From left: Washtenaw County commissioner Conan Smith, Meredith Shanle of Municipal Financial Consultants Inc., and bond attorney John Axe, Shanle’s father. (Photos by the writer.)

The bonding is made possible by Michigan’s Public Act 329 of 2012, which the state legislature passed in October of 2012. [.pdf of Public Act 329] The law enables municipalities to issue bonds to cover unfunded accrued pension and retiree healthcare liabilities, but has a sunset of Dec. 31, 2014. The county faces a $30 million contribution toward these obligations in 2014, and is looking for ways to manage that obligation.

The most recent estimates put the county’s maximum retirement obligations at $340.8 million. New actuarial reports are due in June, however, and estimates could change. The board was presented with calculations for borrowing $344 million at an assumed average interest rate of 4%. The county would pay $239 million in interest over the life of the 25-year bond, for a total of $583 million in combined interest and principal.

John Axe of Axe & Ecklund, a Grosse Pointe Farms attorney who has served as the county’s bond counsel for decades, helped craft the state legislation that permits this type of bonding. He was on hand at the working session to describe the proposal and answer questions. “If you don’t issue the bonds,” Axe said, “you’re going to have horrible budget problems.”

County administrator Verna McDaniel has advocated for this move, in part to make long-term budgeting easier by having predictable bond payments. She raised the proposal publicly for the first time at the board’s April 17, 2013 meeting. However, Axe told commissioners that he’d been asked by the county administration to start looking into this possibility in November of 2012. He also met earlier this year with the board in closed session, when labor negotiations were discussed.

During the May 2 working session, several commissioners referred to the fact that the new 10-year labor deals approved earlier this year had been key to moving forward with this bond proposal. Allusions to that connection have been made at previous board meetings, but not directly stated. The crucial point was closing the defined benefit plan to employees hired after Jan. 1, 2014. Unless the defined benefit plans were closed, the county would not have been allowed by law to proceed with this type of bonding.

Also a factor are the new accounting standards of GASB 68, which require that unfunded liabilities be included in an organization’s financial statements for fiscal years beginning after June 15, 2014.

Some commissioners expressed concern that the bonding process, now that it’s public, is being rushed. “If I’m borrowing $350 million, I think we should take our time to ask appropriate questions,” said commissioner Ronnie Peterson. “That’s a lot of money.” He felt it was important to see updated actuarial estimates, but noted that based on the board’s discussion, “it’s like we’ve already made up our minds.”

Dan Smith lobbied to explore more options, rather than just one proposal, and raised the possibility of putting this issue before voters. “What we’re really trying to do is to manage our cash flow,” he noted. Smith also expressed skepticism about projections that the bond proposal would result in more than $100 million in savings for the county over 25 years, compared to the amount that the county would pay for its retiree obligations without bonding.

But Conan Smith argued that the board “set the course” when it approved those labor contracts and voted to close the defined benefit plans earlier this year. He acknowledged concerns about the timing, “but in part it has to move so fast because this board closed the plan, and we’re looking at a $30 million payment in 2014 if we don’t do something. So it was a choice we made willfully and with full knowledge and now we’re designing a fiscal strategy to minimize the severity of the impact on our budget.”

That specific budget impact was not discussed publicly when the board voted on the new labor contracts.

Axe also urged the board to act quickly, saying that the proposal is interest-rate sensitive. The proposal assumes that the county would borrow at an average annual interest rate of 4%, then invest the bond proceeds to earn an average rate of return of 6.5% over the 25-year period.

The proposal calls for the board to take an initial vote at its next meeting, on May 15, followed by final approval to issue a “notice of intent” on June 5. The board would also need to approve a state-mandated comprehensive financial plan in July, setting the amount of the bond issue. The county would then submit an application to the state Dept. of Treasury, which must approve the bond issue.

Some commissioners hope to get more input from experts – faculty at the University of Michigan business school, for example, or the county treasurer – who don’t stand to benefit from this bond issue. Because of these concerns, the county is expected to hire a third-party consultant, Public Financial Management Inc., to review the proposal.

In response to a question from Dan Smith, Axe told the board his firm would earn $485,000 in fees from this bond issue, at his standard rate. The county is also using Municipal Financial Consultants Inc. (MFCI) as the financial consultant on this proposal. Axe & Ecklund provides a 15% discount on its fees if the county hires MFCI as the financial consultant. MFCI president Meredith Shanle attended the May 2 working session. Though it was not mentioned at the meeting, Shanle is Axe’s daughter.

Board chair Yousef Rabhi stressed the importance of community engagement, and outlined plans for getting input – including a public presentation and possibly extra meetings. “Regardless of the decision that we make,” he said, “it’s important that the community is involved in that process.”

Public Commentary

At the start of the May 2 session, three people addressed the board. Wes Prater began by telling commissioners and staff that it was good to see everyone again. [Prater, a Democrat, previously served on the board for 10 years but was defeated by Republican Alicia Ping in November of 2012, following a redistricting that pitted both incumbents against each other in the general election.]

Prater reminded commissioners that when he served on the board, he had raised concerns about the county’s long-term liabilities. He pointed out that at the end of 2011, the county – including the road commission – had long-term liabilities for all types of debt totaling $430 million, up from $379 million in 2007. He urged commissioners to look closely at this increase so that they could determine why it had occurred, and figure out how to take care of it.

Former Washtenaw County commissioner Wes Prater, left, talks with corporation counsel Curtis Hedger at the May 2 working session.

He also asked if the county had responded to a letter sent out at the beginning of 2013 from the state treasurer’s office to each local unit of government, asking for a long-term deficit elimination plan. He said the plan must get approval from the governing board, and must be submitted to the state treasurer as part of the annual audit.

