Carrie Leahy is chair of the LDFA board.

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.

Eric Jacobson is the LDFA board treasurer.

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.

Sally Petersen is the city council’s representative to the LDFA board.

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.

Tom Crawford is the city’s chief financial officer, and serves on the LDFA board in an ex officio capacity.

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.

Stephen Rapundalo is a former city councilmember who serves on the LDFA board.

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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Dave Fisher of the accounting firm Rehmann presented the AADL 2012-13 audit. (Photos by the writer.)

There was no discussion among board members on that item, though Fisher noted the audit had been discussed at the board’s budget and finance committee in November.

Also approved was a one-year lease extension with Green Road Associates for storage of newspaper archives. The library has leased the Plymouth Park facility – an office park owned by First Martin Corp. on Green Road, north of Plymouth – since January 2010. That’s when AADL took possession of the Ann Arbor News archives, a few months after the owners of that publication decided to cease operations. The library is digitizing the Ann Arbor News archives, along with material from other local newspapers, as part of a project called Old News.

Much of the meeting focused on two staff presentations: A report on library statistics for November in five categories (collections, users, visits, usage and participation); and an update on the Washtenaw Library for the Blind and Physically Disabled (WLBPD).

One person, Donald Salberg, addressed the board during public commentary. Part of his remarks focused on the board’s decision – at its Nov. 11, 2013 meeting – to approve a tax-sharing agreement with Pittsfield Township and the State Street corridor improvement authority. He told trustees that they hadn’t identified any real benefit that the CIA would bring to the library.

At the end of the meeting, board president Prue Rosenthal read a statement that defended the board’s decision to participate in the CIA, outlining its benefits to the library and the broader community. She said that although the board vote had not been unanimous, she thought that all trustees were comfortable that the decision was made with a great deal of care.

2012-13 Audit

On the agenda was a resolution to accept an audit of the library’s financial statements for the fiscal year 2012-13, which ended on June 30, 2013. The audit, prepared by the accounting firm Rehmann, gives a clean opinion of AADL’s financial statements – the same as in recent prior years. [.pdf of AADL 2012-13 audit]

Dave Fisher of Rehmann gave a report to the board. He noted that he had reviewed the audit in detail at the board’s budget and finance committee meeting on Nov. 12. [Members of that committee are Nancy Kaplan, Barbara Murphy, and Jan Barney Newman.] He told the board that he planned to hit just the highlights.

From left: Prue Rosenthal, Jan Barney Newman, Eli Neiburger and Nancy Kaplan. Rosenthal is AADL board president. Newman and Kaplan serve on the board’s budget and finance committee. Neiburger is AADL’s associate director of IT and product development.

The audit reflects a clean report on AADL’s financial statements, Fisher said. That’s very good, he added, and it’s the same opinion that the library has received in recent years.

The audit covered AADL’s fiscal year from July 1, 2012 through June 30, 2013. Total general fund revenues for the year were $12.055 million – compared to $11.943 million the previous year. About 92% of those revenues ($11.105 million) came from real and personal property taxes that were levied in the AADL district. Total expenditures for the year were $11.967 million. That left a surplus of $87,446. Compared to the budgeted amounts of revenues and expenditures, AADL recorded a favorable variance of $97,446, he said.

Out of the library’s $8.191 million in combined fund balances, $7.7 million is unassigned and available for spending at the library’s discretion. That amount equates to about 64% of general fund expenditures – representing several months of operating expenses.

The library is on very solid financial ground, Fisher said. Unlike many libraries, AADL has no long-term debt, he noted, so the library doesn’t have to budget for principal and interest payments on loans.

The library has $4.637 million in investments. Bank deposits (checking, savings and certificates of deposit) totaled $3.696 million. AADL’s total net position is $30.445 million.

Fisher mentioned a couple of internal control enhancements that are recommended, including documentation for the review of AADL’s check register. The review is already being done, he noted, so it’s just a matter of documenting that process and indicating that it’s been done. The other recommendation is to periodically change the passwords for access to financial software, for security purposes.

There were no substantive questions for Fisher from the board. Margaret Leary asked director Josie Parker whether the audit would be posted on the AADL website. Parker replied that it would be.

Outcome: The board unanimously voted to accept the 2012-13 audit.

Financial Report

Ken Nieman – the library’s associate director of finance, HR and operations – gave a brief report on the November 2013 financial statements. [.pdf of financial statements]

Through November, the library has received 96.2% of its budgeted tax receipts. The library had $14.338 million in unrestricted cash at the end of November, with a fund balance of $8.121 million.

Five expense items are currently over budget, Nieman reported, but all of those items are expected to come back in line with budgeted amounts by the end of the fiscal year, which ends on June 30, 2014. The over-budget line items are: (1) purchased services; (2) communications, for an annual Internet-related payment; (3) software; (4) copier/maintenance expense; and (5) supplies, due to a large purchase of computer supplies in November.

Other November highlights included receipt of a $40,000 donation from the Friends of the AADL. Other than that, there was nothing out of the ordinary during the month, he concluded.

Financial Report: Board Discussion

Prue Rosenthal thanked the Friends for their donation.

Barbara Murphy wondered about the impact of foreclosed properties that had been sold through a recent tax auction held by the Washtenaw County treasurer’s office. The total sale proceeds had been about $400,000 less than the treasurer had expected, Murphy said, and that shortfall would affect the local taxing authorities. She asked Nieman whether it would affect AADL.

Nieman replied that the impact depends on where the foreclosed properties are located. Only the properties that are located in the AADL district would impact the library. He did not have any additional information.

Ed Surovell noted that the likelihood that there would be a significant impact on AADL is “extremely small.” It’s more than likely that the bulk of those properties are outside of AADL’s district, he said. “Ypsilanti will be hit hard, and some of the rural areas.” Even if the entire $400,000 were divided proportionately among all the taxing entities, it would still be a small amount for AADL, he noted – “in the high two figures.”

Outcome: This was not a voting item.

Lease for Newspaper Archives

The board was asked to approve a one-year lease extension with Green Road Associates for storage of newspaper archives. The annual rate of $38,500 is for a period beginning Jan. 1, 2014.

The library has leased the Plymouth Park facility – an office park owned by First Martin Corp. on Green Road, north of Plymouth – since January 2010. That’s when AADL took possession of the Ann Arbor News archives, a few months after the owners of that publication decided to cease operations. [The newspaper's owners, Advance Publications, subsequently opened a new business in mid-2009 called AnnArbor.com. Earlier this year, that publication changed its name to the Ann Arbor News.]

The library’s original lease was for a two-year period at $38,000 annually. In November 2011, the board approved a one-year extension, also at the $38,000 annual rate. No extension was brought to the board for approval in 2012.

The library is digitizing the Ann Arbor News archives, along with material from other local newspapers, as part of a project called Old News. For additional background, see Chronicle coverage: “Ann Arbor Library Set to Publish ‘Old News.’”

There was no discussion on this item.

Outcome: The board unanimously voted to approve a one-year lease extension with Green Road Associates.

Library Stats

Eli Neiburger – AADL’s associate director of IT and product development – gave a presentation on library statistics, providing details in five categories for the month of November: collections, users, visits, usage and participation. The data is compared to year-ago figures, when available.

AADL November 2013 collections data.

AADL November 2013 data on library users.

AADL November 2013 data on visits.

AADL November 2013 usage data.

AADL November 2013 data on participation.

During his 30-minute presentation, Neiburger reviewed highlights from the November data, interspersed with queries from board members. In addition to statistics in the five categories that he’s been presenting over the past few months, Neiburger included information on AADL’s social media.

Neiburger noted that AADL sees most of its engagement on Twitter, compared to Facebook or other social media sites. He highlighted some of the Tweets that mentioned AADL in November, to show board members how people communicate about the library on Twitter. [.pdf of social media presentation]

Outcome: This was not a voting item.

Director’s Report

AADL director Josie Parker covered several items in her Dec. 16 report. She noted that the building’s lower-level exhibit cases were displaying an exhibit of children’s books with culinary themes. The exhibit was curated by JJ Jacobson, who was the curator for the culinary collection at the University of Michigan’s Clements Library. That culinary collection is now part of the UM Special Collections Library, she said. Before the board meeting, Parker said she’d been down at the exhibit with several UM librarians and curators, as well as Jan Longone, who donated her culinary collection to UM.

AADL director Josie Parker, right, talks with Donald Harrison and Onna Solomon before the start of the Dec. 16, 2013 library board meeting.

Parker said that the collaboration with UM started when she first became AADL director. She’d talked with Bill Gosling, who at the time was the UM librarian, about how to bring the university’s collection into the public library so that it could reach more people. She said that because of her own graduate work at UM as well as Gosling’s interest in children’s literature and pop-up books, she had suggested starting with the children’s literature collection. Every year there has been a curated exhibit of UM holdings at AADL, to mark children’s book week, which is in November.

Parker then told a story related to the weekly reading she does for kindergarten classes at Angell Elementary School, as part of an Ann Arbor Rotary program. Earlier in the day, a little girl from one of the classes had visited Parker at her office, brought by the girl’s father. At the most recent reading, the children had talked about elves. So when the girl visited her, Parker showed her the next book she planned to read to the class: “The Blueberry Pie Elf.” The girl’s father then revealed that it had been his favorite book when he was his daughter’s age. Parker said she’d told that story to the current exhibit’s curator, because it related to the exhibit’s focus on culinary-themed children’s literature. Parker said she thought the board would enjoy the anecdote, too.

Parker also highlighted an article that had been provided to the board, written by Ira Lax for the Music Education Association’s publication about the AADL’s Library Songsters program. Parker said she was proud of Lax for continuing to find teachers who are interested in having him and a musician come to a class, at the library’s expense, to write songs with students that teach about history. The students then come to the library to perform the song.

Parker’s report also included an update on collaboration with Washtenaw Literacy. The library currently hosts Washtenaw Literacy’s English as a Second Language (ESL) classes at its Pittsfield and Traverwood branches two days each week. Washtenaw Literacy asked for an additional day to hold classes at Traverwood, and AADL agreed, Parker reported.

In her final item, Parker updated the board on her work as a commissioner with the state Commission for Blind Persons. Parker and six others had been appointed in October 2012 by Gov. Rick Snyder, who had abolished the previous commission and reorganized the department that provides services to the blind. The current organization is the Bureau of Services for Blind Persons, which is part of the state’s Dept. of Licensing and Regulatory Affairs.

The commission’s charge had been to visit all the offices of the bureau and talk with consumers and staff, and to make recommendations to the governor. Parker serves on the commission’s subcommittee on consumer services. She noted that a report will be submitted to the governor with a list of recommendations next year. It will be leading up to AADL’s fifth anniversary for administering the Washtenaw Library for the Blind and Physically Disabled, she noted, which will be marked by an exhibit on Helen Keller at the downtown library in May 2014.

In response to a query from a board member, Parker noted that four of the seven commissioners are legally blind, but all of the other commissioners wear glasses.

Washtenaw Library for the Blind & Physically Disabled

Terry Soave, AADL’s manager of outreach and neighborhood services, gave the board an update on the Washtenaw Library for the Blind and Physically Disabled (WLBPD).

Terry Soave, AADL’s manager of outreach and neighborhood services, gave the board an update on the Washtenaw Library for the Blind and Physically Disabled.

In introducing Soave’s presentation, AADL director Josie Parker told the board that earlier in the month, the AADL had hosted the directors of libraries from Manchester, Saline, Chelsea, Pinckney, Brighton, South Lyon and Ypsilanti. The focus was on the services that AADL provides through the WLBPD, and how other libraries can promote those services to their patrons. Parker asked Soave to give the same presentation to the board.

Soave began by giving the history of AADL’s involvement, noting that the library took over the administration of these services from Washtenaw County. [The library board had authorized that move at its Oct. 20, 2008 meeting, to take effect on Jan. 1, 2009.]

The WLBPD loans books, magazines and videos in various formats – including digital cartridge, digital download, large print, Braille, and descriptive video – to residents of Washtenaw County who are certified as unable to read or use standard printed materials as a result of temporary or permanent visual or physical limitations. A “talking book” machine and materials are mailed at no cost to individual patrons who qualify. The WLBPD also provides access to download over 50,000 books and dozens of magazines via the National Library Service’s Braille and Audio Reading Download (BARD) site.

Although WLBPD is located in the lower level of the downtown library, services are available at all branches, Soave said. Anyone who eligible for WLBPD services – along with anyone living in the same household – is also eligible for general AADL borrowing privileges, even if they live outside of AADL’s district.

Soave noted that WLBPD is a sub-regional library for the National Library Service (NLS), which is a department of the Library of Congress. The NLS controls the collection in terms of selecting acquisitions. It also provides equipment and oversees standards that all libraries in the network must meet.

In order to provide services at all branches, AADL staff were trained at every location, Soave said. The biggest challenge was training in the automation system. To help with that and other training, some of the AADL staff created a Wiki page with step-by-step instructions, Soave said.

The model of training all staff, rather than having a dedicated department to handle services for the blind and physically disabled, has been successful and unusual, she said. AADL is probably the only library in the country that’s doing it this way, Soave added. So in May of 2013, AADL staff also launched a national Wiki for the network of libraries for the blind and physically handicapped. Parker noted that because of this work, AADL has been officially recognized by other library organizations.

Soave reported that people who are interested in applying to WLBPD can download an application from the website, and submit it online or via fax, email or regular mail. Applications can also be picked up at any branch, or can be requested by phone at (734) 327-4224. Criteria include:

Blind: Visual acuity of 20/200 or less in the better eye with correcting glasses or the widest diameter of visual field subtending an angular distance no greater than 20 degrees.

Deaf-Blind: Severe auditory impairment in combination with legal blindness.

Visually Disabled: Lacks visual acuity to read standard printed materials without aids or devices other than regular glasses.

Physically Disabled: Unable to read or use standard printed materials as a result of physical limitations. Examples include: without arms of the use of arms; impaired or weakened muscle and nerve control; limitations resulting from strokes, cerebral palsy, multiple sclerosis, muscular dystrophy, polio, arthritis.

Reading Disabled: Organic dysfunction of sufficient severity to prevent reading printed materials in a normal manner (this disability requires the signature of a medical or osteopathic doctor as certifying authority).

Soave brought examples of digital machines and other equipment that WLBPD patrons receive. She noted that the national goal to get people signed up for the Braille and Audio Reading Download service, known as BARD, is 10% of eligible patrons. The WLBPD is currently at 29%.

AADL trustees Ed Surovell and Margaret Leary.

The AADL doesn’t house a collection of Braille material, but has access to the collection from the regional library in Lansing, or items can be ordered from the National Library Service. Other materials include “described” videos – movies in which visual elements, like scenes and costumes, are described with voiceovers.

For its large print books-by-mail service, Parker noted that AADL worked out a deal with the post office so that the books can be mailed as “free matter” – at no cost to the library or the patron.

In terms of outreach, Soave reported that WLBPD puts out a quarterly newsletter that’s produced by AADL’s community relations and marketing staff. The newsletters are posted online, and are available in audio and text-only versions.

The WLBPD is required by the NLS to do a patron satisfaction survey every three years. Its first one was in 2012, with a 37% response rate. Of respondents, over 95% indicated that they would recommend the WLBPD services to others, Soave said. The NLS also conducts a site review every two years. Results from the survey and site reviews are posted online.

Soave described a range of other outreach efforts to promote the WLBPD services. All libraries in Washtenaw County are eligible for “demonstration accounts” that include equipment and a sampling of materials, to help sign up patrons. All library systems have agreed to do that, she noted, and “it’s been a tremendous help.”

Originally the WLBPD had targeted eligible patrons, but last year the staff decided to take the additional step of reaching out to readers who wouldn’t be eligible but who would benefit from some of WLBPD services and materials, like the large print book collection. They developed stickers that are placed in every large print book in AADL’s collection. The stickers were also provided to other library systems within the county to put in their large print collection. Ypsilanti District Library, for example, has over 10,000 items in its large print collection.

