeks, the contract committee would schedule a meeting to start going over the changes to the TIF/development plan that they think are appropriate to take to the city councils. Bonner ventured that the satellite LDFA communities might need some support as they go through their process – and he thought it might be appropriate for the LDFA to provide that support in the form of legal counsel from Jerry Lax. That way they could make sure that the resolutions and the agreements are in line with what the Ann Arbor city council would want to see.

The contract committee set a meeting for Tuesday, July 8 to start going over the TIF plan.

Politics of an Extension

The LDFA board’s June 17 discussion included acknowledgment that an extension of the LDFA’s term would likely need to satisfy recent concerns expressed by the Ann Arbor city council:  (1) investments in high-speed fiber telecommunications; (2) audit of jobs creation figures; and (3) clarification of school tax capture by the LDFA.

Politics of an Extension: Jobs Audit

Based on LDFA board chair Carrie Leahy’s conversations with Paula Sorrell, the MEDC ex-officio representative on the LDFA board, and some email exchanges with Rosalyn Zator, it does not look like any other SmartZones are doing audits of job creation numbers. Sorrell said the MEDC would be looking specifically at its grant to SPARK– and not all of Ann Arbor SPARK – just those things that are associated specifically with the grant.

Sorrell explained that there are process audits and financial audits – and they take place every 2 to 3 years. Those are audited by the state, she said. As far as job creation numbers go, those are collected monthly, she said, and those are specific to grants. Spot-checking is done on those numbers as well.

Stephen Rapundalo asked Sorrell to describe how the spot-checking was undertaken. He ventured that all of the numbers are essentially self-reported by the companies. So are you randomly calling companies and saying, “Hey, you said this,” and verifying the numbers? Is that how it works? he asked.

Sorrell told Rapundalo that in a start-up tech company, it would be typical to see a few jobs added at a time. Eventually the only thing that can be done is to just work down the list of all the companies that had been served and to verify whether the numbers that had been quoted were in fact accurate or not. Sorrell said the MEDC also gets reporting from multiple areas, and most of the companies use three or four other grantees at a time, so they can check to see if anybody is reporting different numbers.

Petersen also noted that the previous evening’s council meeting had included quite a bit of discussion about the appropriate metrics – in terms of return on investment. The question had arisen with respect to projected job creation as opposed to actual job creation, she noted.

Tom Crawford, Ann Arbor’s CFO, said he’d heard some the comments about projected versus actual jobs created and he was not sure exactly how that applies. When a company comes in, they are not necessarily incentivized to give you a number that they would overshoot. The system is designed so that they give you a higher number. That’s not a detriment to the entity that is providing the incentive, Crawford said, because the incentive is based on the actual jobs that are provided. He wasn’t sure that everyone understood that point. Historically the state has paid grants based on actual jobs. Companies were only paid tax credits for actual jobs, he said.

For SPARK’s business development team, Luke Bonner said, its metrics for counting jobs are based on what the company says it will do in a public announcement – based on a tax abatement application, or a state grant they are receiving. And those numbers are what are included in Ann Arbor SPARK’s successes annually, Bonner explained.

For example, the company says that they are investing $2 million and creating 75 jobs in Ann Arbor, and that goes into SPARK’s annual report for successes, he said. SPARK continues to meet with that company over time. However, SPARK does not have to track what that company does over time, because they are not committed to SPARK to report anything. If it is a tax abatement, it’s part of the letter of agreement that you can go back and ask them how many jobs they have created. Or if it’s a state grant, the company has to report the actual jobs that they create to the state.

What SPARK’s business development team has been doing that is a little different now, however, is starting to look at the number of jobs a company has created this year as opposed to last year, Bonner said. That allows the business development team to start to measure the health of the local economy. So if a company adds 100 jobs last year and 200 this year, SPARK want to be able to show that difference.

But the LDFA uses really different metrics, Bonner said. LDFA metrics are those from the SPARK entrepreneurial services team. Those are two different areas, he stressed.