Later in the meeting, Kelly Belknap – the county’s finance director – replied that the plan is only required for local governments that have fund deficits. She said none of the county funds have a deficit, so there’s no requirement to submit a deficit elimination plan to the state.

Doug Gross, a certified financial planner from Saline, cautioned commissioners to think carefully about what business they’re in. The business is to provide services to taxpayers, he said. The county isn’t in the investment business, he said, and it takes a risk in borrowing money to fund an obligation that they should have been paying for all along.

It’s a risk to borrow the money and just hope for a higher rate of return, Gross said. There’s certainly a shot at achieving a higher rate of return, he added, given the low-interest rate environment. But the focus should really be on what can be done to lower employee benefits in the future. Are the benefits comparable to what the general public and taxpayers are getting? He thought the county’s benefits were likely way beyond what others are receiving. People are retiring in their 50s with lifetime pensions and that’s not sustainable, he said. And healthcare is no longer a retirement benefit for almost anyone in society, he added.

Gross suggested the county look at its labor contracts, and over time to stop offering the defined benefit plan. He realized there was an obligation to existing employees, but it doesn’t have to keep accruing.

In responding to Gross, commissioner Yousef Rabhi pointed out that the county reached new 10-year labor contracts earlier this year. [The new contracts were approved by the board on March 20, 2013, prior to the state's right-to-work law taking effect.] Those contracts close the current pension and retirement healthcare benefits for people hired after Jan. 1, 2014. Rabhi noted that the county wouldn’t be allowed to pursue the kind of bonds it’s seeking without closing those retirement defined-benefit plans, “so with the 10-year contract, that’s a step that we took – to cap the growing long-term liability.”

It wouldn’t make sense to borrow money if the plans weren’t capped, Rabhi said, because you wouldn’t know what your total liabilities were. “I don’t think that any of us would be at this stage of the road if we hadn’t gone through the 10-year contract process.” He praised the labor unions for making sacrifices. “What we’re trying here is something that isn’t necessarily being tried in a lot of different places. It’s been tried in a few places, and I think it’s worked relatively well,” he said. “But we are, in the tradition of Washtenaw County, leading the way in terms of how we can make some of these changes.” Rolland Sizemore Jr. replied to Rabhi, saying he’d like to know what places have tried this approach successfully.

At the end of the meeting, after commissioners had clarified that the pension and retirement health care plans will be closed, Gross pointed out that any new employees hired through 2013 will still be eligible for those benefits – so the county hasn’t actually closed those plans yet.

Gross also wondered whether the bond would be tax-exempt or taxable. If it’s taxable, interest rates will be higher, he noted, so the spread between what the county pays and what it hopes to earn off investments will be narrower. He didn’t think it would be viable as a taxable bond. [The proposed bond issue would be taxable.]

Thomas Partridge urged the board not to take on such high debt, but rather to put their efforts into funding affordable housing.

Bond Proposal: Public Process

Yousef Rabhi, the board’s chair, reported that he and vice chair Alicia Ping had been working to make sure this process is as open to the public as possible. Between this meeting and the May 15 vote, he wanted to make himself, Ping and Felicia Brabec – who chairs the board’s ways & means committee chair – available to the media. They were thinking of scheduling a press conference or informal discussion, he said. A lot of information has been released already to the public, Rabhi said, but Ping has also suggested that the administration develop a brochure about this bond proposal that would be distributed to libraries and other public places to ensure that the public is well informed about the process.

Washtenaw County commissioners Yousef Rabhi (D-District 8) and Alicia Ping (R-District 3). They serve as board chair and vice chair, respectively.

He also wants to schedule a public presentation sometime between May 15 and the final vote on June 5, so that the public can come and hear more details about the proposal and get their questions answered. In addition, there will be a formal public hearing at the board’s June 5 meeting. He said it’s an open process, and these outreach measures are a way to ensure that in a more formal way. “There’s an overwhelming sense on this board that we want to engage the public in this process,” he said. “Regardless of the decision that we make, it’s important that the community is involved in that process.”

Rabhi also noted that the county board meetings include opportunity for public commentary, and he encouraged the public to speak during that time.

Ping, the board’s vice chair, noted that the board has had a lot of conversations “touching around what we’re going to do.” Starting with this working session, she said, and in the next few meetings, “we’ll really be able to dive in” and get all questions answered.

Rolland Sizemore Jr. expressed concern about the process. Some commissioners have told him this process has to be completed by July, he said, and that the proposal might have to get initial approval and final approval on the same night. “That is going to be a major problem with me,” he said. [Typically, an initial vote is taken at the ways & means committee – on which all board members serve – followed by a final vote at the regular board meeting two weeks later. For most of the year, the ways & means committee and regular board meetings are held every two weeks, in back-to-back sessions on the same night. During the summer, those meetings are held only once a month.]

Noting that not everyone has a computer, Sizemore encouraged the public to call the county administration office at 734-222-6852 and ask questions.

Ronnie Peterson criticized the speed of the process, noting that one of the public forums was planned to happen after the board’s initial vote on May 15. “If I’m borrowing $350 million, I think we should take our time to ask appropriate questions. That’s a lot of money.”