The average age of a WLBPD patron is 80, Soave said, so natural attrition on the list of patrons is a big challenge. The director of the NLS has challenged all libraries for the blind and physically disabled to increase the number of patrons by 20%. In 2010, there were only seven libraries nationwide that showed any increase at all, Soave said. Since putting the stickers in books, WLBPD has shown a 12% increase.

Soave noted that WLBPD has been recognized twice by NLS for best practices in outreach.

WLBPD: Board Discussion

Margaret Leary, noting that she is a former librarian [she retired as director of the University of Michigan Law Library], pointed out that typically organizations will have specialists who are trained to provide services in one area. But when all staff members are trained, then patrons never have to wait for services if someone is on vacation or away from the desk. Leary praised Soave and the whole AADL staff for pushing this model of integrated training, saying that it hugely enhanced services to the blind and physically disabled. When the WLBPD was managed by the county, it was located in a small building that wasn’t open very often, Leary noted.

Leary said she appreciated Soave’s presentation, because it was about a service that she personally doesn’t need – so she had been unfamiliar with the details of WLBPD. “It’s an example of the iceberg that’s beneath the tip that we see so often in these meetings,” she said.

From left: Barbara Murphy and Rebecca Head.

Barbara Murphy asked how AADL can make people aware of WLBPD, even if they don’t need it, so that they can tell people they know. Soave noted that staff of the outreach department goes out into neighborhoods talking about AADL services, including WLBPD. Parker added that local ophthalmology offices are also aware of WLBPD, as is the University of Michigan’s Kellogg Eye Center. She said it’s like any of AADL’s programs and services – if you don’t need it or use it, it’s not on your radar.

In response to a query from Ed Surovell, Parker said there’s no other service that’s comparable to WLBPD locally, or to the network of the National Library Service. She noted that when Washtenaw County was having budget problems several years ago, county administrator Bob Guenzel asked if AADL would help. At the time, Washtenaw County’s program served several counties, but AADL agreed to serve just Washtenaw County, Parker said. However, no one goes unserved, she added. The other counties are served now by the state library, and the level of service is different.

Parker noted that the decision to incorporate WLBPD into the overall AADL services – and not to have a “library within a library” – had been controversial when they first took on the project. But five years later, they can show a positive outcome.

Rebecca Head praised Soave, saying that the AADL has shown what outreach and communication can do to promote what the library has to offer. That’s critical, she added, because people are so busy and don’t always have the time to find out about the AADL programs and services that are available.

Outcome: This was not a voting item.

Committee Reports

The board has six committees: communications, budget and finance, facilities, policy, director’s evaluation, and executive. Two brief committee reports were made during the Dec. 16 board meeting.

Committee Reports: Budget & Finance

Nancy Kaplan reported that the board’s budget and finance committee met with Dave Fischer of the accounting firm Rehmann to review the audit. Committee members were very pleased that it was an excellent report, she said.

Committee Reports: Policy

Barbara Murphy reported that the policy committee met and reviewed proposed staff updates to the AADL policies. She indicated that a resolution to update the policies likely will be brought to the full board at its January 2014 meeting. Murphy joked that the updated policies will “no longer refer to bookmen.”

Resolutions of Thanks

The board was asked to pass resolutions of thanks for two employees who are retiring at the end of 2013. Sharon Iverson has worked for AADL since mid-2004. Betsy Baier started working for AADL in February of 1975.

AADL director Josie Parker noted that Baier is a children’s librarian who was instrumental in developing the preschool storytime program. Within the last few years, she’s been responsible for the acquisition of children’s material in all formats. Parker invited board members to a reception held later that week for Baier.

Parker reported that Iverson is a teen librarian, who came to AADL after serving as a public school librarian. She primarily worked at the Malletts Creek branch.

Outcome: Both resolutions were passed unanimously.

Public Commentary

Donald Salberg began by wishing the board members a merry Christmas and happy new year. He hoped that when they next met in 2014, they’d have some new resolutions for dealing with library issues. He hoped they would revisit the accessibility and safety issues for disabled people at the downtown library. His understanding was that library officials met with people who were familiar with ADA standards prior to the November 2012 referendum on bonding for a new downtown library. He said he understood why any changes to be made would have been postponed until after that vote, since a new building would have made renovation unnecessary.

However, the referendum did not pass, he noted, and there are recommendations for improvements – especially for the front entrance, where there are certain risks along the ramp leading up to the front door, he said. Also, bathrooms could be improved and there are other minor changes that would help the disabled move around with more ease.

Salberg also noted that the Saline District Library and the Washtenaw Community College have opted out of Pittsfield Township’s State Street corridor improvement authority. He said that officials from both entities had indicated that taxpayers had not voted for a millage to be spent on street construction, and they preferred to have the tax revenues spent for the originally-intended purposes. There’s hope, he said, that if enough taxing authorities don’t join the CIA, then the project won’t be initiated, he said, and that the AADL then wouldn’t lose the tax revenues that it will lose if the CIA moves ahead.

He said the AADL board hadn’t identified any real benefit that the CIA would bring for the library. “It appears that the biggest benefit will be to the real estate industry,” Salberg added, because purportedly 40% of properties along the State Street development area are undeveloped. Property will appreciate because of the road improvements, Salberg said, so the real benefit will be to the people who sell, develop or manage those properties. In the future, he concluded, it would be helpful for the AADL board to get input from the community before making a decision on how to spend the community’s money.

Public Commentary: Board President Response

At the end of the meeting, board president Prue Rosenthal read a statement regarding the CIA. She noted that the board voted at its last meeting, on Nov. 11, 2013, to approve a tax-sharing agreement with Pittsfield Township and the CIA. The board had discussed it since they first heard about it in August, she said, and there were differing opinions. The vote on Nov. 11 wasn’t unanimous, she pointed out. [Nancy Kaplan cast the lone dissenting vote on the seven-member board.]

The board’s fiduciary responsibility requires that they make decisions that serve the public the best, Rosenthal said. Sometimes, those decisions affect tax revenues – as is the case with the CIA, she noted. State law gives the board the power to opt-out of a corridor improvement authority, but the board’s duty is to consider all relevant elements and make the best decision for the library. The amount of money was relatively small, she pointed out, and the project would improve access to AADL’s Pittsfield branch. If the CIA goes forward, it would increase the library’s tax base, she added. And if the project doesn’t move forward, AADL will be held harmless.

A publicly funded road is more equitable than requiring property owners to do it themselves, Rosenthal said. “We believe in being a good neighbor to Pittsfield,” she said, which has helped AADL considerably when the library branch was built in the township. She noted that only 50% of the tax increment increase will be captured by the CIA, and that the township worked with AADL to negotiate terms of the agreement.

Rosenthal said the AADL cares about the environment and sustainability, and this project will improve pedestrian and non-motorized transportation between Pittsfield Township and Ann Arbor, and will enable better public transportation to reduce the use of cars and improve air quality. It will provide better stormwater management to protect the watershed, she said.

Although the board vote was not unanimous, Rosenthal concluded, she thought that all trustees were comfortable that the decision was made with a great deal of care.

Ed Surovell responded directly to Salberg’s commentary. He noted that if the value of the land adjacent to the road improvement is increased, then any of that land that’s within the AADL district will provide increased tax revenues to the library. That’s a direct benefit to AADL, Surovell said.

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

Next meeting: Monday, Jan. 20, 2014 at 7 p.m. in the fourth-floor conference room of the downtown library, 343 S. Fifth Ave., Ann Arbor. [Check Chronicle event listing to confirm date]

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According to city of Ann Arbor CFO Tom Crawford, the city’s response to the letter would not require any city council action. The city staff would be explaining to the state how the city’s internal financial procedures mitigate against what Crawford characterized as a “minor issue.”

A note in the city’s own audit report called attention to the fact that:

An excess of expenditures over appropriation were reported in the local street nonmajor special revenue fund (final budget of $1,582,562 and actual of $1,623,495); this excess of $40,933 was absorbed by available fund balance. No other expenditures in excess of appropriations were reported.

The city’s local street fund receives Act 51 money from the state and is used primarily for street repair and maintenance.

If expenditures exceed the appropriations for any fund, it violates state statute, and thus triggers a letter from the Department of Treasury. The letter notes the violation and requires the city to file a corrective action plan (CAP) within 30 days. The CAP, according to Crawford, would not require any city council action, and would include an explanation of the city’s internal procedures. Crawford observed in an emailed answer to a Chronicle question that “They note expenses over by $40K but did not note transfers out that were under budget by $60K.”

Terry Stanton, with the state’s treasury department, responded to a Chronicle inquiry with an email that explained how common such letters are:

Letters, such as the one sent to the City of Ann Arbor, are not rare, with approximately 400 sent to local units in 2012 (there are about 1,800 cities, villages, townships and counties in Michigan).

Essentially, the letter acknowledges certain conditions which have been noted in a local unit’s audit report and informs a city (or village, township, county) that it needs to submit a corrective action plan. They are expected to indicate to the department how they plan to fix any deficiencies noted in the audit report.

To help ensure the local unit submits a corrective action plan in a timely fashion, there can be consequences if a plan isn’t submitted. Those consequences are outlined in the letter.

The audit of Ann Arbor’s FY 2013 financial statements was recently reviewed by the city council’s audit committee.

[.pdf of Nov. 22 state of Michigan Dept. of Treasury letter to city of Ann Arbor] [.pdf of final audit report released on Nov. 15, 2013]

The DDA’s audit firm is the same one used by the city of Ann Arbor – Rehmann. [.pdf of DDA FY 2013 audit]

This brief was filed from the DDA offices at 150 S. Fifth Ave., Suite 301. A more detailed report will follow: [link]

Oct. 24, 2013 Ann Arbor city council audit committee meeting. From left: auditor Mark Kettner (Rehmann Robson), Margie Teall (Ward 4), city chief financial officer Tom Crawford, Sumi Kailasapathy (Ward 1), Sally Petersen (Ward 2) and Stephen Kunselman (Ward 3). Arriving after this photo was taken was Chuck Warpehoski (Ward 5).

Highlights from that draft FY 2013 report, which has now been issued in final form to the city, include an increase to the general fund balance from about $15.4 million to about $16.2 million. The $800,000 increase contrasts to the planned use of roughly $1.6 million from the general fund balance in the FY 2013 budget. About $200,000 of the increase was in the “unassigned” fund balance. The rest of it fell into restricted categories, CFO Tom Crawford explained at the meeting.

The result of the audit, in the new GASB terminology, was an “unmodified” opinion – which corresponds to the older “unqualified” opinion. In sum, that means it was a “clean” audit. The concerns identified last year had been addressed to the auditor’s satisfaction.

Members of the audit committee were enthusiastic about the $2.4 million better-than-budget performance for the city’s general fund, which had expenditures budgeted for $74,548,522 in FY 2013.

However, Crawford cautioned that he is “not crazy about the versus-budget comparison” because actual expenses will generally be less than budget anyway. He also pointed out during the meeting that just $1.3 million of the $2.4 million better performance are recurring items – things that he would expect to continue going forward.

While the year-end audit provided some good news, Crawford said he recommended that the city try to have about $1 million to $1.5 million of “good news” each year, because the city needs fund balance to pay for non-recurring items.

Crawford and Rehmann auditor Mark Kettner walked the committee through some of the highlights that still, on balance, had led to the good news. Revenue for services was almost $400,000 less than budgeted, due in part to lower-than-budgeted fire inspection fee revenue. Fines and forfeitures – including parking tickets – were $300,000 less than budgeted. And investment income was off by $400,000. But state shared revenue came in at $500,000 better than budgeted. [These figures come from page 36 of the final audit report.]

“The general fund had pretty much a year like you’d hope it would,” Crawford said. The year ended with an unassigned fund balance of roughly $14 million, or about 18% of expenditures – and 18-20% of expenditures is where the fund balance should be, he said. “So we’re really in a good spot.”

Challenges facing the city this coming year include the implementation of the new GASB 68 accounting standard starting in FY 2015, which begins July 1, 2014. That standard requires that most changes to the net pension liability will be included immediately on the balance sheet – instead of being amortized over a long time period. The GASB 68 standard must be implemented for an organization’s financial statements for fiscal years beginning after June 15, 2014.

Crawford prepped the committee to see a probable drop in the pension plans funded ratio – from about 82% to 80% – because of the five-year window used to book losses. The last of the losses in 2008-09 will be on the books this year, but after that the city would expect to see improvement every year, Crawford said. This most recent year, the pension fund had an 11% return, which is four points better than the 7% return the fund assumes for planning purposes.

Two of the city’s funds were highlighted by Crawford at the Oct. 24 meeting as having potential difficulties associated with the GASB 68 standard – solid waste and the public market (farmers market). For the public market fund, Crawford floated the idea to the audit committee that it could be folded back into the city’s general fund, on analogy with the golf fund. Starting this year (FY 2014) the golf fund has been returned to general fund accounting.

The consensus on the audit committee was that the full city council should receive a brief presentation on the audit report – either at an upcoming working session or a regular meeting. [.pdf of final audit report released on Nov. 15, 2013]

Prior to new committee assignments to be made by the post-election composition of the city council, the audit committee consists of: Margie Teall (Ward 4), Sumi Kailasapathy (Ward 1), Sally Petersen (Ward 2), Stephen Kunselman (Ward 3), and Chuck Warpehoski (Ward 5).

This report includes additional description of the Oct. 24, 2013 city council audit committee meeting.

Two Sets of Statements

The only item on the audit committee’s agenda was to review the draft audit report. Chief financial officer for the city, Tom Crawford, first reviewed how the city did from an operating perspective last year. He stressed that the document being reviewed by the committee was a draft report.

Crawford reminded committee members that the audit report presents the city’s financial condition in two different sets of statements. One set is the government-wide statements, which use full accrual accounting for everything. Those statements are used for comparability across communities and give you a sense of how the city is doing over time, Crawford explained. The second set of statements is the fund statements, which are used for budgeting.

Government-wide Statements

On a government-wide basis, the equity – or what is now called “net assets” of the city – is about $1.058 billion, Crawford said. That’s an increase of about $28 million from the prior year, according to the final audit report. Most of that equity is tied up in fixed assets, he said, like streets and other assets – $890 million of it, according to the final audit report.

And of the $1.058 billion in net assets, the final audit report shows $81.7 million is “unrestricted.” Even though it’s “unrestricted,” Crawford explained at the committee meeting, that amount is still subject to the requirements of the funds containing the money. The water fund, for example, accounts for some of those unrestricted funds – and the water fund is restricted to water-fund type uses. Of the total amount of “unrestricted” funds, the general fund’s unassigned portion is $14.3 million – which is basically what it was last year. But it reflects a slight increase, from $14 million to $14.3 million, Crawford said.

The government-wide statements show that over time, the city is in a strong financial position and there’s a moderately positive momentum. There’s an increase of 3% in unrestricted net position, he said. “Government-wide statements indicate that Ann Arbor is financially healthy,” Crawford concluded, “and will continue to be so.”

Sally Petersen (Ward 2) asked about the city’s long-term liabilities, which the draft report indicated had increased by $11 million. Crawford explained that the debt for which the city’s general fund is accountable had increased by about $7 million – primarily due to the First & Washington parking structure project. That project had required $9 million of bonding, but the city had also had some “pay downs,” Crawford explained, reducing that $9 million to $7 million. The city had done some debt issuances – but off the top of his head, he thought they were all re-financing of existing debt in water and sewer bonds.

Street Millage Fund: Minimum Fund Balance Requirements

Sumi Kailasapathy (Ward 1) asked if the street millage fund was required to have one year’s worth of millage revenue as fund balance – possibly under the city charter or under an ordinance? Crawford responded to Kailasapathy’s question by noting the street fund showed $18 million in fund balance. He pointed out that $9 million had been spent out of the street fund last year, when it showed a fund balance of $25 million. The minimum requirement for fund balance in the street millage fund is $9 million, Crawford said – as a part of the city’s fund balance policy [that is, it's not a city charter or an ordinance requirement].