Sally Petersen, the city council’s representative on the LDFA, ventured that the council would like to see metrics that show projected versus actual jobs created. Bonner told Petersen that the LDFA should work with Skip Simms and Bill Mayer to look at the programs they’re running, and to figure out the best metrics to report that would satisfy the MEDC, the LDFA board and the city council.

Crawford added that projected jobs numbers are typically associated with incentive-based financial support – which is not what the LDFA board deals with. Stephen Rapundalo pointed out that the LDFA board’s own metrics committee had reviewed the kind of metrics that SPARK reports – and SPARK is already required to report a great deal of information to the MEDC.

Bonner went on to explain that internal to SPARK, they use a different nomenclature to talk about “retained jobs.” The entrepreneurial services team will say that “retained jobs” mean one thing, whereas for the business development team, “retained jobs” mean something else. For the business development team, Bonner continued, if a company says they’re going to move out of this state with their 100 employees and add another 200 employees elsewhere, and through the efforts of SPARK the company were to actually stay, the business development team would characterize that as 100 jobs retained – if not for the effort of the community and the state.

But for the entrepreneurial services team, when a company comes to SPARK, with, say, two employees, then that is their baseline – two retained jobs for when SPARK entrepreneurial services started to work with the company. Mayer added that he refers to the “retained jobs” in entrepreneurial services as a “snapshot” of the growth curve of a start-up. At a moment in time when SPARK “touches” the company, they say the retained number of jobs was three. And then six months later the retained number of jobs is four. That equates to one job created, Mayer concluded.

Board chair Carrie Leahy noted that the  issue of an independent jobs audit had been brought up in multiple city council meetings. Petersen said that a lot of the “noise that is out there” has to do with accountability. Putting aside accusations about whether SPARK is or is not inflating job creation statistics, it’s important to focus on the interest in accountability, she said.

If Ann Arbor were to be the first SmartZone in Michigan to do an independent audit, that would reflect positively on Ann Arbor, Petersen said. That would show that the Ann Arbor/Ypsilanti SmartZone is not afraid of being accountable, she added. The components of such an audit are still unknown, because no one else has done it before, she said. So she felt it was important for the LDFA board to pursue that direction with an intention to do such an audit.

Eric Jacobson asked if Petersen was talking about an audit of metrics or a financial audit of the dollars. Petersen explained that the interest was an audit of the job creation numbers. Stephen Rapundalo ventured that such an audit would have financial implications. How much would it cost? In addition, was the LDFA also planning to do a financial audit?

Jacobson explained that the financial audit is to be done about every two years and usually in the fall. He then explained that a financial audit of the LDFA is done every year in conjunction with the city of Ann Arbor’s audit. Another kind of audit is an audit of the LDFA’s contract with SPARK – which is an audit on contract compliance.

Jacobson said that the firm that had done the financial audit last time had done a great job from his perspective, so he would like to use the same firm again – Abraham & Gaffney. It would be an audit by the LDFA of Ann Arbor SPARK, using a third-party, to go through and check all the LDFA dollars that are going to SPARK, to check to make sure none of the funds had been misappropriated according to the terms of the contract, he explained.

Rapundalo suggested that the scope of the financial audit could be expanded to include the jobs numbers. Leahy asked if an inquiry could be made with Abraham & Gaffney to see how they would propose to check those numbers. Petersen asked if Abraham & Gaffney could be used just because they had done the audit previously – and wondered if they needed to use a bid process and accept the lowest responsible bid.

Jacobson told Petersen that Tom Crawford, the city of Ann Arbor’s CFO, was checking into that issue. Some back-and-forth between Petersen, Leahy and Jacobson led to a tentative consensus that the auditor would be asked to develop a proposal.

But SPARK’s Simms expressed some skepticism: “Wait, wait, wait!” Earlier in the meeting, Bonner had done a nice job of explaining that the job numbers that are projected come from SPARK’s business development team, Simms said. Entrepreneurial services has never provided the LDFA or anybody else “projected” jobs, Simms added. [The LDFA-SPARK contract approved by the LDFA board at the June 17 meeting includes a requirement for reporting to the LDFA "projected new employees" for Phase IV companies: "These reports shall include but not be limited to the following ... 4) the companies that receive Phase IV assistance, description of assistance, number of full time equivalent employees and projected new employees."]