Bond Proposal: Financial Analysis

Meredith Shanle of MFCI reviewed the documents she had provided to commissioners, showing how the bond proposal would cover the existing obligations for the Washtenaw County Employees’ Retirement System (WCERS) and Voluntary Employees Beneficiary Association (VEBA) – the defined benefit pension and retiree healthcare plans. The information included charts that compared existing debt obligations with the proposed bond payment schedule, as well as an analysis on the bonding’s impact on future borrowing. [.pdf of MFCI overview memo to commissioners] [.pdf of comparative charts on covering VEBA and WCERS obligations] [.pdf of MFCI memo regarding impact on future borrowing] [.pdf of MFCI debt load analysis]

Actuarial reports are being completed – likely available in June – to show the county’s updated obligations for VEBA and WCERS as of Dec. 31, 2012. The most recent actuarial report showed valuations at the end of 2011, when the county had $101.27 million in unfunded liabilities for its defined benefit pension (WCERS), and $148.46 million in unfunded liabilities for its retiree healthcare (VEBA).

However, those figures were based on assumptions that haven’t been updated since 1999. According to draft minutes of a April 16, 2013 special joint meeting of the WCERS and VEBA boards, county finance director Kelly Belknap asked for an expedited “experience review” to be completed by the actuarial Buck Consultants by June 25, 2013. Her request was approved by the boards at that special meeting. The review will focus on investment returns, mortality, wage inflation and core demographics since 2009, with a more in-depth study scheduled for a later time. According to minutes from a Feb. 7, 2013 VEBA meeting, this kind of study is typically conducted every three to five years, in order to inform actuarial valuations.

Until new actuarial reports are completed, MFCI has estimated that the maximum obligation is $340.8 million – $210.5 million for VEBA, and $130.3 million for WCERS. Calling this a “worst case assumption,” MFCI is recommending that the county board authorize a notice of intent to issue up to $345 million in bonds to fully fund both VEBA and WCERS.

Borrowing that amount at an assumed average interest rate of 4%, the county would pay $239 million in interest over the life of the 25-year bond, for a total of $583 million in combined interest and principal.

The annual payments would vary, beginning at $18.558 million in 2014 for interest only. Subsequent years would include both interest and principal payments: $14.110 million in 2015, $15.170 million in 2016, and $16.278 million in 2017. Payments increase incrementally in subsequent years, and starting in 2024 the county would be paying about $26.2 million annually. [.pdf of comparative charts on covering VEBA and WCERS obligations]

MFCI’s analysis assumes that the county would earn an average rate of return from the bond proceeds of 6.5% over the 25-year period of the bond. Proceeds from the bond, held in an intermediate trust, could be used to call the bonds after nine years, if some future event eliminates the WCERS and VEBA liabilities.

The MFCI analysis also states that the county would pay up to $112 million more to cover its VEBA and WCERS obligations if it doesn’t bond, based on the county’s current 27-year estimated debt payment schedule for those two funds. John Axe, the bond attorney used by the county, noted that the annual estimated contributions that the county will be required to make in the next few years – if it doesn’t bond – are considerably higher than the bond payments it would be making if it does bond. [.pdf of charts showing retiree fund payments without bonding]

The reason that most entities don’t want to close their defined benefit plans is that they don’t want to have to start making those annual contributions, Axe said. But Washtenaw County has done the “responsible thing,” he added, and closed its defined benefit plans. The bond proposal would cover the obligations “in an orderly way,” Axe said, by spreading out the debt over 25 years with a fixed-rate obligation, which is estimated to be about 4% on average. If the estimates are different when it comes time to issue the bonds, Axe said, then the proposal would need to be re-evaluated.

“If you don’t issue the bonds,” Axe added, “you’re going to have horrible budget problems.”

Another aspect of the MFCI analysis looked at how the proposed bond would impact the county’s debt limit and ability to bond for other purposes. Assuming that the county bonds for the entire $345 million, its overall debt would total $445.88 million – or 32% of what it is legally allowed to issue. The MFCI memo states:

We do not believe that the issuance of debt at that level will have any negative effect on the County’s ability to maintain its current credit rating or to issue future debt since the County would have in excess of $975,000,000 in additional room to issue debt in the future. Moreover, because the County is issuing this debt for the purpose of funding a debt which it currently owes, we believe the action will be welcomed by both Moody’s and Standard & Poor’s.

Bond Proposal: How It Would Work

John Axe of Axe & Ecklund, the bond counsel hired by the county, began his presentation by referring to a memorandum he had sent earlier to commissioners that outlined the process. [.pdf of Axe's process memo]

Axe said the process now being pursued by the county actually began in 2008. At that time, the bond proposal would have covered about half of the amount that’s now proposed, he said, and would have covered only VEBA, the retiree healthcare plan. The idea would have been to issue certificates of participation (COPs), a different type of financing than the bond issue that’s now being proposed.

But the county ultimately didn’t move ahead at that time, because of the economic meltdown that occurred about a month before the COPs would have been issued, Axe said. At that time, Washtenaw County was following the lead of Oakland County, he said, which had issued COPs a year earlier. It wasn’t the best type of borrowing situation, he noted, and bonds would have been preferred.

Axe reported that his firm had prepared legislation in 2006 to allow bonding for these retiree obligations. The legislation was supported by many units of local government statewide – including Washtenaw County – and was passed by the state legislature, but had been vetoed by then-Gov. Jennifer Granholm. Because of that, there was no other alternative except for COPs, he said.

In 2008, the proposal considered by Washtenaw County was to close the retiree healthcare plan at that time, and issue COPs to fully fund the liabilities of that plan for the employees that were covered by it. “What we’re doing today involves exactly the same thing,” Axe said, “except we’re now proposing a bond issue because the Michigan legislature finally approved essentially the same legislation that was proposed back in 2006.”

The legislation passed in 2012 permits this kind of bonding, Axe explained, to fully fund the pension and retiree healthcare plans – but only if those plans have been closed to new employees. “You have done that,” he said.

Andy LaBarre (D-District 7), chair of the Washtenaw County board’s working sessions.