From left: CFO Tom Crawford, Sumi Kailasapathy (Ward 1), Sally Petersen (Ward 2).

The logic behind that $9 million figure is that it’s equivalent to about one year’s worth of millage revenue, Crawford said. Because that millage is renewed every five years, maintaining one year’s worth of millage revenues in the fund balance gives the city some flexibility in case the millage isn’t approved by voters when it’s up for renewal. Kailasapathy observed that the $18 million currently in the street millage fund balance equated to two years’ worth of millage revenue, so the city had twice the required amount. Crawford responded by saying, “You do, and you don’t.”

The fiscal year ends in the middle of the construction season, Crawford explained, so there’s fund balance that is shown, but there are ongoing projects that are not yet closed out. It doesn’t get booked until a project gets closed, he continued. So a portion of the street millage fund balance, above the $9 million, is really just a matter of timing, he said.

Kailasapathy wanted a rough estimate of how much in additional, as yet unclosed projects would “hit” this year.

Crawford indicated that he’d need to ask other staff. He based a rough guess on the kind of fund balances the street millage fund typically showed before money was conserved in anticipation of possibly needing to pay for a substantial portion of the East Stadium bridges repair out of that fund. He ventured it could be $3-5 million of projects that would be paid yet. He felt that going forward, the kind of fund balances the council could expect to see in the street millage fund would be in the neighborhood of $10 million to $13 million.

General Fund

Crawford noted that while the city’s general fund balance had increased by around $800,000, that compares with a FY 2013 budget that had planned to use $1.6 million from the fund balance. So that was about “$2.4 million in good news versus budget,” Crawford concluded. He’d reviewed that amount to look at some of the variances, he told the committee. About half of the good news was recurring items, he said. So about $1.3 million of that better performance are things that he would expect to continue going forward.

For example, state shared revenue came in higher than budgeted – by about $500,000. But about $1.1 million of the “good news” was for non-recurring items, he cautioned. “I would say it was a very good year for us; we didn’t use the fund balance we’d planned.” He recommended that the city try to have about $1 million to $1.5 million of good news each year, because the city needs fund balance to pay for non-recurring items, he said.

Responding to positive comments around the table from committee members about the $2.4 million better-than-budget performance, Crawford cautioned that “I’m not crazy about the versus-budget comparison.” That’s because the budget is always going to be higher than actuals, he said.

But Stephen Kunselman (Ward 3) pointed out that in the two-year budget planning, the projection for FY 2015 had been for a shortfall. So Kunselman ventured this year’s outcome would help balance that out. Crawford’s response: “Yep.”

Mark Kettner, the auditor, also pointed out that the value is in having a conversation about it. He ventured that you’d typically estimate low, particularly on items like state shared revenues, but you’d usually be realistic on the property taxes.

Crawford countered Kettner’s remarks by saying that in his view, the city was not budgeting that conservatively any longer. He said he was actually trying to hit the budgeted numbers. There are some council policies that will create good news, he said. The parks fairness resolution, for example, meant that the parks department got extra money this year. The parks department didn’t have plans to spend that, but the parks department might need those resources in the future. In a dry year when less mowing was required, maybe they wouldn’t need it, but that extra amount might be used in a future year, he said.

Kettner pointed out that on revenue items, charges for services were almost $400,000 less than budgeted. Fines and forfeitures were $300,000 less than budgeted. Investments were off by $400,000. So on the revenue side, that was offset by the increase in the state shared revenue increase. All of it had been made up on the expenditure side, he explained. Some of that is likely simply delayed spending.

Crawford offered some detail on the lower-than-budgeted fees for services. Not as much revenue was received as had been budgeted for fire inspection fees, he explained. Parking ticket revenues were down $200,000, he continued. About $700,000 had been budgeted for bond user fees, but those fees wouldn’t be collected because the city was using some state financing tools.

Committee members were interested in knowing why parking ticket revenue was under budget. Crawford indicated that parking ticket revenue had been trending down for the last couple of years but had stabilized. He attributed the lower numbers to some vacancies, saying he thought community standards was down one or two people over the last year, so they’re not writing as many tickets.

On the expenditure side, Crawford continued, the city never knows how many people are going to retire. And when they retire the city has to pay out their leave balances. Fewer people retired than the city forecasted last year, and that amounted to $500,000 just for that item. For some items you use your best guess, and it doesn’t work out, he said.

More General Fund

The golf fund, which had been budgeted for about a $500,000 subsidy, turned out to require $200,000 less subsidy than that, Crawford said.  That won’t be an issue in the future, he noted, because the golf fund has now been folded into the general fund for FY 2014.

The dangerous buildings fund – a $250,000 allocation that the city’s building official Ralph Welton can tap to demolish blighted properties – had not been spent down, Crawford said. That shows up as “good news” versus the budget, he said. Kunselman interjected that the fund is meant to be self-replenishing, as costs are recovered from property owners, and that the council won’t be adding money to that fund.

Crawford allowed that was accurate, but for this year, a certain amount had been planned to be spent and it wasn’t spent – that’s why it showed up as “good news.” Kunselman responded by saying, “The fact that he didn’t spend it is a problem.” He said he knew of some significantly blighted properties that needed to be torn down. Kunselman asked if there were any houses torn down and any liens paid back. Crawford wasn’t sure, but did indicate that the city had finally gotten the Michigan Inn situation settled this year. [That property is located on Jackson Road, on the city's far west side.]

Second floor bathrooms in city hall are being renovated.

There was a delay in the asbestos remediation and handicapped accessibility work in the city hall bathrooms, Crawford reported, so that work had shifted into FY 2014 – about $300,000. There were a number of items like that, he said. A brief discussion ensued about which bathrooms on the second floor were now open and which were under construction.

Summarizing the general fund condition, Crawford said, “The general fund had pretty much a year like you’d hope it would.” The year ended with an unassigned fund balance of $14 million, or about 18% of expenditures – and 18-20% of expenditures is where the fund balance should be, he said. “So we’re really in a good spot.”

Enterprise Funds

Reviewing the enterprise funds, Crawford noted that the water and sewer funds have very large fund balances – $81 million and $111 million. But most of that is tied up in capital assets, he explained. The water fund has about $12 million in unrestricted funds and the sewer fund has about $18 million. For both of those funds, the minimum fund balance is about $4 million, Crawford said.

The amounts are greater due to the rate smoothing that the city uses, where a 3-4% increase is applied each year – so the fund balance will build up and then go back down. In addition, about $20 million in capital projects are planned for each of those funds, Crawford said. Those two funds are pretty much on track, he said. They show an income of $6-7 million.

Turning to the golf course and the airport funds, Crawford noted that both funds showed a slight “deficit” – which was the unassigned deficit. If the assets of the funds were included, then there’s not a deficit, he explained. During the last year, the city was required to create a deficit elimination plan for the airport fund. Now, however, Crawford reported that the state recognized that the state’s definition of “deficit” needed to change to reflect the actual viability of a fund. So the state had issued a new standard back in December 2012, he said.

At this point, it wasn’t clear if a deficit elimination plan would be required for the airport. He described the fund as “holding its own,” saying that it made some money last year. It’s currently showing a deficit because of the way the city books a loan that was made to the fund, he said. “I’m not concerned about it, from that perspective,” Crawford concluded.

However, Crawford cautioned that GASB (Governmental Accounting Standards Board) 68 is coming and that’s going to be something that might challenge the city. GASB 68 will be part of the council’s budget discussion, Crawford said. It’s a new accounting standard for pensions, he said.

Kailasapathy inquired about the municipal service charge that’s applied to the different enterprise funds – water compared to golf, for example. For the water fund, personnel services were about $6.6 million and the fund had about $400,000 in municipal service charges – the “overhead” that’s allocated. She allowed there wasn’t a 1-1 correlation between personnel charges and the municipal service charge, but the amount charged for the golf courses looked disproportionate.

Crawford said that issue had been discussed in connection with the golf task force. The MSC calculation is done by an outside consultant, he said, and it’s based on the best metrics the city can get. The golf fund employs a lot of temps, he said, so there’d be significant allocation for recruiting and human resources – more so than the water fund, which has low turnover. For golf, the MSC will disappear anyway, he said, because the golf fund is being folded into the general fund.

Kailasapathy asked why the solid waste fund showed such a large fund balance – $11 million. Kettner noted that property taxes for an enterprise fund like the solid waste fund are not recorded as operating revenue. Rather, it shows up as non-operating revenue. By its operations alone – its fees as revenues against its expenses – the fund does show a loss. But that’s covered by the property taxes. So it’s “substantially break-even,” Kettner concluded. He described it as an example of the difference between accrual and modified accrual accounting. Crawford noted that the solid waste fund is the only enterprise fund that receives property tax dollars.

Enterprise Funds: Public Market Fund

Crawford also drew the committee’s attention to the public market fund, which has an unrestricted reserve of $485,000. It has lost money, however, he said. That fund is one that needs some attention this next budget year, Crawford said. “It’s borderline, so we need to look at that one in our next budget discussion.”

Kunselman asked if the market fund – which is associated with park activities – could be compared to the golf enterprise fund as far as being general fund activities that are accounted for in an enterprise fund.

Crawford allowed that there were many analogies between the market fund and the golf fund. The market fund is a parks-type activity that is the only enterprise fund that the parks system has, he said. “It’s not quite there in the long term, particularly when GASB 68 comes.” Kunselman observed that the farmers market is in the Ann Arbor Downtown Development Authority district, quipping: “Imagine that!”

The stormwater fund shows about $16 million in fund balance, Crawford. Solid waste has $27 million in its fund balance, he noted. The fund balance policy for the solid waste fund calls for $2 million, but he noted there are a number of issues associated with that fund that had been discussed in connection with last year’s budget. That fund has a significant GASB 68 issue, he added, and there are some liability issues with the city’s closed landfill.

Crawford said he wasn’t concerned about any of the funds, but noted that the market fund was one that deserved some attention.

Later, toward the end of the committee meeting, the conversation came back around to the market fund. That needs to be on our radar, Crawford said. Kunselman asked why it was put into an enterprise fund in the first place. Crawford said he had no idea, because it happened so long ago. 

Crawford said he wanted to discuss that with the public market advisory commission, because he doesn’t want to get out in front of that group. Teall indicated that the park advisory commission also should be kept apprised.

Part of the issue, said Crawford, is parking revenue. The new contract between the city and the Ann Arbor Downtown Development Authority – which transfers to the city 17% of the gross parking revenues of the public parking system – changes the allocation of parking revenue to the public market fund. But the real issue for the market fund, Crawford stressed, is GASB 68.

Petersen worried that putting the market fund into the general fund might mask the need for operational improvements. Crawford noted that the public market advisory commission and park advisory commission would apply scrutiny regardless of the fund.

[The public market advisory commission includes: Aimee Germain, David Santacroce, Jillian Lada, Karlene Goetz, and Lindsay-Jean Hard.]

Pension System, VEBA

The pension system investments had an 11% return last year. The system operates on an assumption of just a 7% return, so that was a “pretty good year for the pension system,” Crawford said. The system is funded at about 82%, he said. Because of the timing for the audit report and when the actuaries are finished with their work, he’d chosen to include the 2012 pension system numbers in the audit report, Crawford said. He was just now receiving the actuarial numbers as of June 2013, and that’s where the 11% will come through.

In general, the investment losses from 2008-09 roll through during a five-year window, and the last year of that will be FY 2015. So Crawford is expecting the percentage funded ratio to drop from 82% to around 80%. He said he thought that would be the low point, and after that the council would see improvement, reflecting the gains that had been realized since the 2008-09 down period. During that period, about 25% of market value had been lost, he explained, and that loss was recognized over a period of five years. The last year of that will be FY 2015.

On average, the city is about ready to hit the positive years that the pension system has enjoyed after that. The VEBA (Voluntary Employees Beneficiary Association) was not as severely impacted back in 2008-09, Crawford explained, because it didn’t have that much money in the market – as it was only funded at about the 35% level. So when the market went down, there wasn’t as much money to lose. The pension system, however, had been previously funded at 100%.

The VEBA funding policy and the actuals are in a really good position, Crawford said. “All you need is time,” he said, and the contribution policy will work so that “you will be funded one day.”

Crawford also mentioned the Ann Arbor housing commission, but noted that the housing commission situation was something that the council had been fairly well briefed on. [For background, see Chronicle coverage: "Work Progresses on Public Housing Overhaul."]

The Future

The audit report reflects an economic firming up of the city, Crawford said. Kettner noted that there’d been a recent management conversation, and he’d suggested that Crawford present the city’s own financial statements. Another thing they’d discussed was whether they’d like a presentation to the full council – from him and the CFO.

Crawford said that the council in the past would have committees dive into things and it would be passed along to the full council. About a possible presentation to the council, Crawford said: “If we did it, I’d liven it up a little bit,” but he quipped that it’d be “no more exciting than today.”

Petersen wanted a presentation from both Kettner and Crawford to the full council. There’d be balance if both presented the information, she felt. She told Crawford: “You’re a city guy and you’re always going to want to tell us good news …” Crawford countered by saying this was the first year he’d been able to deliver good news, quipping that the feeling was unfamiliar to him.

The committee then weighed having a presentation at a work session or a regular meeting. Kunselman said that he didn’t want a lengthy PowerPoint presentation. Crawford indicated that he could do a “one-pager” and be done in 10 minutes. Kunselman felt that would be appropriate. Committee members discussed how the audit report would be provided to all councilmembers.

Crawford noted that he’s focused on GASB 68.

Auditor’s Remarks

GASB 63 and 65 standards modified the terminology used in the audit report, Kettner told the committee. Instead of “net assets” for full accrual statements, “deferred inflows of resources” and “deferred outflows” are now used. And the term “net position” is used for the equity in the full accrual basis statement. In the modified accrual statement, which is the governmental accounting, the term “fund balance” is still used.

From left: Auditor Mark Kettner and Chuck Warpehoski (Ward 5).

Also, there are some new headings and some changes to the order. The opinion is no longer called an “unqualified” opinion. Instead  it’s an “unmodified” opinion. So the city’s audit this year will again be an “unmodified” or a “clean” opinion, Kettner said. That should be the expectation of management each year, he added.

The audit report includes an introduction, plus the basic financial statements and then the notes. Kettner walked the committee through the components of the report, including the Comprehensive Annual Financial Report (CAFR). He noted the statistical section is really interesting. He also pointed committee members to the section with notes: Why did the debt go up $9 million? It’s in the notes, he said.

The good news is that it’s only the end of October, he said. That’s about a month to a month and a half ahead of schedule for the audit. The first year of his firm’s service as auditor (last year) was more time consuming. He figured that in subsequent years, the timing would be similar or even earlier.

The management letter, like last year’s letter, includes three pages about the conduct of the audit. After the “auditor-ese” there’s “nothing there” of concern, Kettner said. The GASB 68 issue is “really really complex,” he said. It’s going to be a challenge for the city as well as for his auditing firm, Kettner said. The good news is that Crawford and accounting services manager Karen Lancaster are up to speed on the issue, he added. That’s a matter of “cake in the oven.”

There’s no attachment B, Kettner said, because there were no findings. No adjustments were made by the auditor that weren’t already identified by the city, he explained.

Management issues from last year had been addressed to the auditor’s satisfaction, Kettner concluded.

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David Helisek, at the podium, presented highlights of the audit report to the AATA board on March 21, 2013. (Photo by the writer.)

About the audit report, Plante Moran’s David Helisek told the board: “Hopefully, you found it somewhat boring.” By that he meant there were no material weaknesses or significant deficiencies to report. And his firm had struggled even to find suggestions for improvement in controls and processes. In the category of a suggestion was a recommendation to formalize a policy on user access to IT systems. And one question was left over from the previous year’s audit – on the legal basis of the AATA’s investment in heating oil futures as a hedge against possible price increases in diesel fuel. The AATA has inquired with the state of Michigan on that issue, but has not received an answer.