Rapundalo told Simms that they were talking about the metrics that SPARK’s entrepreneurial services team does currently report, which includes jobs created and jobs retained. Petersen explained that this audit was not focused on the city’s contract with SPARK for the business development services. Leahy said that what they were hearing from the city council is that the LDFA is just accepting what SPARK says with no verification.

Simms replied that there has in fact been an audit: “We somehow allowed the thought to occur that there has never been one.” Leahy told Simms that they reported to the city council that there had been a contract audit. But Simms told Leahy he was not sure the council had actually heard that.

So this won’t be the first audit, Simms concluded. Rapundalo felt the council had heard clearly that there had previously been a financial audit. Leahy said they had reported to the council that SPARK has undergone a financial audit, and they were clean and that the results of that audit have been posted.

Petersen wrapped up by reiterating the importance of doing an independent audit of the metrics. The LDFA needs to provide documentation, she said. She wanted an independent audit, even if that meant the Ann Arbor/Ypsilanti SmartZone was the first in Michigan to do it. Ann Arbor would be putting its best foot forward and saying: Here’s what an independent audit of job creation numbers actually looks like. The Ann Arbor/Ypsilanti SmartZone needs to focus on the accountability outcomes first, Petersen concluded.

Politics of an Extension: Infrastructure, City Fiber Initiative

With respect to infrastructure, Stephen Rapundalo asked if the MEDC could provide information about what other SmartZones and LDFAs had done in the way of investing in infrastructure. Paula Sorrell said she had put Carrie Leahy in touch with MEDC contacts. And by-and-large, there are not a lot of SmartZones that have undertaken infrastructure projects.

Leahy reported that so far she’d found the use of TIF for infrastructure on road improvements and sewer connections in Grand Rapids. In Grand Rapids, TIF had also been used for marketing in the SmartZone and for equipment and furniture – updates to their business incubator – which the Ann Arbor/Ypsilanti SmartZone already uses money for. Leahy ventured that furniture in incubators is not what the Ann Arbor city councilmembers mean when they talk about infrastructure. She also described a bridge project in Grand Rapids where there was a question about whether TIF funds were used – and it turned out that TIF funds were not used.

The Ann Arbor/Ypsilanti SmartZone development plan, Leahy continued, states that infrastructure such as roads and sewers and certain other infrastructure are already complete in the SmartZone. So if there were some kind of project like that, she ventured that the development plan would need to be changed.

The one kind of infrastructure project that keeps coming up, Leahy said, is high-speed fiber telecommunications. That seems to be the only type of infrastructure project that has been floated that is specifically addressed in the current development plan for the Ann Arbor/Ypsilanti SmartZone, she said. If that were something the LDFA wants to pursue, then it would not require altering the development plan, she said.

Leahy wondered who would initiate that kind of project. Is it the LDFA that says, We should put money toward fiber? Or does the Ann Arbor city council tell the LDFA to pursue it? “That’s a good question,” allowed Sally Petersen, who is the Ann Arbor city council’s representative to the LDFA board. Like Leahy, she wondered what the next step might be toward high-speed fiber. If it would be helpful for the city council to pass a resolution on the topic, Petersen said she would be willing to try to move that forward.

City of Ann Arbor CFO Tom Crawford told Petersen that the city staff was working on a proposal for high-speed fiber that would be brought forward. Asked what the timeframe for that project would be, Crawford said it would be some time during FY 2015. [That means before June 30, 2015.]

As for details about projected costs, Crawford told the board that it was a proposal that would be “worthy of this group.” Rapundalo recalled Ann Arbor’s ultimately unsuccessful Google Fiber initiative, toward which the LDFA board at the time had pledged $250,000.