Axe said his firm had been asked by the Washtenaw County administration to start working on this proposal in November of 2012. His firm prepared a memorandum on it that was given to commissioners at a working session in February. [There was no working session on this issue in February. It's likely that Axe was instead referring to a closed session that was held during the board's Feb. 20, 2013 meeting to discuss labor negotiations. Axe attended that meeting and participated in the closed session, which was not open to the public.]

Since February, Axe said, his firm and the financial consultant hired by the county have been working hard on this proposal. [This was not mentioned at the meeting, but the financial consultant – Municipal Financial Consultants Inc. (MFCI) – is closely tied with Axe. MFCI's president, Meredith Shanle, who also attended the May 2 working session, is Axe's daughter. And Axe & Ecklund provides a 15% discount on its fees if the county also hires MFCI as the financial consultant on a bond proposal.]

Axe then reviewed the legal steps that are required in this bonding process. He noted that this is a new process, and no one has ever issued these kinds of bonds – because they haven’t previously been permitted until the new law was signed in October of 2012. As of now, no unit of government has received approval from the state department of treasury – that approval is one of the requirements needed to issue these bonds, he noted.

Local units of government can only issue bonds if they’re “qualified,” Axe explained. To get qualified, a certified financial report must be submitted to the state annually, showing a balanced budget. This has been the case since 1982, he said. Before that, the only way to issue bonds was to get prior approval from the state. Axe said he helped draft the legislation passed in 1982 to allow for the qualifying process, noting that Washtenaw County has been qualified every year since then.

But for this new type of bond issue in Michigan, the qualifying process doesn’t apply, Axe said. Instead, each bond issue must be approved by the state department of treasury, after completing a series of steps. [.pdf of Axe memo outlining bonding process] [.pdf of bonding timeline]

Axe then outlined the required steps in this process:

• A notice of intent to issue bonds. This standard notice must be published in a “newspaper of general circulation within the county.” It lets residents know that they have 45 days during which they can circulate petitions to require a vote of the people before any bonds are issued. The notice must include a maximum amount of the bond issue, a maximum interest rate, and a maximum term for the bonds. To do this, the board needs updated actuarial information – but those reports won’t be ready until June, Axe said. So the maximum amounts at this point are estimated by the county’s financial consultant (MCFI) and assume a worst-case scenario. Axe said it’s likely that the bond issuance will be lower than estimated. Expected dates of board votes: initial approval on May 15, 2013, with final approval on June 5, 2013. Assuming board approval, a notice of intent would be published soon after the June 5 vote. Axe’s memo indicates the notice would be published in the Sunday, June 9 printed edition of AnnArbor.com.
• Approval of the bond resolution and “continuing disclosure” resolution. Even though the final amount of the bond won’t be determined, the board will be asked to set a maximum amount for the bond. The continuing disclosure resolution is standard for all bond issues over $1 million, and indicates that the county will provide updated financial information annually during the term of the bond. Expected dates of board votes: initial approval on May 15, 2013, with final approval on June 5, 2013.
• Meeting with credit rating agencies, request for bond ratings. The county currently holds an AA+ rating from Standard & Poor’s and an AA1 rating from Moody’s. The timeline distributed by Axe indicates that these meetings would be held in Chicago, but he did not address this item during his remarks. Expected meeting dates: June 12-13, 2013, with a request for bond ratings made on June 15.
• Actuarial reports approved by VEBA and WCERS boards. There are separate boards for the Washtenaw County Employees’ Retirement System (WCERS) and Voluntary Employees Beneficiary Association (VEBA). Members of these boards are appointed by the county board of commissioners. Both VEBA and WCERS boards will receive updated actuarial reports, as of Dec. 31, 2012, which they will then approve. The information in these reports will indicate the size of the county’s unfunded pension and retiree health care liabilities, and thus determine the amount of the bond issuance. Expected date of approval: June 25, 2013.
• Setting of the final amount of the bond issue and approval of the comprehensive financial plan. After the actuarial reports are received, the amount of the bond issue will be set to cover the unfunded liabilities. This amount will be part of a “comprehensive financial plan” that’s required by state law (Public Act 34). It will include a financial analysis of current and future liabilities, an estimated debt service schedule, and a description of the new retiree health care plan. It will also include a comparison of the county’s obligations with and without a bond issue. [.pdf of comprehensive financial plan components] Expected date of board approval: July 10, 2013.
• Receipt of credit rating. One of the requirements for these bonds is that at least one credit-rating agency give the bonds a minimum double-A rating. The best rating possible is triple-A. Expected date of rating: July 24, 2013.
• Expiration of 45-day notice of intent. This bond proposal assumes that petitions won’t be filed for a voter referendum. It also assumes that the notice of intent will be published on June 9. End date of 45-day notice: July 25, 2013.
• Application to state for approval to issue bonds. The application to the Michigan Dept. of Treasury must include several components, including documentation of the requirements listed above. [.pdf of bond application requirements] Expected application date: July 26, 2013.
• Approval from the Michigan Dept. of Treasury. Axe expects it will take about two months to receive approval from the state, which might require additional information. Expected date of approval: Sept. 26, 2013.
• Actions related to bond sale. Assuming that approval is received by the end of September, a notice of sale for the bonds would be published on Oct. 2, 2013, with the bond sale occurring on Oct. 16. Expected date of bond delivery to the county: Oct. 31, 2013.

Axe stressed that until the actuarial reports are completed, the amount of the liabilities – and therefore the amount of the bond issue – can’t be determined. The current estimate of a $345 million maximum amount is a big number, he acknowledged. “It’s on purpose a big number,” he said, “because we don’t want to have to go back and put a new notice [of intent] in the paper later.”