At the meeting, the board also rescinded a $119,980 contract it had authorized with PM Environmental – because of a failure on the AATA’s side to go through the standard procedure for bidding out the contract. The contract is for remediation of contaminated soil at the AATA’s headwaters on 2700 S. Industrial Highway. That contract will now be re-bid, and PM Environmental will have an opportunity to participate in that process.

In a final voting item on its agenda, the board authorized a four-month extension to the current pricing agreement the AATA has with Michigan Flyer – to provide AirRide service between downtown Ann Arbor and Detroit Metro airport. The extension will allow negotiations to take place on a new arrangement, which is being considered in the context of at least two factors. Ridership on the service, launched last year in April, has exceeded projections. And Michigan Flyer may be eligible for a federal grant that could increase the number of trips per day. The current service is hourly.

The board also heard a range of updates from its committees and CEO Michael Ford. Among the most significant was about a meeting scheduled for March 28 among representatives of Washtenaw County’s “urban core” communities that have, for the last few months, been engaged in discussions with AATA about expanded transit in a much smaller geographic footprint than the entire county.

FY 2012 Audit

The board was asked to accept the result of AATA’s fiscal year 2012 audit report. [.pdf of FY 2012 audit]

There were no significant deficiencies found in the audit, which resulted in an “unqualified opinion” from the audit firm of Plante Moran. A question remained from last year’s audit – about the legal basis for the AATA’s investments in heating oil futures. The AATA has inquired with the state of Michigan seeking a legal opinion on the issue, but has not yet heard back.

The auditor also had some suggestions for implementing a formal policy on user accounts for information technology (IT) systems.

The AATA’s basic financial picture at the end of FY 2012 was as follows:

2012
ASSETS
$17,109,000 Current assets
 37,094,000 Capital assets, net
 54,203,000 Total assets
LIABILITIES
  1,619,000 Current liabilities
  1,233,000 Noncurrent liabilities
  2,852,000 Total liabilities
NET ASSETS
 37,094,000 Invested in capital assets
 14,257,000 Unrestricted
 51,351,000 Total net assets
===========
$54,000,000 Total liabilities and net assets

-

The AATA operates on a fiscal year that runs from Oct. 1 through Sept. 30. The audit is due to be submitted to the state of Michigan within 180 days of the end of the fiscal year. That deadline translates to the end of March.

FY 2012 Audit: Auditor Presentation

AATA controller Phil Webb introduced auditors David Helisek and Alicia Davis of Plante Moran.

Helisek said it was great to be before the board again. He reminded the board that last year had been the first time he’d appeared before them. [Plante Moran was awarded the auditing contract at the board's Sept. 15, 2011 meeting.] On that occasion, he’d presented the audited financial statements for FY 2011. This year he was there to present the statements for FY 2012.

Helisek distinguished between the financial statements themselves, which are a comparative statement between this year and last year, and the communication to the board, which is charged with governance of the organization. The letter to the board, he noted, is a required communication under the auditing standards. He told the full board that he and Davis had met with the performance monitoring and external relations committee of the AATA board the previous day. The committee and the auditors had gone over the statements in detail for about 45 minutes to an hour, he said, covering highlights and answering questions from committee members.

The number one highlight, Helisek said, is the opinion. Plante Moran was once again able to give the AATA an “unqualified opinion,” he reported. That’s the highest level of assurance that an auditing firm can give to a set of financial statements, he explained. It means that the statements, as presented fairly, represent the financial position of the AATA as of Sept. 30, 2012. That’s the opinion that the AATA should strive for on an annual basis, he continued, and as a result of the audit procedures, it’s the opinion that Plante Moran had given.

Helisek also noted that the report included a supplemental schedule of federal awards. Any entity that receives and spends in excess of $0.5 million in federal awards during the year is required to have a federal compliance audit – to ensure that the federal awards comply with laws and regulations related to those specific federal grants. For the federal awards audit, he reported, Plante Moran also had given the AATA the equivalent of an unqualified opinion.

Helisek then turned over presentation to Davis, who went over the highlights of the financial statement. She began on page 6 of the report by looking at a comparative financial statement based on the prior year, but focused her comments on fiscal year 2012. For the fiscal year 2012, the AATA ended with just over $54 million in total assets. The majority of the assets held by the AATA, she said, are related to amounts invested in capital purchases – a little over 70% of the asset value, or $37 million. The total “current” assets are about $17.1 million, most of which is composed of cash investments and receivables. She pointed out that on a comparative basis, as of the end of 2012, grants receivable were a little bit higher than last year. She attributed that to a difference in timing compared to last year, and the way the grant money was collected. As a result, there was less money in the bank. She described it as a “collection pending” issue.

Moving from assets to liabilities, she said, the key highlight is that there is no long-term debt. She described that as “fantastic.” The AATA has about $14.2 million viewed as unrestricted – to be used at the AATA’s discretion. It’s important to be mindful of the fact that this includes property tax revenue, Davis cautioned, which is levied on July 1 every year. So while the AATA has some money in the bank, a large amount of that is already earmarked to get the AATA through the current budget year. She told the board that they were in solid financial position with some cash reserves, but reminded the board that some of that has “already been spoken for.”

On the income statement, Davis highlighted the fact that operating revenues were up about 13%, or $670,000 compared to the previous year. Total operating expenses were a little over $32 million. That reflected a roughly $3 million increase in operating expenses, she said. That had an impact on the operating loss compared year-over-year, she noted. The largest source of revenue consists of local and state revenue, she pointed out – totaling close to $22 million for fiscal year 2012. That total did not include capital amounts that are received from the federal and state government.

The change in net assets, before considering any capital contributions, was roughly negative $5 million. There was a significant capital contribution received during the year – about $10.5 million, most of which was investments in the AATA’s fleet. She estimated that about 98% of that was funded by federal and state sources. When the capital contribution is added to the equation, the result is a net change in the net asset figure of about positive $5.6 million for the year. Summarizing the year-to-year comparison, Davis said AATA started out at $45.7 million and wound up with $51 million in net assets at the end of the year.

Moving to page 8, Davis reviewed the statement of cash flow. She highlighted the third line from the bottom, which indicates a net decrease in cash of about $2.2 million. She assured the board that this simply relates to the fact that some of the cash had not “come in the door” before the end of the fiscal year. Because the receivable balance was higher, the cash inflow was lower. She described the rest of the statements as mostly boilerplate language, which does not change from year to year. There are some informational schedules that the state requires to be included – but Plante Moran does not audit that portion of the report.

Davis then moved to the federal awards audit. She noted that pages 40 and 41 were essentially another version of the opinion on the basic financial statements. On page 42 there is an opinion on the federal awards audit, which is also clean, she told the board. Everything had been done properly and in accordance with all the rules and regulations. On page 44 she highlighted the total federal awards of about $11.6 million, which was a significant increase compared to the $5 million spent last year. Much of that she attributed to investments in the fleet.

Davis pointed out that on page 46 is a summary of all the results – on the financial statements and on the federal awards audit. “This is the best that it could look,” she told the board. There was an unqualified opinion on both audits, with no material weaknesses or deficiencies on either audit.

Audit: Preliminary Board Discussion

Board chair Charles Griffith invited questions from the board.

Board treasurer David Nacht reported that he’d had some conversation with the auditors before the meeting. He told the auditors that Plante Moran is a well-respected audit firm – which audits other transit agencies, as well as other governmental entities, nonprofits, and businesses. Obviously, Nacht continued, the opinion on the audit was unqualified, which means that the AATA is doing what it is legally supposed to do, and is in accordance with the accounting standards that apply to a transit authority.

But Nacht wondered about best practices. Based on the audit firm’s experience with other entities, he wanted to know what their overall sense was. “Could we use some work? How do you feel about our entity?” Davis told him that they always had an eye out for suggestions they could make to their clients. As they do the audit, reviewing internal controls and really digging into things, they always look for recommendations they could make to the board. “I tell you, we had a really tough time coming up with anything, because you guys have some really sound internal controls, checks and balances in place,” Davis said.

She noted that there were some minor suggestions that Helisek would cover – but it had been tough to come up with those suggestions. In about 95% of the audits done by the firm, there is a third letter that’s issued, which is a report on internal controls, including a report on significant deficiencies. It’s rare that they would not find something, she told the board – because there are just so many transactions that go through an organization. But there was no deficiency letter for the AATA, she noted.

Audit: Additional Presentation

Helisek returned to the financial statements and the net asset number. Of the multiple components in the net asset figure, the most significant is the number of capital assets, he said. A lot of that is the fleet. So around 75% of it is capital, not liquid, and not something that the AATA can spend money on for operations. He also reiterated the point Davis had made about property taxes, which are reported as revenue as of Sept. 30. That means the collection cycle does not come around for another nine months. So you have to keep that in mind, he said – not only looking at the audit, but also as the AATA assembles its budget on an ongoing basis.

Related to the federal awards audit, the two major programs the auditors tested covered about 97% of all the AATA’s federal expenditures. Helisek allowed that they don’t have a choice on what they audit, but he did observe that 97% is an extraordinarily high coverage level for this year’s audit.

Helisek reminded the board that the previous year the accounting firm had recommended an adjustment to the way property taxes are reported. There’d also been some other suggestions last year that Plante Moran thought the AATA should implement. This year’s letter is pretty boilerplate, he said. There’s nothing really remarkable to point out in this year’s letter. “Hopefully you found it somewhat boring. Boring letters are good letters,” he said. During the course of the audit, nothing rose to the level of a significant deficiency in terms of the internal control structure. The AATA is living by the control system and is able to produce a financial statement that merits an unqualified opinion, Helisek concluded.

Helisek told the board that he and Davis were excited by the fact that the one main suggestion they had made last year had been implemented by the AATA. That suggestion related to Public Act 217 of 2007, which requires quarterly reporting of investment activities to the board. It’s his understanding that as a result of that suggestion, an investment report is now presented quarterly to the board.

This year the one suggestion that Helisek had to report to the board related to general controls for information technology (IT) user accounts. In terms of best practices, he suggested a formalization of a policy related to adding, modifying, and terminating user rights in the system. The existing policy is adequate that an unqualified opinion could be issued for the audit, he said. But he suggested a formal policy that included the handling of user rights.

Audit: Additional Board Discussion

During question time Eli Cooper noted that a question had been raised in the report about the AATA’s policy on investing in heating oil futures. He wanted to know if the AATA had yet heard anything from the state of Michigan that would help settle the issue. Controller Phil Webb told Cooper that no reply had yet been received.

Board treasurer David Nacht took the opportunity to explain that the practice of investing in heating oil futures have been used for quite some time by the AATA. The futures are purchased as a hedge – just as farmers would use the options market, he explained. Nacht described the strategy as having been quite successful. The board is keenly aware of the question about whether this is allowed under the state of Michigan’s regulations. The AATA has made the case that it is not gambling, but has asked for a legal opinion, Nacht said. He was comfortable as treasurer that it’s definitely a prudent financial practice. And he hopes that the state will confirm that the practice conforms with regulatory practices as well.

Outcome: The board voted unanimously to accept the audit.

Audit: Current Operations Report

Reporting out from the board’s performance monitoring and external relations committee, Roger Kerson presented highlights from the monthly operations statement. He noted that the new advertising contractor is performing better than the previous one. From the notes to the monthly statement:

Advertising [revenue] is over budget for the year by $111,000. CBS Outdoor, our new bus advertising contractor, has been paying us our annual minimum on a monthly basis. In February, we recorded the amount $74,800 earned during the 5.5 months of the contract, but not yet paid. We will receive this amount (and more) in September 2013 at the end of the 1st contract year.

Revenue from University of Michigan passengers through the MRide program is not as great as expected, Kerson reported. UM ridership is not dropping, Kerson explained, but it’s not growing as much as projected. According to the notes in the monthly report, the original ridership projection was revised only after the budget was adopted, and the unfavorable difference for the year is projected to be $160,000.

Kerson also noted there’s a gap in the reserves of about $300,000. At the Feb. 21, 2013 board meeting, it was reported that AATA is operating with a level of unrestricted fund balance that equates to about 2.88 months of operating expenses. Board policy is to keep a minimum of a 3-month reserve on hand.

By way of background, the AATA’s portion of the $166 million in state operating assistance took a roughly $800,000 dip last year – compared to what AATA expected at the time the AATA set its budget. The reduction in funding relates to the way the state’s formula applies when spending is reduced by other transit agencies in the AATA’s category.

The AATA is hopeful that the “placeholder” bill SB 126 would eventually restore the $800,000.

Kerson noted that AATA staff have been directed to come up with a contingency plan in the event that the legislature does not act as expected.

AirRide Airport Service

The board was asked to extend for another four months the current pricing agreement it has with Michigan Flyer to provide bus service between downtown Ann Arbor and the Detroit Metro airport, known as AirRide.

AirRide Weekly Boardings: April 2012 through March 2013.

The current agreement has a yearly not-to-exceed cost of $700,000 per year, running for two years starting April 1, 2012. As the second year of the agreement is approaching, Michigan Flyer has indicated a willingness to renegotiate the arrangement in the context of a Transportation, Community, and System Preservation (TCSP) grant that Michigan Flyer might be awarded. The grant could support four additional trips from East Lansing to the airport, which would also stop in Ann Arbor.

The agreement the board was asked to approve at its March 21, 2013 meeting will extend the current pricing arrangement until the negotiations on the options offered can be completed. The cost during the four-month extension is not to exceed $230,000, based on current annual costs.

The weekly ridership for the hourly service between Ann Arbor and Detroit Metro airport now averages more than 1,000 passengers a week, with some weeks reaching 1,400 riders.

AirRide Airport Service: Board Discussion

Reporting out from the performance monitoring and external relations committee, Roger Kerson noted that the AATA is involved in renegotiating the contract for the AirRide service with Michigan Flyer. There’s an open question about whether Michigan Flyer will receive a federal grant, so there’s not enough information right now to renegotiate the contract for a full year, Kerson said. That’s why the proposal before the board was to extend it just for four months. He said it seemed like a good idea all the way around.

He noted that after almost a full year of operating the AirRide service, it is now possible to assess more completely how it’s working out. About 23,000 people had ridden the service at a net cost of Ann Arbor property tax dollars of around $80,000, he said. Kerson concluded that the expansion of service between Ann Arbor and Detroit Metro airport was being done in a very cost-effective way.

And during his oral report to the board, CEO Michael Ford provided recent ridership numbers for the AirRide service. In connection with the spring break for University of Michigan, 1,476 rode the service during the week of Feb. 24. And 1,438 people rode the service the following week of March 3. Ford indicated that the AATA was pleased with the progress and wanted to continue the working relationship with Michigan Flyer for that airport service.

When the board reached the AirRide item on the agenda, Ford described the AATA as in the middle of negotiations with Michigan Flyer. He noted that there is a grant that Michigan Flyer might receive, but it’s not yet clear whether the grant will be awarded. The AATA is also working on different service-delivery scenarios with Michigan Flyer to see if anything can be changed to make it most effective in the future. Ford felt that a four-month period for a contract extension would be helpful to achieve that.

Board treasurer David Nacht observed that the AirRide contract is a transaction where money is not only spent, but revenue is also received. He noted the board policy is that a vote must be taken on any contract that is more than $100,000 – and the policy applies even if there is offsetting revenue.

Nacht picked up on the optimistic figure that Roger Kerson had given earlier in the meeting about 23,000 passengers in the first year of service at a net cost of $80,000. Nacht said that in general terms, AirRide is not only carrying a lot of people; it was also a useful and invaluable component of the financial health of the AATA going forward, he said.

Outcome: The board voted unanimously to approve the four-month extension.

Soils Contract

The board was asked to rescind the award of a $119,980 contract with PM Environmental – because of a failure on the AATA’s side to go through the standard procedure for bidding out the contract. The contract is for remediation of contaminated soil at the AATA’s headwaters on 2700 S. Industrial Highway.