Rapundalo wondered how the LDFA could reach out to the high-tech community to get input on what that community feels is lacking in terms of high-speed infrastructure. Crawford responded to Rapundalo by saying that he would look to Skip Simms specifically, or Ann Arbor SPARK generally to facilitate that inquiry. He ventured that Ann Arbor SPARK conducts that kind of inquiry as a matter of course.

But Simms told Crawford that Ann Arbor SPARK does not do that in a formal way – characterizing it more as an ad hoc approach. The main mechanism for that is through the business development team, Simms continued, through their conversations with the more mature technology companies about their needs. “So far, quite honestly, we’re not hearing any outcry that we need a bigger pipe,” Simms said.

What SPARK is hearing, Simms continued, is “I need job training. I need people with skill sets. I need office space downtown. Those are the things we’re hearing from those companies. They’re not saying … fiber.”

But Simms allowed that could change in five years. Video technology is requiring more capacity – more storage space. So maybe what is needed is more online technology facilities, as opposed to fiber – but who knows? Simms said. He added that it’s important to be careful going forward that the LDFA doesn’t lock itself in and limit itself. Whether the proposal comes from the city council or from Ann Arbor SPARK or from city staff, Simms urged that the approach be kept fairly broad that whatever unfolds 10 years from now – and no one knows what that might be – it can be accommodated.

Crawford agreed with Simms’ remarks. The existing tech companies, Crawford said, are currently very well served – because if you want very good high-speed service, you can just pay for it. What the city has been considering is a broader look that would not necessarily address the issues of technology companies, but that would be a real asset and attraction for new companies to come in and other kinds of companies to start up. So the city’s fiber initiative would not necessarily address the need that existing companies have.

Crawford characterized it not as “incremental” but rather as “supplemental.” It would not take away from anything that Ann Arbor SPARK is already doing, Crawford said. Petersen ventured that there would be some “positive externalities” that would come from the installation of high-speed fiber, which would benefit residents as well. So if this project were viewed as affecting “community prosperity,” it would also help start-ups. Petersen thought there were also a lot of existing, mature businesses and residents who would be helped as well.

Crawford responded to Petersen by saying that it’s somewhat of a chicken-and-egg problem. Without high-speed fiber, innovations are not occurring and we are falling behind worldwide on innovation in this kind of thing, Crawford said.

Responding to a question about whether the city’s high-speed telecommunications fiber project would extend to the neighborhoods or just to the downtown area, Crawford explained that the concept is to include the entire city. Eric Jacobson said that his “gut feeling” was that demand for high-speed fiber capacity from residents would be possibly more than the demand from businesses – just because at home, people are pulling down massive amounts of bandwidth for video programming and things like that.

For a business, there’s some of that, Jacobson added, but perhaps not as much as for residents. He works for a software company [Amplifinity] and all of his company’s bandwidth to the outside world is provided by its hosting facility. But for his company’s office space, the bandwidth requirements are more than met by commercial providers, he said.

Crawford responded by adding that the price point that Americans are paying for the service they get is high compared to international standards, and speeds are uneven for uploading compared to downloading. Improving bandwidth in both directions has the potential to change the way that people do business, Crawford said. It’s not just about adding bandwidth to the business that you have – it’s potentially changing the way you use bandwidth.

Leahy brought the conversation back to the concerns of the Ann Arbor city council.

Leahy told Jerry Lax that she understood the current TIF/development plan limited how TIF funds could be expended on infrastructure. She asked him to provide some additional background. Lax told her he wanted first to look at the TIF/development plan a little more closely, because he has not investigated it in detail. Whatever conclusions might be drawn about its current limitations, he said, the real question is: What would the LDFA board like it to see? The next question is whether there are concerns either in the enabling legislation or elsewhere that would make it difficult to have the TIF/development plan say what the LDFA board has concluded that it wants the plan to say.

Lax wanted some additional time to take a look at what the constraints are in the current TIF/development plan, and also the question of whether in general there might be some limitations on altering the TIF/development plan. Right now, Leahy said, the TIF/development plan says that the roads and sewers and lighting are complete and basically done in the Ann Arbor/Ypsilanti SmartZone district. The only real item that is addressed is high-speed telecommunications fiber.