He also noted that this plan couldn’t have been brought forward until the county board approved closing of the current pension and retiree healthcare plans, which was done as part of the new 10-year labor contracts that the board approved in March.

There has been only one other government entity so far to apply to the state for this type of bond issue, Axe said. Saginaw County applied in February. [.pdf of Saginaw County comprehensive financial plan related to its pension bond issue]

The state has not yet approved that application. Axe said he knows there are other governmental units that are in the process of applying, but no one else has submitted an application yet. He also noted that the more entities that apply, the slower the process will likely be. State government has downsized, he said, so there are fewer people to handle these requests.

Board Deliberations

The board’s discussion covered a wide range of issues related to the bond proposal, including many clarificational questions. This report presents a summary of the discussion, organized thematically – with the recognition that there is considerable overlap among these issues. Topics included the timing of the proposal, risks, investment-related issues, bond types, fees, credit ratings, a possible voter referendum, alternative options, and the need to seek additional advice and input.

Board Deliberations: Timing

Ronnie Peterson asked why the board was being asked to take an initial vote on the bond resolution prior to receiving the updated actuarial reports. John Axe replied that it’s simply to publish the notice of intent as early as possible, to start the 45-day clock for the possible voter referendum. If the board waits until its July 10 meeting to vote on the notice of intent, Axe said, then other applications to the state will likely be submitted ahead of Washtenaw County, thus delaying the process.

Commissioner Ronnie Peterson (D-District 6).

Peterson said he was disturbed that so much of the board action took place prior to public input. He wondered why the board couldn’t wait until the actuarial reports are seen. Axe explained that even though the board will be asked to approve the bond resolution – initially on May 15, with a final vote on June 5 – it won’t take effect until the rest of the process is completed. If the board doesn’t approve the comprehensive financial plan on July 10, for example, then “we stop,” Axe said.

Peterson again wondered why the board is rushing, noting that the state legislation doesn’t sunset until Dec. 31, 2014.

“Remember this – this is interest-rate sensitive,” Axe said. “The interest rates today are at good levels. No one can tell you for certain what the interest rates are going to be. We don’t think they’re going to go up, but we don’t know.” All of the assumptions are based on interest rates today, he added. If interest rates go way up, he’d likely advise the county to wait before issuing the bond. “We don’t want to sit around and wait the extra 45 days if we don’t have to,” Axe said.

Peterson didn’t appear to be persuaded. “In our conversation, it’s like we’ve already made up our minds,” he said. It seems like the board should have more information. There are three crucial documents – the actuarial reports for VEBA and WCERS, and the comprehensive financial plan showing how the bonds will be retired – that the board and the public won’t have before commissioners vote on the initial authorization for this bond proposal, Peterson said.

The board has another year and a half to work with this bond program, Peterson noted, so he hoped they would take more time to consider the impact of this proposed indebtedness.

Kent Martinez-Kratz asked what would happen if the county waited until after 2014 to make the bond issue. Axe replied that for the current type of bond, the law sunsets on Dec. 31, 2014, so the county wouldn’t have that option. It would be possible to issue certificates of participation (COPs), like Oakland County did in 2007. Martinez-Kratz alluded to a discussion that the board had with a representative of Oakland County on this issue. [This apparently occurred during a closed session – as there has not been a public presentation by any Oakland County official.]

Yousef Rabhi asked a series of clarificational questions about the proposed timeline. He noted that when the actuarial reports are provided in June and the information is not what the board expected, “we can pull the ‘off switch’ then.” Axe replied that the board isn’t committed to do anything until the comprehensive financial plan is approved, which can’t possibly occur until July at the earliest. And the county can’t issue the bonds until receiving state approval. The June 5 board vote simply authorizes the notice of intent and sets a maximum possible bond amount, Axe said.

Rabhi indicated that he’d be open to having an additional meeting in July, given the feedback he’s heard from other commissioners about having only one meeting, on July 10, to give both initial and final approval of the comprehensive financial plan.

Alicia Ping pointed out that the only reason the initial and final approval would be scheduled on July 10 is because the board traditionally only has one meeting in July. “I don’t think the intent here is to push anything through,” she said.

Board Deliberations: Interest Rates, Investments

Dan Smith asked Axe to elaborate on why this bond issue is time sensitive, regarding interest rates. Axe replied that no one can know the future. All of the financial analysis is based on current interest rates. The only reason to vote early is to “get the 45-day notice of intent out of the way,” Axe said. His advice is that unless there’s some good reason for waiting, the board should proceed.

D. Smith wondered why the county should be concerned about the interest rate, given the nature of this bond issue. It’s a bond issue unlike any other, he noted. It’s not for a capital project. Rather, in this case the proceeds will be directly invested back into the market.

It matters, Axe replied, because all of the financial analysis is done based on prevailing interest rates. The analysis is very conservative, and a 45-day wait probably won’t matter, he said. But unless there’s some reason, he wouldn’t advise waiting. All of the steps are interrelated, he added.

The analysis is based on paying an estimated average 4% interest rate for the bond over 25 years, Axe said, with the expectation of investing the proceeds of the bond sale and getting a 6.5% average rate of return on that investment over that period. The proceeds won’t be invested exclusively in other municipal bonds, Axe said. Proceeds will be held in an intermediate trust and managed by investment advisors hired by the county, with an estimated worst-case return of 6.5%.

Interest rates on the bond aren’t likely to go down much lower, Axe said – right now, they’re in the range of rates last seen in the 1930s. Axe added that this approach – borrowing at 4% and investing to get a 6.5% return – is an element of the plan, but it’s not the only element.