The board had originally approved the soil remediation contract at its Feb. 21, 2013 meeting. That action essentially extended the scope of work of the contract that PM Environmental already had for the site assessment work. However, the evacuation and remediation work was supposed to be bid out separately. From an AATA staff memo:

AATA processes require that a second RFP be issued for the soil remediation, to ensure full and open competition. AATA, therefore requests the Board to rescind this unexecuted contract with PM. AATA has notified PM with our intent to issue a new RFP so that they will not begin any work or incur any costs. AATA will publish a new RFP, to which PM is free to respond.

The remediation activity dates back to 2010, and will address an in-ground gas leak that was discovered when the AATA upgraded a fuel tank monitoring system. A final assessment report (FAR), based on monitoring wells and ground water sampling, was filed with the Michigan Dept. of Environmental Quality on Dec. 15, 2011.

The costs for the work will be reimbursed by the AATA’s insurance carrier, Chartis, which is a subsidiary of American International Group Inc. (AIG). The AATA’s deductible for its policy was $25,000, which the AATA has already expended.

Soils Contract: Board Discussion

Reporting out from the performance monitoring and external relations committee, Roger Kerson said, “I guess we goofed on the soil remediation contract.” There was testing and analysis, and a rebid should have been completed before the remediation was actually done, but the AATA had not done that, he said.

When the board reached the soil remediation contract item on the agenda, CEO Michael Ford reported that there was a two-step process that was not followed – but the AATA had caught it in time, before any contracts were executed. The AATA needed to go back out and open the contract for a competitive bidding process. Ford noted that some checks and balances didn’t happen internally that should have happened. For that reason, the contract needed to be rescinded. The bottom line was there was a misstep, he said, it had been caught, and steps have been taken to ensure that the appropriate checks and balances would apply in the future to avoid the need to rescind contracts.

Outcome: The board voted unanimously to rescind the contract.

Future Transit Planning

Two future initiatives factored into comments and reports during the March 21 meeting: (1) a reduced-scope effort to expand AATA services in the communities adjoining Ann Arbor; and (2) the formation of a four-county regional transit authority (RTA) during the state legislature’s lame duck session of December 2012.

Future Transit Planning: Urban Core Communities

By way of background, the AATA had led an effort to expand the governance and funding base for the AATA to a newly incorporated transit authority that would cover all of Washtenaw County. But the Ann Arbor city council voted to opt out of the newly incorporated Act 196 authority late last year – effectively bringing to a close that particular approach to expanded transit services in Washtenaw County.

However, the council gave direction to continue discussion with several communities immediately adjacent to Ann Arbor. The AATA has engaged in talks with communities about a new transit authority with possible members to include the cities of Ann Arbor, Ypsilanti, and Saline, as well as the townships of Pittsfield and Ypsilanti. Involvement with the townships of Superior and Ann Arbor is also a possibility.

Since mid-November 2012, the AATA has been working under the direction of the Ann Arbor city council’s resolution [passed on Nov. 8, 2012] and has been focused on planning expanded services in the “urban core communities.” That has included meetings with elected representatives of those communities. One recent meeting held on March 16 included Ann Arbor city council representatives as well as representatives from Ypsilanti Township.

Future Transit Planning: Urban Core – March 28

CEO Michael Ford reported at the AATA’s March 21 board meeting that staff are working to finalize the agenda for a meeting of urban core community representatives on March 28 starting at 5 p.m. at the Pittsfield Township Hall, 6201 W. Michigan Ave. The agenda will include a financial analysis, a benefit analysis, and responses to sidebar issues raised by elected officials over the past few months. Three service themes will be presented to facilitate discussion and decision-making among urban core elected officials, Ford said. Daniel Cherrin, from North Coast Strategies, will provide pro bono facilitation on March 28, Ford said.

During question time, board chair Charles Griffith asked if the meeting scheduled for March 28 has been publicly noticed. Ford indicated that the urban core partners are helping with that effort. Mary Stasiak, AATA manager of community relations, reported that the communication had been done through individual websites and newsletters. Ford indicated it would be an open meeting.

Roger Kerson raised the question: What would happen if more than four AATA board members (a quorum) attended? Some back-and-forth – including some additional discussion at the end of the meeting – established that if more than a quorum of any AATA board members attended, the standard Michigan Open Meetings Act requirements would be followed, including a formal agenda that included public commentary. Added on March 23, 2013, after initial publication: [.pdf of March 28 meeting materials]

Future Transit Planning: Telling D.C. About It

During his oral report to the board, Ford reported that in late February he had traveled to Washington D.C. He met with Michigan Sen. Debbie Stabenow, Congressman John Dingell, and staff members of Sen. Carl Levin. He’d also met with Michigan Gov. Rick Snyder’s representatives in Washington, and with Peter Rogoff of the Federal Transit Administration.

Ford told the board that in meeting with those people, he’d highlighted the record ridership AATA had shown for the 2012 calendar year, and explained how AATA is transitioning from countywide transit master planning to a more narrowly focused effort on the “urban core.” Ford noted that he had also continued to meet with local area and community leaders to discuss the urban core to support expanded fixed route and commuter service.

Future Transit Planning: Urban Core – Title VI

During public commentary, Jim Mogensen offered a perspective on the “urban core” process. The desire to preserve, improve, and expand transportation service, he noted, is about preserving, improving, and expanding AATA’s service, not the service of the partners. And that’s why he felt the process needed a Title VI analysis. He told the board that he was glad that the March 28 meeting would be open to the public – but he hoped that any documents related to the meeting could be made available in advance, noting that the meeting location is not served by public transit.

Related to Title VI, during his oral report to the board, CEO Michael Ford followed up with some issues raised at the previous board meeting. Regarding the Title VI requirements from the Federal Transit Administration, he summarized by saying that the AATA had been given a due date of Nov. 1, 2014 to submit documentation to the FTA to demonstrate compliance with Title VI – that there is no discrimination on the basis of race, color, national origin, low-income persons, or persons with limited English proficiency.

Future Transit Planning: RTA

Legislation authorizing a southeast Michigan regional transit authority (RTA) was passed late last year. The geographic area includes the city of Detroit, and the counties of Washtenaw, Wayne, Macomb and Oakland. On the RTA front, Ford reported at the AATA board’s March 21 meeting that staff had met with the two Washtenaw County appointees to the board – Liz Gerber and Richard Murphy – to discuss the mechanics of state funding and the need to establish an understanding of how the funding process would work between the AATA and the RTA.

AATA staff had also met with Shanelle Jackson, the Michigan Dept. of Transportation director of outreach and strategic relations for the RTA, as well as with representatives from the Detroit Dept. of Transportation and SMART – as part of the AATA’s effort to further AATA’s outreach with RTA partners. Ford had met with Paul Hillegonds, the governor-appointed, non-voting chair of the RTA board. Ford had shared information with Hillegonds about the range of service the AATA offers, how the AATA is funded, the transit master plan and the urban core planning process.

According to Ford, Hillegonds expressed that it would be important for the RTA board to show that the RTA has value for the AATA, Ann Arbor, and Washtenaw County. Hillegonds gave some assurance that AATA federal funds are protected through separate urbanized areas – but understood that the AATA would like RTA board resolutions on several processes, including state funding, and the budget.

The RTA board will be holding a planning workshop on March 28, Ford reported. The first RTA board meeting will be held on April 10. Both are open to the public, Ford said. The RTA workshop will be held just before the AATA’s “urban core” meeting, so Sarah Pressprich Gryniewicz will be attending the workshop on behalf of the AATA and will bring back a full report, according to Ford.

Communications, Committees, CEO, Commentary

At its March 21 meeting, the board entertained various communications, including its usual reports from the performance monitoring and external relations committee, the planning and development committee, as well as from CEO Michael Ford. The board also heard commentary from the public. Here are some highlights.

Comm/Comm: Website

Ford reported that external testing on the website is now complete. Three focus group sessions had been held at the Ann Arbor District Library, and there are some other people that staff still wants to meet with. But feedback from the 20 participants will be used to address specific areas of focus. The launch is expected in May, although Ford indicated a bit of hesitation about specifying that May would be the month for the scheduled launch. [The project has taken longer than expected. The board had authorized the implementation of the new website at its Aug. 24, 2011 meeting.] Ford concluded with a seemingly less-than-certain: “You heard it here!”

Comm/Comm: Blake Transit Center

Due to the poor spring weather, Ford said, construction work on the new Blake Transit Center is about two weeks behind schedule. Additional bids include some for artwork, furniture, walkways, and redesign of bus shelters on Fourth Avenue.

Comm/Comm: AAPS

Ford reported that the AATA is continuing to work with Ann Arbor Public Schools on transportation solutions. This year, students in some areas are using AATA buses, with the school district paying the fare. Next year, students in additional selected areas could use existing AATA services. That would allow the elimination of some school bus routes, he said.

Comm/Comm: WCC, EMU

Ford indicated that an agreement is being worked on with Washtenaw Community College. The college has asked for a stop to be installed on the south side of its campus, and the AATA is working with the college to resolve that agreement by the end of the month.

Included in Ford’s written report to the board, but not highlighted at the board meeting, are discussions that are taking place between Eastern Michigan University and the AATA to implement a program similar to the University of Michigan’s MRide program, which allows university affiliates to board buses by swiping their ID cards, without paying a fare. The cost of the rides would be paid by EMU, just as UM pays for rides taken by its students, faculty and staff.

Comm/Comm: DDA Support

Ford reported that the Ann Arbor Downtown Development Authority had appropriated funds to support the getDowntown program and the go!pass program. [The vote to authorize $610,662 came at the DDA board's March 6, 2013 meeting.] Ford noted that DDA board members had deferred a decision on supporting the Canton and Chelsea express services right now – until they had a bit more information about how that service fit with the DDA’s mission.

Comm/Comm: WALLY

A possible north-south commuter rail service known as WALLY (Washtenaw and Livingston Railway) is currently in a phase of station design. [The AATA received a federal grant last year, at its Aug. 16, 2012 meeting, to proceed with station location design.] Ford described how the work on station location design is proceeding.

The project is currently undertaking station location studies for five communities: Ann Arbor, Whitmore Lake, Hamburg Township, Genoa Township and Howell.

Ford reported that he’d met with Ward 5 Ann Arbor city councilmembers Chuck Warpehoski and Mike Anglin to give them some advance information on WALLY station design. A robust public involvement process is being planned, he said, with a list of stakeholders being developed to include in the preliminary outreach.

Eli Cooper also reported from the planning and development committee that the station design planning work in connection with the WALLY project is now underway.

Comm/Comm: Washtenaw Avenue

Eli Cooper reported that the planning and development committee had received a presentation on Reimagine Washtenaw. He described it as a study to change the character and utility of the corridor that runs from the Stadium/Washtenaw split in Ann Arbor, five miles east to the city of Ypsilanti. It includes organizing land development into activity centers, he said. The project also looks at aligning transit services with the activity centers and ramping up the level of transit service.

The AATA is critical to the success of the Reimagine Washtenaw program, Cooper said. There was some discussion of a grant award to the program for a travel demand management study. Smart Growth America has come in and is providing particular expertise and guidance to several large business operations along the corridor, on how to apply transportation management strategies, Cooper said.

Comm/Comm: Bike Share

Reporting out from the planning and development committee, Eli Cooper said the committee had received a brief presentation from the Clean Energy Coalition on an anticipated bike share program. Cooper characterized the interaction at the committee meeting as “good dialogue,” saying that AATA staff had been asked to make a recommendation to the committee for its April meeting.

The CEC is seeking support for the bike share program from the University of Michigan, the city of Ann Arbor, the Ann Arbor Downtown Development Authority and the AATA.

Comm/Comm: Route 12A, 12B Service Changes?

Reporting out from the performance monitoring and external relations committee, Roger Kerson said that of the current service changes being considered, the one involving the most passengers relates to Routes #12A and #12B. The idea would be to arrange the scheduling so that the routes are not running at the same time – with the idea that better coverage could be achieved.

Comm/Comm: LAC Report

Rebecca Burke reported from the AATA’s local advisory council (LAC), a group that provides input and feedback to AATA on disability and senior issues. At the council’s most recent meeting, Clark Charnetski had given a background presentation on the regional transit authority (RTA), she said. And Richard Murphy, one of two Washtenaw County appointees to the RTA board, has been invited to the next meeting of the LAC. They’re waiting to see if he’ll be able to attend. The group had also received a presentation from Nick Sapkiewicz of the Washtenaw Area Transportation Study (WATS).

Comm/Comm: Misc. Public Commentary

Thomas Partridge addressed the board during public commentary at the conclusion of the meeting, calling on them to expand transit. He ventured that millions of dollars have been spent on studies and surveys – surveys that have indicated a positive reaction on the part of the public to expanded transit. He accused the board of undertaking a strategy to expand transit countywide that it knew was doomed to failure. He complained about setting up the March 28 meeting of the urban core communities out of sight of the Community Television Network.

Partridge’s turn came at the end of the meeting after board chair Charles Griffith had checked for additional speakers after Jim Mogensen had addressed the board. Griffith asked: “Anybody else?” Partridge responded with: “I am anybody else,” and then took the podium.

Present: Charles Griffith, David Nacht, Eli Cooper, Roger Kerson, Anya Dale.

Absent: Jesse Bernstein, Sue Gott.

Next regular meeting: Thursday, April 18, 2013 at 6:30 p.m. at the Ann Arbor District Library, 343 S. Fifth Ave., Ann Arbor [Check Chronicle event listings to confirm date]

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There were no significant deficiencies found in the audit, although a question remained from last year’s audit. One remark was made about the legal basis for the AATA’s investments in heating oil futures. The AATA has inquired with the state of Michigan seeking a legal opinion on the issue, but has not yet heard back. The AATA’s basic financial picture at the end of FY 2012 was as follows:

2012
ASSETS
$17,109,000 Current assets
 37,094,000 Capital assets, net
 54,203,000 Total assets
LIABILITIES
  1,619,000 Current liabilities
  1,233,000 Noncurrent liabilities
  2,852,000 Total liabilities
NET ASSETS
 37,094,000 Invested in capital assets
 14,257,000 Unrestricted
 51,351,000 Total net assets
===========
 54,000,000 Total liabilities and net assets

-

The AATA operates on a fiscal year that runs from Oct. 1 through Sept. 30. The audit is due to be submitted to the state of Michigan within 180 days of the end of the fiscal year. That deadline translates to the end of March. The board’s vote came at its March 21, 2013 meeting.

The AAAT’s audit firm is Plante Moran.

This brief was filed from the downtown location of the Ann Arbor District Library at 343 S. Fifth, where the AATA board holds its meetings. A more detailed report will follow: [link]

The original version of the letter had indicated three instances of an employee with a vehicle allowance also being reimbursed for mileage, and characterized those reimbursements as a “violation of city policy.” It was subsequently revealed that it was the mileage reimbursements of city attorney Stephen Postema that had caused the auditor to flag the issue.

But after further review – pushed by Postema and chief financial officer Tom Crawford – auditor Mark Kettner agreed that there was no written policy per se that disallowed the dual claims. Kettner is a principal at Rehmann, the city’s auditor, which is in the first year of a five-year contract.

But Kettner also noted that his original conclusion of inappropriateness was based on his view that the dual claims would be “illogical” whether a policy existed or not. Kettner also indicated in reaching his conclusion of inappropriateness that he had not reviewed Postema’s employment contract, which Postema and Crawford contend would have permitted Postema to claim mileage reimbursements in addition to the vehicle allowance.

Postema’s contract was altered last year, chronologically after the contested mileage reimbursements, so that his vehicle allowance was eliminated.

The new wording of Kettner’s letter omits the characterization of the mileage claims as a “violation” but still calls attention to the issue, and adds language to highlight the problematic character of the reimbursements – that “… in each instance the expense report was not subject to independent review and approval.”

Postema’s contract stipulates that his reimbursements for travel are to be made according to standard city procedures. And one new procedure recommended by Crawford in his written response to the auditor’s report would address the lack of independent review. The recommendation is to require that reimbursements claimed by the city attorney or the city administrator – who are the city council’s two direct reports – be approved by the chair of the council’s administration committee.