Lax cautioned that even if that was an accurate statement at one point in time, it might no longer be accurate. Leahy thought that the enabling legislation does in fact permit infrastructure investments, pointing out the Grand Rapids had done it. Lax allowed that his recollection of that portion of the enabling legislation was that there is not a constraint, but he would like to take another look at that.

Luke Bonner then interjected, asking if he could be a “wet blanket” based on his experience. If you look at the local development finance authority legislation that was put together in the 1980s, it’s important to note that’s when things were terrible in Michigan, he said. An LDFA was a tax increment financing mechanism that allowed for reimbursements of infrastructure costs to spur certain kinds of investments – basically for manufacturing in high tech, engineering, and alternative energy, he said. And that is the only type of project that those TIF dollars could be used for – it was very specific.

Then came along the amendment to the LDFA legislation in 2000 that created SmartZones, Bonner said. What the state did was create a new kind of TIF that was a “certified technology park.” That basically meant that if you had an existing LDFA, or if you wanted to create one, you could apply to the state to have a certified technology park designation – and that certified technology park designation basically allows an LDFA to capture school taxes to support business incubation and acceleration services.

The deal that has been put together on almost all of the certified technology parks, Bonner continued, is that if the state is going to contribute funding, there has to be some kind of local contribution – a local match. So if an LDFA already existed, and the LDFA had debt obligations – because it had built roads and bridges and sewer pipes – then the state treasury considered that to be the local commitment: Your local taxes are being used to create local economic development, and so you are allowed to capture school taxes, Bonner said.

In the case of Ann Arbor, there was a downtown development authority (DDA) district that was already established and that was already investing money. The infrastructure in which the Ann Arbor LDFA could invest could serve an incubator or an accelerator program. For example, an incubator could be built and you could run high-speed telecommunications fiber to that incubator. You could, under the enabling legislation [even if not under the Ann Arbor LDFA TIF/development plan] build a road or a sewer connecting to the incubator.

Where the challenge comes is trying to use school millage capture to build out general infrastructure that is not tied to an incubator. Bonner reported that the city of Rochester Hills was actually refused by the Michigan Dept. of Treasury, when the city wanted to use school taxes to help build out local infrastructure. The treasury had said: No way, you have to use the DDA, or a [non-SmartZone] LDFA to do that. The school millage can be used by a SmartZone LDFA to do infrastructure improvements – just as long as it is for an incubator, Bonner contended.

Leahy ventured that the restriction was not that specific and that it could be for infrastructure improvements anywhere in the SmartZone district. That’s what Grand Rapids had done, she thought. Bonner questioned whether what had happened to Grand Rapids was infrastructure improvements through a SmartZone LDFA or through an already-established LDFA.

Stephen Rapundalo said he knew some of the background of the situation in Grand Rapids and characterized the interpretation of the statutory language in that case as “rather liberal.” Grand Rapids had somehow got away with something, Rapundalo said. He told Bonner that he was on the right track in describing how things were supposed to function according to the statute. How Grand Rapids had done what they did, Rapundalo had no idea. Bonner pointed out that Ann Arbor’s LDFA is set up only to manage the use of the school taxes.

The LDFA in Ann Arbor is not set up in the original sense of the LDFA Act passed by the state legislature in the 1980s – which was to set up a mechanism to fund infrastructure improvements to attract manufacturing high-tech and engineering companies. But what Ann Arbor does have is a DDA that can make those improvements as well, Bonner pointed out. He had never looked at the Ann Arbor DDA plan before, but he knew that the DDA built parking decks and made road improvements.

The DDA has a lot of flexibility to make infrastructure improvements within the district, he said – whether it’s high-speed fiber or parking decks or roads or sewers. He noted that the geographic area of the LDFA and the DDA in Ann Arbor are the same district. He suggested again that it would be a good idea to develop an LDFA 101 presentation for the city council to explain how all these entities are very separate and distinct from one another.