Commissioner Dan Smith (R-District 2).

D. Smith drew an analogy to taking out a mortgage on a house at 4%. So 100% of his house would be leveraged, and he owes the entire amount of his house. “I should take that money and go invest it in the stock market, because the stock market is going like gangbusters right now, and I could make 6-7% difference on that.” Axe replied that he wasn’t suggesting this is the same thing as Smith had described. The interest differential is only one aspect, Axe said. “I think you ought to hear the complete plan.”

Felicia Brabec asked about the investment strategy – hiring another company to invest the bond proceeds, and assuming that there would be rate of return higher than the interest on the bond payments. If there was a surplus from the investments, can that surplus be used to pay down the debt at a higher rate without a penalty?

Yes, Axe replied. The 25-year bonds would be callable in nine years – meaning that the bonds could be paid off fully or partially at that time, if the county decided to do that. The county could also choose to re-fund those bonds, if interest rates are lower in nine years.

Axe responded to a written question asking if the county is essentially gambling on market performance. The answer, he said, is that all investments – including those made currently by VEBA and WCERS financial advisors – are made by professional advisors. The estimated rate of return is calculated over a long period and is based on past experience, he said. The county is using an estimated rate of return that’s substantially below the current actuarial estimate, as well as below what the county has actually been getting from its VEBA and WCERS investments, he noted.

The most important thing is that you hire good people to make the investments, Axe said. Oakland County, for example, is in much better shape now than before they issued their bond, he said.

Andy LaBarre asked about a hypothetical situation in which the investments made “are bad from the start. Even the best investment management can lead us astray,” he said. “Are we really being as prudent as possible, and are we incurring any risks that we normally wouldn’t through any sort of investment?”

Axe replied that “you already owe the money” and are already relying on the market to provide returns for VEBA and WCERS funds. The board’s main responsibility is to hire the best possible investment managers. The county would want to do that anyway, he said, regardless of the bond proposal – because there is already a huge amount of money that’s currently being invested. “I wouldn’t be here if I didn’t think this process would work,” he said.

Board Deliberations: “Saving” Money

In response to a written question, Axe explained how the county will be saving money with this proposal. First, he said, the county has closed its VEBA and WCERS plans. That means the county now will know what its obligations are for employees who are currently in the plan. [Employees hired through Dec. 31, 2013 will still be eligible for these plans. And the obligations are based on actuarial estimates – for example, estimating how long retirees would be expected to live, on average.]

This bond will be paid off over 25 years, Axe said. In contrast, the county’s estimated actuarial liability has been calculated over a period of 27 years – so the county is actually shortening the period of its pension and retiree healthcare obligations.

When the bond proceeds are invested by the trustees – the managers of the intermediate trusts for VEBA and WCERS – the estimated average return is 6.5% He noted that the county’s current actuarial estimates call for 7.75% and 7.5% returns for VEBA and WCERS, respectively. So the estimated percentage return for the investments of the bond proceeds is more conservative than current actuarial estimates.

Conan Smith pointed out that the 7.75% is a policy target. The actual 10-year trailing return is 6.75%, he said.

Axe noted that the county already owes the money for its unfunded pension and retiree healthcare liabilities. “You’re not borrowing more than you already owe.” Instead of owing it to everyone who’s entitled to receive the benefits in the future, he said, “you’re going to owe it to the bond holders. That’s the only difference.”

C. Smith pointed to the MFCI estimate that the county would save $112 million because of the bond issue. When the bond is paid off in 2039 and if the estimate is accurate, he said, “we’re sitting on $100 million. What could we do with that money?” He wanted to know if the excess funds were restricted in any way.

Axe replied that the money would be coming to the county over a long period of time, and most of it would be seen in the early years of the bond schedule. If there was money left in the intermediate trust after VEBA and WCERS obligations were fully met, then that money could be returned to the county for other purposes, Axe said.

C. Smith observed that if the earnings from the bond are saved and invested, after the retiree obligations are met, that money would become general operating funds that a future board of commissioners can allocate in any way.

In light of the estimated $100 million-plus in savings, Ronnie Peterson wondered if the county is borrowing too much money. He felt the county would be better served by breaking close to even on this bond issue. He said he wasn’t troubled that there would be savings, but he was troubled by the large amount.

Dan Smith asked if the $112 million “savings” was largely due to “playing the spread” between the average 4% interest rate paid on the bond and the anticipated 6.5% earned from investing the bond proceeds. Yes, Axe said, that’s a large part of it. The restructuring also allows the county to avoid paying a “huge” amount upfront, he added. The county has closed its defined benefit plans, so it must make contributions to VEBA and WCERS, Axe said. “This is simply one of the ways that you can do it.”

After identifying a typo in MFCI’s report that resulted in a $10 million under-reporting of the total VEBA/WCERS estimated obligations, D. Smith addressed the issue of estimated contributions. He pointed out that MFCI had used a conservative estimate of the county’s total contributions – without bonding – which made the option of bonding appear more favorable. He said his understanding is that without bonding, contributions to VEBA and WCERS will spike in the next few years. [Estimates provided by MFCI call for roughly $30 million annual contributions for the next five years, without bonding.] But after that there could be a tapering off, he said. That’s why he’s interested in seeing the new actuarial projection, which might provide a different scenario.

Board Deliberations: Bond Types

Responding to a written question from the board, Axe explained the difference between a bond issue that’s authorized by the county board, and bonds based on approval by voters.