[.pdf of original letter] [.pdf of revised letter] [.pdf of Crawford's Jan. 24, 2013 response]

This brief was filed from the city council’s chambers on the second floor of city hall, located at 301 E. Huron. A more detailed report will follow: [link]

Sumi Kailasapathy (Ward 1) questioned CFO Tom Crawford’s conclusions about the travel and mileage policies at the audit committee’s Jan. 24, 2013 meeting. (Photo by the writer.)

Listed among other relatively minor matters in Rehmann’s report was a note identifying three instances of an employee who had claimed mileage reimbursement despite receiving a vehicle allowance. At a scheduled Dec. 20, 2012 meeting of the audit committee, the dual claims were described by Rehmann’s Mark Kettner as a “double dip.” Those claims were also cited in Kettner’s written report as a violation of city policy.

The Chronicle’s write-up of the auditor’s presentation late last year to the audit committee – which did not achieve a quorum on that occasion – included the result of additional reporting: Mileage claims made by city attorney Stephen Postema caused the auditor to flag the issue in his formal report.

But at the Jan. 24 committee meeting, Kettner revealed that he’d been convinced to change the wording of the note. The new wording will not indicate a “violation” of city policy. At the meeting, however, Kettner indicated that a note about this issue would still be included – with the exact wording yet to be settled. City CFO Tom Crawford’s written response to the auditor’s report includes email messages that show it was Crawford and Postema who made a successful effort to convince Kettner to alter the report’s wording.

The wording of Postema’s employment contract factored into arguments made by Postema and Crawford for a revision to the auditor’s report. When Postema made his reimbursement claims, his contract at that time provided for “travel” expenses in addition to a vehicle allowance. Postema’s vehicle allowance was eliminated late last year, as a result of his annual performance review. Also factoring into the argument for revising the auditor’s note was Crawford’s contention that the city’s written policies don’t provide clear guidance on the question.

However, at the Jan. 24 committee meeting, Sumi Kailasapathy (Ward 1) challenged Crawford on that point. [Kailasapathy was elected to the council in November 2012 – running a campaign that stressed her credentials as a certified public accountant.] She reviewed the logic and specific wording of each of the city’s relevant policies, with particular attention to the meaning of the word “travel” – and reached the conclusion that the mileage reimbursements had not conformed with city policy.

And even though Kettner has agreed to change the wording of the note in his report, Kettner wrote in a Jan. 18 response to Postema and Crawford: “… from a business practices standpoint, our conclusion (with or without the existence of a policy) was it would be illogical and, therefore inappropriate, to make mileage reimbursements to persons having a car allowance.” Kettner’s response also indicates that his conclusion of inappropriateness was not based on a review of Postema’s employment contract.

At the Jan. 24 meeting, Crawford interpreted the fact that he and Kailasapathy reached different conclusions about the appropriateness of the mileage claims as evidence that the written policies didn’t provide clear guidance.

Stephen Kunselman (Ward 3) seemed to reflect the general sentiment of the two other committee members present – Chuck Warpehoski (Ward 5) and Margie Teall (Ward 4) – in concluding that he didn’t think anyone had been trying to “game the system.” Kunselman indicated little enthusiasm for delving into the wording of Postema’s contract or existing city policies. He was more interested in making sure that the relevant policies would be revised and applied in the future – not just for the travel and mileage policies, but for the other issues identified in the auditor’s report.

Kunselman also indicated that he was keen to see the audit committee take a more active, engaged role – throughout the year, not just once a year on the occasion of the auditor’s report. The committee as a group also seemed favorably inclined toward adopting a more proactive approach. The committee’s extended conversation about the relationship of the city’s part-time internal auditor indicated that while the internal auditor would still report to Crawford, the audit committee would be looped into the ongoing issues that emerged throughout the year as they arose – instead of six months after they happened. It could result in meetings of the committee at other times besides the occasion of the annual auditor’s report.

That reflects a transition from the role that the audit committee has played as recently as two years ago. The committee did not meet at all during that year, even to review the FY 2010 auditor’s report – because audit committee chair Stephen Rapundalo declined to call a meeting. Kunselman complained at the time about the lack of a committee meeting. Rapundalo was not re-elected in 2011 – when he had faced Jane Lumm, who received more votes than Rapundalo that November.

Travel versus Mileage

The note in the auditor’s formal letter, previously conveyed to the city last year, reads:

Employee Expense Reports. We reviewed various employee expense reports to ensure reimbursements were properly supported and approved. We noted in three instances, that an employee was requesting and receiving mileage reimbursement while also receiving a car allowance, which violates City policy. After further inquiry, it was determined that the City became aware of this situation during the year and has since implemented procedures to address this issue.

Travel versus Millage: Background

As The Chronicle previously reported, a request of the city made under Michigan’s Freedom of Information Act revealed that city attorney Stephen Postema made three claims for mileage reimbursement, despite having a vehicle allowance. One was for a professional meeting in Grand Rapids, while the other two were for court appearances in Cincinnati and Lansing. [.pdf of city of Ann Arbor response to initial FOIA request] [.pdf of follow-up city of Ann Arbor response with additional, corrected data on vehicle allowance amounts]

Up until his performance review in November 2012, Postema’s employment contract provided for a vehicle allowance:

Section 2.14 Car Allowance. Employee shall receive a car allowance calculated at $330/per month.

The resolution approved by the city council as the result of the city attorney’s performance review – which included a salary adjustment upward that is just slightly less than the value of the car allowance – explained the elimination of the car allowance this way:

Whereas, The City Attorney has offered to eliminate his contractual car allowance of $330/month as of January 1, 2013, as has been done with the City Administrator’s contract;

Even though the “whereas” clause seems to invite the conclusion that city administrator Steve Powers also had a vehicle allowance specified in his contract, and that it was also eliminated in the context of a regular performance evaluation, that’s not the case. Previous city administrator Roger Fraser had such an allowance, but Powers, who took over the city’s top job in the fall of 2011, never had such an allowance in his contract.

The initial discussions of the city attorney’s performance review are handled by the council’s administration committee. It currently consists of Sally Petersen (Ward 2), Margie Teall (Ward 4), Christopher Taylor (Ward 3), mayor pro tem Marcia Higgins and mayor John Hieftje. At the time of Postema’s performance review, former Ward 2 councilmember Tony Derezinski served instead of Petersen. Higgins did not respond to an emailed query from The Chronicle asking if she was aware of the issue with Postema’s mileage claims at the time of Postema’s performance review. Hieftje responded to that same query saying he was not aware Postema had made mileage claims.

In his response, Hieftje also insisted that the current review of travel and mileage policies was not caused by Postema’s mileage reimbursements:

I should note that going forward there will be a clarification of city policy regarding mileage reimbursement. However, this was not triggered by Stephen’s being reimbursed but as an overall response to something that came up as a minor issue in a “clean” audit.

In an interview with The Chronicle on Jan. 11, 2013, Hieftje explained his written assertion in part with the idea that Postema does not report to the city administrator but rather to the city council. [Under the city charter, the city council hires and evaluates two positions – the city attorney and the city administrator.] From that, Hieftje concluded that whatever policy revisions might be undertaken now by city administrator Steve Powers would not affect Postema’s reimbursements, because Postema’s reimbursements would be governed by his employment contract.

However, Postema’s employment contract explicitly states that reimbursement is to be made under standard city procedures:

Section 2.2 Business Expenses. Employee is authorized to incur such reasonable budgeted travel, cell phone expenses, entertainment and other professional expenses as are necessary in the performance of his duties. The City will reimburse Employee for such expenses in accordance with standard City procedures.

Hieftje seemed unaware during the Jan. 11 interview that the city’s response to The Chronicle’s record request had linked Postema’s mileage claims to the auditor’s note. At the conclusion of the interview, after being shown the records, Hieftje conceded the connection between Postema’s mileage claims and the policy review.

Travel versus Mileage: Significance of the Note

Tom Crawford, the city’s chief financial officer, led off the Jan. 24 meeting of the audit committee by establishing some context for the auditor’s note. He referred committee members to a written response he’d provided them. [.pdf of Crawford's response to auditor's letter]

Crawford reviewed how the basic result of the audit, communicated in the SAS (Statement of Auditing Standards) No. 114 letter, had been essentially a clean audit with two deficiencies. This year the letter had included notes on other matters, of a type that Crawford said he wouldn’t normally expect to see: “I don’t usually look for these comments down here.” The letter typically includes things like a material weakness or other deficiencies, but this year the letter included some other matters, that in Crawford’s experience are usually mentioned orally to staff – the CFO or the city administrator.

Crawford’s portrayal of the notes in the letter is consistent with that of auditor Mark Kettner’s remarks about them – when he presented the report to two audit committee members on Dec. 20, 2012. From The Chronicle’s report:

Kettner described a hierarchy of problems that an auditor can find: deficiencies, significant deficiencies, and material weaknesses.

There are also “other matters” that an auditor is not required to put into writing, he said. But they have to be communicated at least orally, and you have to document who was told and what they were told. So Rehmann’s practice is to include other matters in the management letter, because it’s easier to write down the information.

On Jan. 24, Crawford indicated that typically, the staff just deals with the orally-communicated notes in this category. But because this year the notes were in writing, Crawford said, he wanted to respond in writing. He indicated that a response would be sent to the auditor as well. He wanted the committee to understand that “We take this stuff seriously.”

Crawford welcomed any comments the audit committee members had on the written response. He continued by drawing a distinction between “council policies” and “administrative policies.” Crawford was recommending that the policies be reviewed and he indicated that the revisions to the policies were included in the written response that he’d provided to the committee. He invited questions from the audit committee.

Travel versus Mileage: Definitions

Sumi Kailasapathy (Ward 1) led off questions by focusing attention on the second page of Crawford’s written response. It portrays a lack of consensus among city finance staff about the appropriateness of the mileage claims. But Kailasapathy focused on Crawford’s contention that the city’s written policies don’t provide clear guidance. From Crawford’s written response [emphasis added]:

In evaluating this issue, staff first looks to legal contracts as a guiding document and secondly to administrative policies for guidance. The above employee with 3 trips had an employment agreement (see attached) with the city at the time of travel that included two separate provisions for an auto allowance and for reimbursement of travel expenditures. A review of the travel & mileage policy (see attached APP #504 & #505) revealed they do not provide clear guidance on how to handle this situation. Some finance staff reasonably believed a mileage reimbursement appeared like the same expense was being reimbursed for twice and raised the issue to the CFO. Meanwhile some supervisors and administrators operated with the belief that the vehicle allowance was for ordinary and customary travel within the city/county but not for less frequent out-of-town trips necessary for travel, training, etc.

Kailasapathy indicated that she’d reviewed the administrative policy on travel and on employee mileage reimbursement. She quoted from Policy 505:

The City of Ann Arbor shall pay mileage reimbursement for authorized business travel when an employee uses their personal vehicle.

Kailasapathy said that for her, that sentence is unambiguous: If you use your personal car, then you will be provided reimbursement and that is called “mileage reimbursement.” But in Crawford’s description of the issue, he’d used “travel” repeatedly, Kailasapathy pointed out. That, she felt, was incorrect, because you could come to different conclusions depending on whether it’s considered mileage reimbursement or travel.

By way of additional background on the issue of travel versus mileage, in response to an initial request made by The Chronicle under the FOIA, the city of Ann Arbor did not produce any official “City of Ann Arbor Travel Expense Report” forms for the three mileage claims made by Postema. For other claims, however, such forms were produced. Because the wording of the request had been somewhat vague, The Chronicle made an additional request asking specifically for those forms, if they existed.

After additional back-and-forth with the city in connection with that request, The Chronicle was able to establish that “City of Ann Arbor Travel Expense Report” forms were not submitted for Postema’s claims. Instead, an electronic submission was used, consistent with reimbursement for mileage by city employees who use their personal vehicle for city business. In terms of the distinction Kailasapathy was drawing, the claims appear to have been considered mileage reimbursements, as a opposed to travel expenses. [.pdf of records associated with Postema's mileage claims].

Kailasapathy then appealed to the city’s travel policy, which defines travel in a way that she indicated is consistent with IRS rules, which includes the need to stay overnight:

2.2 General Travel Limitations – Subject to budget limitations, all employees are permitted to attend, subject to authorization by the service area administrator or his/her designee, City work-related overnight conferences, seminars, training, certification programs, continuing education, or other similar work-related educational or professional events. The number of employees from a service area allowed to attend the same travel function will be at the service area administrator’s discretion. Overnight travel will be used only for opportunities that cannot be achieved locally.

Kailasapathy said it’s important to be clear about what it means for someone to be using their personal vehicle. She contended that if an employee has a car allowance, then it is for operating that car – and to her that’s clear. She told Crawford she was disappointed that he was saying the city policies don’t provide clear guidance. She felt the guidance is clear – and that travel and mileage reimbursements are very clearly defined. If you have a car allowance and you’re asking for a car allowance, then you’re asking for the reimbursement for “one and the same thing.” Kailasapathy ventured that a car allowance is not “to park the car in front of your house to look pretty.”

Travel versus Mileage: Intent of a Vehicle Allowance

Earlier in the back-and-forth, Crawford had asked if Kailasapathy was drawing a conclusion about any employee who had a vehicle allowance – and whether “the vehicle they acquire” is still their personal vehicle. Crawford seemed to indicate a view that, to him, it’s reasonable to interpret the intended use of a vehicle allowance to be exclusively the acquisition of a vehicle, not including the operation of that vehicle for businesses purposes.

Responding to Kailasapathy’s “to look pretty” comment, Crawford again reiterated his position that a vehicle allowance was intended for acquisition of a vehicle, saying that if an employee uses their vehicle allowance to acquire a vehicle, that doesn’t make it a city vehicle. Because it’s still their personal vehicle, Crawford contended, the employee could be reimbursed for mileage. He then allowed that it’s at least not clear if an employee with a vehicle allowance could be reimbursed for mileage – because the mileage policy doesn’t mention a vehicle allowance.

Kailasapathy compared the situation to receiving a house as part of your compensation but still claiming rent as an expense. Crawford said he thought Kailasapathy was assuming that the purpose of the vehicle allowance is for the acquisition and use of that vehicle. Crawford asked her what she felt the point of the car allowance was. “Using your personal car to do business,” she replied, giving examples like going to court to defend the city in a lawsuit. Crawford responded by saying, “That’s interesting … that’s not written anywhere what the allowance is for.”

At that point Stephen Kunselman (Ward 3) said, “It’s an outright perk, basically – right? Monetary benefit, car allowance, no strings attached.” Margie Teall (Ward 4) seemed to chafe at Kunselman’s characterization of the car allowance as a perk, saying, “It’s a ‘perk’ if you want to call it that …” Crawford indicated that the vehicle allowance has been used in different ways by different city employees. He was trying to point out that Kailasapathy’s assumption – that the vehicle allowance was meant to cover the operation of a personal vehicle when it’s used for city business – is not recorded anywhere in a written city policy.

Crawford stated that the mileage reimbursement that Postema had been seeking was subject to his contract, which has two clauses that mention travel. At that point, Kailasapathy appeared ready to argue about whether the clauses in Postema’s contract on travel would, in fact, justify the mileage reimbursement. However, Teall indicated no enthusiasm for that kind of detailed debate: “You know, I don’t want get into a contract issue. … I don’t think we can have that discussion here.” Kunselman also indicated he didn’t want to entertain that discussion.

Kunselman came back to the auditor’s note that indicated there had been a “violation” of city policy. It wasn’t the role of the audit committee to interpret the city policy, but rather to have management address any unclarities. Kunselman said it sounded like there were a lot of changes being implemented with respect to car allowances. By way of additional background, in an email to The Chronicle published previously, city administrator Steve Powers wrote:

During the past year, I have removed vehicle allowances from the compensation for service area administrators.

The remaining vehicle allowances are for employees, such as property appraisers, where the use of personal vehicles with an allowance is more advantageous to the City than paying mileage or using a city vehicle.

Kunselman indicated he felt this was the right direction to go, but didn’t want to spend a lot of time looking back and getting bogged down.