Lax pointed out that one question is how the existing enabling legislation is interpreted. He also pointed out that legislation can be changed – although he would not want to suggest that as anyone’s first line of attack – because that is a “forever project.” Leahy ventured that right now the plan does not allow for the funding of the kind of infrastructure projects that the city council is interested in. Bonner thought that the state treasury would challenge an attempt to use LDFA school millage capture to run fiber to the premises in Ann Arbor citywide.

Politics of an Extension: School Tax Capture

Earlier in the meeting, Skip Simms had argued for a 15-year extension. He said if the LDFA did not get the extension, a significant sum of money would not be coming to benefit the city of Ann Arbor.

Sally Petersen picked up on Simms’ observation about the source of funds and the reimbursement from the state. One of the issues that the city council is concerned about, Petersen said, is whether the TIF capture from the Ann Arbor/Ypsilanti SmartZone is coming from the state school aid fund. “That’s still out there,” she said.

Stephen Rapundalo responded to Petersen by asking: “What’s it take – for them to understand unambiguously how that works? I mean we have told them. Why is the onus on the LDFA to have to show them that?” The LDFA has nothing to do with that aspect of funding, Rapundalo continued, saying that all the LDFA knows and understands is how the calculation is made, and therefore how much money is allocated to the LDFA board for the purposes stated in all of the various agreements. [See above for statutory interpretation indicating that the school aid fund is not reimbursed for the Ann Arbor/Ypsilanti LDFA SmartZone tax capture.]

Luke Bonner of Ann Arbor SPARK suggested that it is a lot to ask of current Ann Arbor city councilmembers, who were not around when the LDFA was created, to have a clear understanding. He suggested that the material needed to be broken down into a kind of LDFA 101 presentation.

Rapundalo expressed frustration – because such presentations have been given over the years, which he thought were really dumbed-down. Jerry Lax quipped that maybe they needed better diagrams. Rapundalo ventured that with respect to the school aid fund reimbursement, the council needed to hear from someone at the state level. He did not know who that person might be, but it could be somebody at the highest level of the MEDC, or the Dept. of Education – but it should not be from the LDFA.

Bonner suggested that it might be someone at the Dept. of Treasury – because the treasury department, more so than the MEDC, has to put their stamp of approval on the TIF plan. The state treasury is responsible for taking the money and reimbursing the school aid fund.

Rapundalo said he would ask Ann Arbor SPARK to identify the person who could explain that. “That needs to be cleared up, as much as we can, once and for all,” Rapundalo said. Lax added that many of the issues that city councilmembers might have concerns about are based on the actions of the state legislature in creating the statutory scheme in the first place. So if people have questions about it, they might very well be legitimate questions that need to be addressed – but the fundamental point is that for better or for worse, this is what the state legislature determined would be the mechanism.

If people have questions or doubts or criticism about how reimbursements are made, and where it comes from, and what bucket the money is taken out of, that’s not something that the city council determined or that the LDFA determined, Lax said. That’s something that the state legislature determined in adopting the state legislation in the first place.

Petersen said there are two things that concerned her about how the city council received this kind of information. The council might decide that they don’t like the mechanism at the state level, and to prove that point, the council might not want to support a 15-year extension of the LDFA. There are also remaining questions about whether the city of Ann Arbor public schools are actually getting reimbursed. She understood that representative Jeff Irwin had done some analysis of that, but she was not sure what it was, as she had just heard about it.

Lax ventured that maybe councilmembers feel that the schools ought to be getting more money – but the question of whether the schools are getting more money is a separate question from whether the way the schools are being reimbursed is fair. If the schools in general are getting a dollar-for-dollar equivalent for the captured taxes, then “so far so good,” Lax said.

Petersen stated that city CFO Tom Crawford has stood up and stated that the schools are getting reimbursed. Rapundalo observed that Crawford’s statement does not satisfy some councilmembers, and that’s why they need to hear from somebody who can walk them through the calculations and the whole process at the state level.

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