Bonds issued based on approval of the county board are called general obligation limited tax bonds. The word “limited” is critical, he said. It means that the only money that can be used to pay those bonds is money that comes into the county already – through taxes, state funding or other means. “You cannot levy any extra tax above the amount of tax that you can levy for operating purposes.” He noted that the county currently levies the maximum rate that it can. [That millage rate for 2013 will be set by the board by June. The 2012 county general operating millage rate was 4.5493 mills.]

Commissioner Rolland Sizemore Jr. (D-District 5).

In contrast, if the county gets voter approval for a bond issue, that gives the county the power to levy an extra tax in any amount – and there’s no limit to the rate or amount, Axe said. [At this point Conan Smith raised his arms in a gesture of enthusiasm, which elicited laughs from other commissioners.]

Axe then fielded another written question: What’s the chance of defaulting on a limited tax bond issue, compared to an unlimited tax bond issue? Washtenaw County has always been very careful about its bond issues and has paid everything on time, Axe said. The county has substantial reserves and is very conservative in its approach. “You don’t go out and issue a lot of bonds for wild purposes,” he said. The county always has a plan for allocating specific funds to make bond payments over many years. Axe said he’s been doing bond issues for Washtenaw County for decades, and in that time the county has never had any difficulty making bond payments.

Dan Smith followed up on the question about the default risk. He noted that Axe’s written response to this question had indicated that there’s no difference in default risk between limited and unlimited tax bonds. Axe replied that this is the judgment of the credit rating agencies. Washtenaw County bonds sell almost at the triple-A level, he said, because people are satisfied with the county’s history. The county is much more stable than other counties because of its demographics, Axe added. Specifically, the University of Michigan and other colleges and universities are located here, and the county has been on a growth path, although that growth has slowed in recent years.

D. Smith replied that there are still considerable differences in the way that limited and unlimited tax bonds are funded. It’s highly improbable, he said, but the county could go bankrupt in 15 years – how would that affect the situation? Axe replied that the county could go bankrupt regardless of whether these bonds are issued. If the county failed to make its obligations, it would go under emergency management.

Meredith Shanle of MFCI clarified that in general, there is a large difference between limited and unlimited tax bonds. But in the specific case of Washtenaw County, those types of bonds are basically the same, she said. With unlimited tax bonds, the county could keep raising the millage rate to cover those bond payments, she noted.

D. Smith observed that in the case of General Motors, no one thought that GM would ever default on its bonds, but it did. So it’s not reasonable to say that a default could never, ever happen – even in Washtenaw County, he said.

Responding to a question about whether the county would have a harder time issuing a limited tax bond if voters turned down an unlimited tax bond, Axe said no. That’s because the county has excellent credit rating, he said, and any action by voters wouldn’t have any bearing on that credit rating.

Regarding a voter-approved bond, Axe noted that the ballot question can’t be put forward until there’s an election, and the next time the county could do that would be at the November general election. He also pointed out that the county doesn’t plan to levy any additional tax as part of this bond proposal.

Axe was also asked about the experience of other government entities. He noted that Detroit had issued pension obligation certificates of participation (COPs), but failed to close its defined benefit plan. That meant that the liabilities were open-ended. In addition, when the city made an estimate of its unfunded pension liability, the estimate undershot the actual amount by $300 million, he said. “Even if everything had worked out brilliantly, they were still not going to be fully funded,” Axe said. “That was a catastrophe.”

Axe also responded to a written question about the Water Street project in Ypsilanti. The city of Ypsilanti had been working with a developer who was interested in redeveloping an area near downtown. The developer had told the city that the city needed to buy the property, remediate it, and put in public services, then the developer would put in housing there. The city agreed and issued a roughly $13 million bond to cover its costs. But remediation cost more than expected, Axe said, and worse than that, the developer backed out. Now, those bonds have been re-funded with a $15.74 million issue, he said. Axe indicated that it was a different situation than what the county is facing.

Board Deliberations: Risks

Felicia Brabec asked about possible pitfalls. She noted that Axe had mentioned the fact that Detroit hadn’t closed its defined benefit plan. That was one possible problem, but Washtenaw County had addressed it already, she noted. What other things should the board be concerned about?

So far, Axe replied, he hadn’t seen anything in the county’s approach that was inappropriate. He stressed that he’s had a lot of experience with this issue, dating back to his work on the state legislation in 2006. “You’ve done what you need to do,” he said, adding that he had confidence in the board that they would pick a strong investment manager and monitor the performance closely.

Brabec also wondered what the board could learn from Detroit’s experience, including the fact that Detroit’s defined benefit plan had been underfunded by $300 million. Underestimating the liabilities is one of her biggest concerns, she said. Axe replied that the board should pay very close attention to the actuaries. He noted that the actuaries are also making a projection. “They’re telling you how many people [they] think are going to live, and how long.” In the case of Detroit, he said, the actuarial reports were “terrible.” That’s how the city ended up with a $300 million underfunding.

Commissioner Conan Smith (D-District 9).

Conan Smith told his board colleagues that the bond itself “is not the thing that should scare anyone.” The bond is the most stable, predictable part of the entire formula, he said. The county will borrow a certain amount of money at a set interest rate, and with set payments over a certain period.

Rather, the “calculus of risk” for the county, C. Smith said, is on the return on investment from the bond proceeds, and whether that return will be sufficient to make the county’s actuarially-required contributions. Also unknown is what those contributions will actually be. If cancer is cured and people suddenly live 15-20 years longer, he noted, that will affect the actuarial projections dramatically, “and we will not have prepared for that with this bond.” But those extra costs would be incurred even if the county didn’t bond, he added. The bond is “a good, smart, stabilizing plan,” C. Smith said, and it ensures as much predictability in the budget as possible.

There are a lot of things out of the board’s control, he noted, including the market and how long people will live. “We’ll have to deal with those variables one way or the other.”