Travel versus Mileage: Revision of the Letter

Kunselman was, however, interested in having the wording of the auditor’s letter revised, because Kunselman felt that the statement that there had been a “violation” of city policy was inaccurate. Based on the material provided in Crawford’s response to the auditor’s comment, auditor Mark Kettner had already agreed to revise the phrase that referred to a policy violation – as a result of a phone conversation he’d had with Crawford and Postema.

In Kettner’s written response to Crawford and Postema, he agrees that the phrase “violates city policy” is incorrect and acknowledges that he was not given Postema’s employment contract for review in reaching his conclusion that the mileage reimbursement was not appropriate. Kettner explained his conclusion this way:

As I also stated in our conversations, from a business practices standpoint, our conclusion (with or without the existence of a policy) was it would be illogical and, therefore inappropriate, to make mileage reimbursements to persons having a car allowance. This conclusion is in the absence of knowledge of an agreement that would reasonably identify that payment of both mileage reimbursement and car allowance is acceptable and appropriate.

The question the audit committee was disinclined to settle explicitly is whether Postema’s contract is an employment agreement that identifies payment of mileage reimbursement and car allowance as acceptable.

At the Jan. 24 meeting, Kettner indicated that he’d be willing to change the phrase “which violates city policy.” After “all the extra stuff that has occurred,” Kettner said he concluded that “there is not a policy per se that says ‘You shall not get a mileage reimbursement if you have a car allowance.’” But he would keep the note in the letter – because even though it involves a small dollar amount, it’s an issue involving policies, procedures and contracts, and he felt the city needs to address it and figure out what to do about it. That’s the whole purpose of it, he said.

In the context of the overall city audit, Kettner said, the mileage issue was really a tiny issue. Crawford indicated he felt that the city’s approach to identifying problems seemed to be working. Crawford indicated that there were differing views by city staff about how the policies should be interpreted, and the fact that he and Kailasapathy had different views on interpretation supported the idea that the policies weren’t completely clear. He said the issue had come to light during the audit – in a minor way – and whenever those issues come to light, the staff re-visits them. Teall added that the review of the policy had already started.

Travel versus Mileage: Recommendations

Recommendations by Crawford responding to the audit note on travel and mileage reimbursements include:

• Clarify and revise the city’s travel policy to reflect expectations for reimbursement when an employee receives a vehicle allowance.
• Clarify and revise the city’s travel policy to require travel reimbursement requests for the city administrator and city attorney to be approved by the Council Administration Committee Chairperson.
• Establish a vehicle allowance policy to clarify expectations for what a vehicle reimbursement is intended to be used for.
• Communicate these policy updates with staff and have Service Area Administrators responsible for ensuring consistent treatment across the organization.

Responding to a query from Kailasapathy, Crawford indicated he did not necessarily think that travel reimbursements for mileage should be tied in the future more explicitly to an overnight requirement – because it could create a perverse incentive for employees to stay overnight, thus incurring even greater expense to the city. Kailasapathy countered that whether the travel expense was appropriate or not was already subject to a supervisor’s review. In the case of the city administrator and the city attorney, Crawford pointed out, the recommendation is that their travel requests in the future be subject to review by the council’s administration committee.

Role of the Audit Committee

The travel and mileage issue took about 25 minutes of the Jan 24 audit committee meeting, which lasted about an hour.

In the remaining time, the committee discussed some of other items in Crawford’s written response. For example, they discussed the challenge of implementing regular password changes by employees, when they must log on to several different systems – the sheer number of passwords could result in a sticky-note strategy of recording passwords, which is also not desirable.

However, the main focus of the remainder of the meeting could be summarized as dealing with the future role of the audit committee. It was prompted by Rehmann’s observation about the way the city’s internal auditor reports:

We noted through inquiries of various City employees that the Internal Auditor organizationally reports through the Chief Financial Officer. We recommend that the City review this procedure and determine if this function would be more effective if the Internal Auditor reported directly to the Audit Committee.

But the consensus of the audit committee at the Jan. 24 meeting seemed to be that the internal auditor should not report in an organizational sense to the audit committee. That is, the city council would not want to explore adding a third employee – in addition to the city attorney and the city administrator – to the two they already supervise. But committee members felt that the internal auditor should be able to communicate to the audit committee, if the internal auditor didn’t feel comfortable communicating a concern to the chief financial officer or the city administrator.

The audit committee as a group indicated a desire to be kept apprised of information that comes to light in the course of the year. For example, Crawford noted that the city has an anonymous fraud hotline, and when tips come in through the hotline, they’re investigated – but he pointed out that not many tips come in. The audit committee would be kept apprised of those tips and the outcome of the investigation.

The committee also indicated a desire to meet again, well before next fall, to review how the recommendations from this year’s audit are being implemented. Chuck Warpehoski (Ward 5) seemed to reflect a consensus, however, that the committee did not want to distract the financial services staff from their current preparations for the budget.

In the shorter term, the audit committee will be meeting again before the next regularly scheduled city council meeting on Feb. 4, 2013. No date or time for that committee meeting has been announced. Audit committee member Sally Petersen (Ward 2) was not able to attend the Jan. 24 meeting, and according to some other members of the committee, the next meeting will give Petersen an opportunity to make sure her concerns are addressed.

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The Dec. 20, 2012 meeting of the city council’s audit committee, from left to right: Chuck Warpehoski (Ward 5); Mark Kettner with the auditing firm Rehmann; city CFO Tom Crawford; accounting services manager Karen Lancaster; Sally Petersen (Ward 2).

The auditor’s report concluded that the city’s financial statements are presented fairly and accurately – but as Kettner stressed, that was not meant to express an opinion on the city’s overall financial condition or anything about what a great place Ann Arbor is. “I never want somebody walking away who says, ‘The auditor said everything’s okay,’ because the auditor doesn’t say that …” Kettner noted.

Also presented to the committee was the comprehensive annual financial report (CAFR). The report included the year-end numbers for the city’s general fund, which were positive. Actual revenues were about $76.5 million, which was $2.2 million more than the budgeted revenues of $74.3 million. And actual expenses were $73.5 million, or $2.1 million less than the budgeted expenses of $75.5 million. That came out to an increased fund balance of $1.6 million – from $13.7 million to $15.3 million. The city had budgeted to tap the fund balance for around $2.7 million. That meant that the general fund did about $4.3 million better than budgeted. [.pdf of CAFR]

Although the audit report was unqualified – that is, clean – some problems were identified with the city’s internal controls. One was deemed to be a “material weakness” – the most serious classification. It related to the representation of the federal portion and state portion of funds involved in revolving loans. A second problem, identified as a “significant deficiency,” involved the reconciliation of subsidiary ledgers for customers’ utility bills with the city’s overall financial system.

Not rising to the level of an actual deficiency were several other matters that Kettner felt still warranted consideration, including: payroll process (no direct supervisor signatures on timesheets); employee expense reports (instances of “double-dipping” on vehicle allowances and mileage reimbursements); related-party transactions (family member of employee with city contract); internal staff auditor reporting relationship (currently reports directly to CFO); and information technology (password and disaster recovery policies).

The auditor’s report does not include the names or positions of any of the employees involved in those matters of concern. Records provided to The Chronicle by the city, responding to a request made under Michigan’s Freedom of Information Act, indicate that one of the employees who claimed both mileage and vehicle allowance in violation of city policy was city attorney Stephen Postema. The records indicate he claimed $1,043.37 in mileage reimbursements dating from June 23, 2011, despite his vehicle allowance of $330/month. Postema’s vehicle allowance has since been eliminated by the city council, as a result of his most recent performance review. It’s not clear at this point if the city will require that the mileage money be repaid. [Updated: City administrator Steve Powers has reached a different conclusion from the auditor's on this point. See below.]

Kettner and the city’s chief financial officer, Tom Crawford, indicated to the audit committee that the material weakness and significant deficiency had been corrected so that recurrence would also be prevented. For the other matters, Crawford assured the audit committee that the goal was not to see a repeat of those same items in future years, especially for the most serious issues – involving payroll and expense reports.

The related-party transactions, Crawford told the audit committee, are currently the subject of review in the context of possible revisions to the city’s procurement policy. Kettner suggested that the city’s part-time internal auditor report directly to the audit committee, instead of to Crawford. And Crawford encouraged committee members to share any concerns with the city’s internal auditor, the city administrator, or the auditor himself – if they did not feel comfortable approaching him. Crawford indicated that the city was currently working on a disaster recovery plan for information technology, but didn’t anticipate that it would be completed by the end of this fiscal year.

The presentation by Kettner was delivered to a short-handed committee. Because just two of the five members were able to attend – Sally Petersen (Ward 2) and Chuck Warpehoski (Ward 5) – the committee didn’t achieve a quorum necessary to vote to recommend the adoption of the audit by the full council. Two audit committee members were out of town – Sumi Kailasapathy (Ward 1) and Margie Teall (Ward 4). The third absentee, Stephen Kunselman (Ward 3), was suffering from the flu. City staff present were chief financial officer Tom Crawford and accounting services manager Karen Lancaster.

Audit Overview

Some of the presentation at the Dec. 20 audit committee meeting dealt with a general orientation to the idea of an audit and the logistics of how the audit was conducted. The two committee members present, Chuck Warpehoski and Sally Petersen, were just recently elected in November. Since being sworn in, the full council has held three meetings.

Audit Overview: What the Opinion Means

Mark Kettner of Rehmann explained that the audit report is just an opinion on the financial statements. “I never want somebody walking away who says, ‘The auditor said everything’s okay,’ because the auditor doesn’t say that … The auditor says that the financial statements are fairly presented, and gives an opinion solely on the financial statements – that they are not materially misstated. That means that it’s not an opinion on your financial condition, not an opinion on what a great place Ann Arbor is. Or on your internal controls.”

That’s the highest level of assurance that can be given by certified public accountants, Kettner said.

Audit Overview: General Praise

Kettner regretted there was not a larger audience to hear it, but told the committee that “You have some very talented, very dedicated people that are working for you. You are fortunate to have – these are just a couple of them [Tom Crawford and Karen Lancaster] – really quality people who know their job and do it really well.”

Crawford echoed that praise, telling the audit committee that Lancaster is “one of the best you’ll find in the business.”

Kettner allowed that the audit, in the first year of a new contract with Rehmann, had taken longer to complete than he expected it would in future years. He thought next year he would arrive at least a month earlier than this year, and that the presentation to the audit committee might take place in early October, instead of mid-December.

Audit Overview: Logistical Elements

Kettner noted that in previous years, the comprehensive annual financial report (CAFR) was a collection of 12-16 files – Microsoft Word, Microsoft Excel and .pdf files. The files were based on downloads out of the general ledger and the trial balance. What Rehmann has done is to take all the individual files and incorporate the entire report into a single MS Excel file – cover to cover.

He allowed that it’s not quite at the optimal level, in terms of linking between the trial balance to the financial statements and the notes, the management discussion and analysis (MD&A) and the stats section. When a change is made, it “ripples through,” he said. When numbers are included in a narrative, he explained, Excel formulas can concatenate the text with the numbers. A lot of efficiency will be achieved for future years’ work – but he allowed that this year it was very inefficient to set all that up.

By way of background, this is the first year of Rehmann’s contract. Previously the city’s auditing had been done by Abraham & Gaffney. At its April 16, 2012 meeting, the city council approved the selection of Rehmann over Abraham & Gaffney and other firms that had bid. Rehmann now has a five-year contract to do the city’s audit, with the possibility of two one-year extensions.

Responding to a question from Sally Petersen, Kettner indicated that the MD&A was written by city staff – he characterized it as mostly boilerplate. It’s constrained somewhat by Governmental Accounting Standards Board (GASB) rules, he said.

Kettner pointed to the discussion that’s included in some of the bulleted items – like the fact that tax revenues were lower because taxable values were lower: “Property taxes declined 3.0% in fiscal year 2012 and 4.0% in fiscal year 2011 due to decreasing property values.”

History of Total Taxable Value in Ann Arbor: Real and Personal Property. The decline has slowed. But 2012 levels were still lower than 2011. The peak year was 2009.

Audit Overview: Governmental Accounting

Petersen asked Kettner for clarification of the distinction between proprietary funds, enterprise funds, and internal service funds. Kettner and city accounting services manager Karen Lancaster confirmed Petersen’s understanding – that proprietary funds are made up of enterprise funds and internal service funds.

Kettner noted that proprietary funds are accounted for on an accrual basis – as contrasted with governmental funds, which are on a modified accrual basis.

The modified accrual basis is used, Kettner said, because “government … is a strange business that gives away its money. It goes and taxes people in a non-exchange transaction and turns around and gives it away in free services – police, fire, elections, that whole thing.” So it doesn’t account for long-lived assets, he explained. When the city buys a fire truck, that’s a use of its in-flow of money. But on its balance sheet, he said, the asset (of the fire truck) is not accounted for. And those become adjustments under the GASB Statement 34, which converts modified accrual statements to the full accrual statement.

Kettner explained that the two-system approach stemmed from a debate by GASB about whether government accounting should continue on a modified accrual method or change to a full accrual method. GASB couldn’t decide, he said, so concluded that two sets of financial statements should be presented.

General Fund

Kettner walked the committee through results for the FY 2012 general fund – budgeted versus actual. He pointed out that the general fund balance had increased by $1,577,246 – from $13,720,048 to $15,297,294. That was $4.3 million “better” than the final amount budgeted, he said. That’s the difference between the budgeted use of $2,736,089 in fund balance compared to the actual addition of $1,577,246.

The $4.3 million difference was split fairly evenly between revenues and expenditures. Actual revenues were $76,445,864, which was $2,159,382 more than the final budgeted revenues of 74,286,482. And actual expenses were $73,479,312, or $2,044,692 less than the budgeted $75,524,004. That reflects a standard, conservative approach to budgeting – go low on revenues and high on expenditures, Kettner said.

The city’s chief financial officer, Tom Crawford, explained to the committee that he’d not been trying to be overly conservative. The budget component that includes state shared revenue had been budgeted that way – $1,293,611 less than the amount the city actually received – because “we didn’t know where the bottom was,” Crawford said. The city was not sure how much it would receive through the state’s new economic vitality incentive program (EVIP), which has replaced what used to be called statutory state shared revenue. Crawford said he was not sure if the city would receive all of the money that was potentially available through EVIP.

State Shared Revenue

The concept behind the state shared revenue system is that local municipalities in Michigan have a restricted ability to levy taxes, so the state reapportions to local municipalities some revenues out of the 6% sales tax that it collects. The state can redistribute 4% out of that 6%. Up until the EVIP legislation was passed in 2011, reapportionment came in two flavors: the constitutional portion (15% of the 4% gross collections of the state sales tax); and the statutory portion (up to 21.3% of the 4% gross collections of the state sales). The EVIP legislation replaced the statutory portion with an incentive program, whereby municipalities would be required to demonstrate compliance with certain metrics in order to receive their share of the state’s sales tax.

In reviewing the evolution of state shared revenue, Tom Crawford – the city’s CFO – noted that over the last decade, the legislature had not appropriated the full amount in the formula, as the legislature struggled with its own state budget issues. After Gov. Rick Snyder was elected, statutory state shared revenue was eliminated. Sally Petersen (Ward 2) ventured that now cities have to “earn” the money they previously were allocated. Crawford allowed that the city “earns” the money by meeting the standards that the legislature sets in a given year.

Mark Kettner of Rehmann described it as a “stick and carrot.” Going back even before a decade ago, he said, back in the 1950s and 1960s cities and counties were able to levy local taxes – inventory taxes, for example. Some of those levies were eliminated in favor of the state’s single business tax (SBT). So as the state now is looking to reduce the state shared revenue, it’s important to remember that the legislature has, over time, eliminated much of the ability of local municipalities to generate their own revenue.

Crawford agreed with Kettner, saying that cities could, years ago, impose an entertainment tax – which could have applied to University of Michigan football tickets, for example. The right to impose that kind of tax was taken away from locals, in exchange for the state shared revenue program.

Kettner felt that the next piece of local funding to disappear would be the elimination of the personal property tax (on business equipment).

Crawford added that the reason the EVIP was conceived as it was – linking certain actions by local municipalities to state funding – was to avoid creating an “unfunded mandate.” And according to the state attorney general, said Crawford, the EVIP program is technically not an unfunded mandate.

Responding to a question from Petersen about whether the city incurs costs to achieve compliance with the EVIP, accounting services manager Karen Lancaster described compliance as “resource intensive.” She described the “performance dashboard” as the first element of compliance. A second component is evidence of consolidation and collaboration with other governmental entities. The third element involves employee health care and retirement benefits, she said.

Petersen ventured that over time, EVIP compliance could become somewhat “boilerplate.” Crawford told Petersen it’s hard to judge, because the program has only existed for two years, and the state legislature could “change direction and pivot” any year they want. Crawford suggested that committee members take a look at the performance dashboard and the citizens guide to finance and budget – as they contain some “neat metrics.”

Ann Arbor: Projected Budget Surplus/Deficit (includes elimination of personal property tax approved by the state legislature). The first year, 2012, reflects actual figures. Subsequent years are projections based on the city’s projections, as presented at a Dec. 10, 2012 planning session.

Pension & VEBA

Kettner pointed audit committee members to the multi-year schedules in the CAFR related to the city’s pension plan and retiree health care. He said he was not so much interested in zeroing in on specific numbers as he was in alerting the committee to the biggest change in GASB rules that are coming: GASB 67 and GASB 68. The first applies to the plan itself. The second one applies to the city, as the employer and the plan sponsor. The new standards will need to be implemented for FY 2015 for the city and for FY 2014 for the plan, he said. Kettner called that a short time for planning.

It would be quite a task to assemble all the additional required disclosures, Kettner said. And the “kicker” is that a liability would need to be booked for the unfunded actuarial liability, he said.

The liability to be booked, Crawford said, will be bigger and more volatile than what’s currently on the books. Kettner noted that this applies to defined benefit pension plans, and two years after that, it would be required for VEBA (Voluntary Employees Beneficiary Association) for retiree health care.

Petersen wanted to know if the change would be required for organizations that have a defined contribution plan, instead of a defined benefit plan. Lancaster pointed out that it would be too late for the city to change to a defined contribution plan – because the liability would have to be recognized until everyone in the plan is deceased.

Control Problems

When Mark Kettner of Rehmann reviewed highlights from the single audit, he noted the two findings – one a “material weakness” and the other a “significant deficiency.” The letter to management also included discussion of other issues that did not rise to the level of a deficiency.

Control Problems: Material Weakness

Kettner began by saying that “requirements that the feds have versus what I see in reality sometimes don’t actually match up.” The biggest federal program the city has comprises $8.2 million in federal funds, he said, and $6.4 million of that is due to revolving loans from the state of Michigan. What happens, he said, is that a cost submitted for the program is returned to the city with the money and a letter that says, “There’s no federal funds in it!” or “It’s 100% federal funds!” or “It’s this!” or “It’s that!” It’s constantly changing, he said. So it’s something that has to be monitored closely. The portion that’s attributable to federal funding can change from one period to the next, he said. From the single audit:

Finding Type. Material Weakness in Internal Control over Financial Reporting.

Criteria. OMB Circular A-133, §___.300, requires that the City “identify, in its accounts, all Federal awards received and expended and the Federal programs under which they were received. Federal program and award identification shall include, as applicable, the CFDA title and number, award number and year, name of the Federal agency, and name of the pass-through entity.” In addition, the City is required to “prepare appropriate financial statements, including the schedule of expenditures of Federal awards in accordance with §___.310”.

Condition. While management was able to provide us with a substantially complete schedule of expenditures of federals awards during our audit fieldwork, large adjustments were needed to one of the programs so that only the federal expenditure portions were reported on the schedule. These adjustments totaled approximately $1.8 million.

Cause. A breakdown in communication between departments resulted in the total activity of a certain federal grant being shown on the schedule of expenditures of federal awards, rather than just the federal portion.

Effect. The activity shown for one of the federal grants included on the schedule of expenditures of federal awards included State-funded amounts. Adjustments were needed to adjust the activity for this grant so that only the federally funded portions of the grant were reflected on the schedule of expenditures of federal awards.

Crawford characterized the problem as a reporting issue that is not difficult to fix.

Control Problems: Significant Deficiency

The second issue involved the reconciliation of subsidiary records – broken out by detail by individual customers of utilities (e.g., water and sewer) – and the control accounts on the general ledger. There should be an interface between the two ledgers – control and subsidiary, Kettner explained, and they should match. “They didn’t – they were off a bit,” he said. From the single audit:

Finding Type. Significant Deficiency in Internal Control over Financial Reporting.

Criteria. In order to determine whether balances in the general ledger are accurate, the City should perform periodic reconciliations of subsidiary ledgers to the related general ledger control accounts.

Condition. The general ledger amounts for certain utility receivable accounts did not agree or readily reconcile to the subsidiary detail.

Cause. This condition was caused by the absence of a standard procedure for reconciling subsidiary detail to the related control accounts.

Effect. As a result of this condition, the City’s accounting records were initially misstated by amounts which in certain instances were significant to the financial statements. In addition, such unreconciled balances increase the risk that amounts may be materially misstated, whether by error or fraud, and remain undetected by management.

…

Lancaster clarified that the public services area turns in the reconciliation on a monthly basis for the utility system. They reconcile to the utility system and to the city’s financial system; however, the step that was not being completed was the reconciliation of the subsidiary ledgers. That’s because the subsidiary ledger “doesn’t talk to the accounting system inside the utility system,” Lancaster said. An extra step will now be implemented, so that Lancaster can see that the subsidiary ledger reconciliation is taking place.

Crawford pointed out that the reconciliation that the city had already been doing ensured that revenue recognition was correct overall. It’s not difficult to correct, he said, and the city has already started with implementation.

Kettner assured the audit committee that this type of issue was not unusual – many organizations have similar types of issues.

Control Problems: Other Matters

Kettner described the management letter as a combination of different types of communication. The auditor is required to talk about the responsibilities for the audit and any problems found with conducting the audit. The answer was no, the auditors didn’t have any problems with city staff during the audit, he said.

Kettner described a hierarchy of problems that an auditor can find: deficiencies, significant deficiencies, and material weaknesses.

There are also “other matters” that an auditor is not required to put into writing, he said. But they have to be communicated at least orally, and you have to document who was told and what they were told. So Rehmann’s practice is to include other matters in the management letter, because it’s easier to write down the information.

Other matters included issues with payroll process, expense reports, related-party transactions, internal auditor responsibilities, and IT policies:

• Payroll Process. Some timesheets are not signed by a direct supervisor. Kettner characterized it as a “procedural thing.”
• Employee Expense Reports. Some employees who have a vehicle allowance were also claiming mileage reimbursements. Kettner characterized it as maybe more serious than the timesheet signing issue, but involved what he called “trivial dollars.” Claiming mileage reimbursement when you have a vehicle allowance is a “double-dip,” he said. Kettner indicated that the city had itself actually identified the issue earlier in the year, and implemented corrective measures.
• Related-Party Transactions. Some vendors who have family members working for the city also hold contracts with the city. Kettner noted that this situation was actually prohibited by the city’s conflict-of-interest policy.
• Internal Auditor Responsibilities. The city’s internal auditor reports to the CFO, when it may be more appropriate to report directly to the city council’s audit committee. Kettner suggested that by having the internal auditor report to the committee, it would give that person more organizational independence – it was not meant to reflect negatively on the CFO, he said.
• Information Technology. Lack of some controls in the information technology department, including no regular changing of passwords and no disaster recovery plan. Kettner didn’t elaborate on this item.

Regarding the “double-dipping” issue, Kettner did not name individuals or their job titles who had claimed mileage reimbursements while also getting a vehicle allowance. Responding to a request made under Michigan’s Freedom of Information Act, the city provided to The Chronicle records showing that two employees had claimed mileage reimbursements over the last few years, even though they had vehicle allowances.

One was a staff member who works in the city assessor’s office, and receives a monthly vehicle allowance of $180/month, but also claimed $246 in mileage reimbursements. Those instances appear to have taken place in the previous fiscal year.

Records also indicate that Stephen Postema, Ann Arbor’s city attorney, had claimed $1,043.37 in mileage reimbursements since late June 2011, despite his vehicle allowance of $330/month. [.pdf of city's response to request made under the FOIA]

In the records provided to The Chronicle, the earliest set of mileage claimed by Postema included $558.96 of total mileage for a trip to Mackinac Island, for a Michigan Association of Municipal Attorneys (MAMA) conference and for the Biennial Mackinac Policy Conference.

Postema’s $330/month vehicle allowance was eliminated as part of the outcome of Postema’s annual performance review – which was approved by the city council on Nov. 8, 2012. The city attorney reports directly to the city council. From the resolution passed by the council:

Whereas, The City Attorney has offered to eliminate his contractual car allowance of $330/month as of January 1, 2013, as has been done with the City Administrator’s contract;

At that meeting, the council also adjusted Postema’s salary upward for the first time since 2007, by 2.4%. According to the city’s human resources office, Postema’s salary before the increase was $141,538. The 2.4% increase on that base brought his annual salary to $144,934, just under that of city administrator Steve Powers, who is paid $145,000. The city attorney and the city administrator are the two positions that report directly to the city council. [.pdf of form used by councilmembers to evaluate Postema's performance]

The salary increase for Postema, when balanced against the elimination of his vehicle allowance of $330/month, gives a net loss in total annual compensation of $563 [141538*.024 - 330*12]. That does not factor in the mileage reimbursements for which Postema is now able to claim, in conformance with city policy.

Control Problems: Response from City Administrator

Updated at 3:45 p.m. Jan. 9 after initial publication.

On Wednesday afternoon, Jan. 9, city administrator Steve Powers sent the email below to The Chronicle in response to a query that had been made before the publication of this article. It reaches a different conclusion than the one contained in the auditor’s letter.

However, when The Chronicle asked auditor Mark Kettner in a telephone interview if he had received any “pushback” from city financial staff during the auditing process – about his view that the identified mileage claims were against city policy – Kettner indicated he had not. Kettner went on to characterize the city’s financial staff as having been cooperative in allowing him to do his job as auditor. He indicated that he did not assume that the city staff necessarily agreed with every conclusion in the auditor’s report and that those conclusions could be subject to judgement and interpretation in light of closer investigation. From Powers’ email:

Vehicle allowances are provided to employees for use of personal vehicles during their daily job requirements within the city or when specified in an employment agreement. I have discussed the auditor’s comments with Tom Crawford and I believe the instances were not against city administrative policy. The few instances mentioned by the auditor of mileage reimbursement were for employees who used their personal vehicle to travel to a meeting outside of the county.

The interpretation of the City’s administrative policy was that the mileage reimbursement was appropriate because the travel was beyond the person’s daily job requirement. The instances were for trips for professional or state meetings, such as in Lansing. The outcome from the audit is that the City’s administrative policies will be clarified to specify the reasons for mileage reimbursement. During the past year, I have removed vehicle allowances from the compensation for service area administrators.

The remaining vehicle allowances are for employees, such as property appraisers, where the use of personal vehicles with an allowance is more advantageous to the City than paying mileage or using a city vehicle.

Postema’s mileage claims, which the city administrator is characterizing as beyond the daily job requirement of the city attorney, include one to cover mileage to drive to Lansing, in order to represent the city in a lawsuit.

Other Matters of Concern: Discussion

About the other matters listed out in the management letter, Kettner said that the notes are not meant to say, “Thou shalt not do …” but rather to convey that the auditor had noticed these things. Kettner noted that he’d already had conversations about them with Lancaster and her staff. The city needs to decide what the cost and benefit of having those controls is, he said.

Kettner suggested that the audit committee should ask the city staff for a recommendation on a course of action on these other matters.

Crawford indicated that his goal – especially with the more serious issues – is to make sure they don’t have a repeat in the following year. He told Kettner that he did not expect that Kettner would see instances of the same problems next year with payroll process and employee expense reports.

Some of the other issues wouldn’t necessarily be addressable within the timeframe of a year – like the IT disaster recovery plan. It’s something the IT department is working on, but Crawford didn’t think it would be ready by the end of June.

Other Matters of Concern: Discussion – Conflicts of Interest, Ethics Policy

On the question of related-party transactions, Sally Petersen ventured that there’s only so many companies in the city. She wondered if the policy really meant that if someone’s spouse works for the city, then that person can’t have a contract with the city? She felt that was “very limiting.”

Tom Crawford indicated that the city is currently revisiting that policy, and he’s seen so many drafts he was not certain if Petersen’s characterization was accurate. But he indicated that the issue concerns ownership interest as opposed to employment. He said the intent of revising the policy is to define more clearly which relationships would be allowable, but he couldn’t say what the final draft of the policy would be. He told Petersen that it’s intended to be somewhat restrictive.

One of the elements of the policy, Crawford said, would be to ensure that disclosures are obtained from vendors – if there are conflicting interests. He said the issue should be approached from multiple angles. You want people to have the responsibility to disclose relationships, he said, and you want to have the ability to find out internally. And if no one identifies a conflicting relationship at the time, but someone later finds out, it’s important that the policy has a mechanism for dealing with it.

Peterson ventured that such a policy makes it hard to “think local first.” Crawford allowed Petersen’s “think local first” point, but also noted that the city needs to have a very high standard so that people trust that the city is spending their money wisely. It’s been a difficult policy to revise, he said.

Petersen asked if all city contracts needed to be competitively bid. Not all, Crawford said – small contracts are not bid out. Petersen asked how many contracts the city had. Karen Lancaster guessed it was on the order of 500-600 contracts.

Mark Kettner suggested that the city council might want to have the ability to grant exceptions, but that would need to be balanced against the city council looking into every contract. Crawford indicated that the approach being considered with the policy revision is that even if the contract is small, any conflicting relationships need to be “daylighted.” Crawford summed up his perspective on the issue by saying there’s now a good opportunity to update the policy.

Kettner added that one of the duties of the auditor is to make inquiries in the organization – not just of management, but a smattering of high-level, mid-level and low-level employees. It was during one of those inquiries that Rehmann had heard about people having contracts or side businesses or something. So Rehmann didn’t ignore it and went back and asked some questions. The issue did not have a significant impact on the financial statements, Kettner said.

Chuck Warpehoski said he understood that it could be a slippery slope, but observed that if someone works at a swimming pool for a summer job, that person won’t have influence over who the city hires as an IT vendor. So he asked if there was a way to require disclosure, but consider what the potential is for actual influence.

Crawford indicated some agreement with Warpehoski’s idea, saying that disclosure is essential, and that after disclosure, some relationships would have the result that “you just say no” and for other situations, you might say that it needs further consideration.

As an example, he gave a parent who is part of the immediate family, but not part of the household of a city employee. That needs to be balanced against the general interest in making sure that the city gets the lowest cost for the work delivered. If that parent is willing to do it for less, do you want to exclude that person from contracting with the city? Crawford asked.

Lancaster suggested that “it feels better” if a relationship involves a completely different department from the one involving the contract and it’s just coincidental. It’s more complicated if it’s in the same department, she said.

Some of the issues that the committee had just then discussed were those that Crawford wanted to see incorporated in a revised policy.

Petersen asked if the city had some sort of ethics policy. Crawford indicated that city staff have an ethics policy, but he was not sure if the council had a separate one. He indicated that the city hired a procurement professional about a year ago, and he was looking at a lot of updates to procurement procedures.

Petersen asked Crawford if he could make a case for a full-time internal auditor – as opposed to part-time. Crawford said he didn’t think the city needs a full-time auditor at this time. He encouraged audit committee members to bring any concerns they had to the internal staff auditor – Ken Bogan – if they didn’t feel comfortable coming to him, or to city administrator Steve Powers, or to Rehmann.

Kettner suggested that it might be worth considering the possibility of collaborating with Washtenaw County on hiring a full-time auditor.

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