The other risk-tolerance question can be seen using Dan Smith’s house analogy, C. Smith said. If he could mortgage his house and get $200,000 in cash at 3%, then invest it in the market and earn 6%, “why wouldn’t I do that?” The question is how much risk are you willing to tolerate? he said. The board can look at the entire earnings history of the VEBA and WCERS funds, and use that as a fairly reliable measure of return on investment. “It’s just a question of how much confidence we as a board have in those figures.”

The board needs to assess if the bonding lessens the risk somewhat, C. Smith added. “My own personal assessment is that it lessens our risk.” The actuarial projections might change and the market might shift up or down, he said. But at the very least the bonding provides a foundation that the county can work from, to deal with the volatility between the bond payments and the market return, rather than the volatility for the VEBA and WCERS funds as a whole.

Dan Smith referred to communications from Axe that characterized the bond as “fully funding” the county’s VEBA and WCERS systems. He noted that it would really only be fully funded at the moment that the bonds are issued, “because everything in the future is dependent on the actuarial reports.” It’s possible that the bonds will overshoot or undershoot the actual amount needed. “Five years into this, we could be back in the same position,” D. Smith said.

Axe replied that there’s no guarantee about what will happen in the future. It’s not allowed under the law to borrow more than the fully funded amount, he said. That amount might change if people live longer. At least for future hires, the county is protected because the defined benefit plan is closed, Axe noted. But if people who are currently covered by the plan live an extra 10 years beyond the actuarial projections, “it will mess up the actuarial reports something fierce, there’s no doubt,” Axe said.

Axe added that all actuarial reports are based on history, but people are living longer than they used to live. He noted that when the federal Social Security system was set up in 1935, it was based on people beginning to collect benefits when they were 65. But the life expectancy at the time was 63.

D. Smith observed that it appears people have forgotten about recent history, and what dismal years there have been in the economy, especially in Michigan. To make long-term assumptions, using the past as a predictor of the future, is a scary approach, he said. In 2000 or 2001, no one except doomsday extremists would have predicted a housing market bubble. Basing the future on the past “is a little dicey,” D. Smith said.

Board Deliberations: Advice from Others

Rolland Sizemore Jr. wanted to get input from experts at the University of Michigan and Eastern Michigan University business schools. It bothered him that the county would be paying a third-party advisor to look into this proposal. “We’ll be paying out a ton of money to get the bonding, and we’re going to pay out a ton of money to figure out if it’s right.” He also asked for the opinion of the county treasurer, Catherine McClary, as well as the county’s current actuaries for the VEBA and WCERS funds, and the local state senator and representatives. [The state senator representing the Ann Arbor area is Rebekah Warren, who is married to county commissioner Conan Smith. The state representative for the district covering Ann Arbor is Jeff Irwin, a former Washtenaw County commissioner.]

Washtenaw County treasurer Catherine McClary talks with county commissioner Dan Smith after the May 2 working session.

Sizemore was concerned that the board seems to be pushing this through, without time to get outside advice.

Yousef Rabhi responded, saying he felt those concerns are valid. As a reaction to some concerns he’d heard from other commissioners, Rabhi said a third-party firm that’s not affiliated with Axe & Ecklund could be hired to review the process. That firm would be paid by the county. “We certainly don’t have to do that,” Rabhi said. But he’d recommended it, because he’s heard from others that another set of eyes is needed.

[That third-party firm is Public Financial Management Inc., with offices in Ann Arbor. Both PFM and Axe & Ecklund are part of the county's bond and financial consultants pool. For this project, PFM has not yet provided an estimate of their fees, which will be based on the number of hours needed to review the bond proposal. (.pdf of PFM's general consultant proposal, including the firm's fee structure)]

Rabhi agreed with Sizemore that the county is lucky to have others in the community who are qualified to look at this, and it would be great to have their input. He offered to work with Sizemore and the administration to find out the best way to engage these people.

Sizemore said that in his experience, when a consultant is hired, that consultant can be swayed to present the kind of response that the client wants. That wouldn’t be the case with a university expert, he said.

Dan Smith wanted to see a study that “paints the absolute worst-case scenario.” Looking at the markets today, predictions are “all over the place.” At this point, the board is getting only one opinion, he noted.

Board Deliberations: Axe & Ecklund, MFCI

Ronnie Peterson asked about the financial obligations that the county would have toward Axe & Ecklund. Axe replied that there are no financial obligations if the bond proposal doesn’t go through.

Axe also responded to written questions related to his firm. He was asked how the board can be assured that his advice is sound, when he stands to benefit from this proposal. Axe said that this question could be asked any time his firm gives advice on a bond issue. He noted that “we’re the lawyers, we’re not the financial advisors.” [The financial advisor used in this and many other county bond deals, MFCI, is led by Axe's daughter, Meredith Shanle.]

Axe said that if there’s any indication of a problem with a bond issue, “we would naturally bring it to your attention.” The firm has represented Washtenaw County on 131 bond issues since 1973. Since 1981, that amount has totaled $668 million. There’s never been a problem or legal challenge, he said. As bond counsel, his firm has the legal responsibility to defend the bonds for the life of the bonds. Over the years, he said, his firm has issued a lot of legal opinions on behalf of Washtenaw County.

Andy LaBarre asked if it was correct to say that as bond counsel, “you’re on the hook for 25 years?” Yes, Axe replied. “Absolutely.” He added that he valued the county’s business, and it’s his firm’s responsibility to point out any problems. Axe also noted that his firm is not being paid any extra to work on this particular bond issue. “We’re being paid the regular rate that’s already established in the contract we have.” [.pdf of Axe & Ecklund professional services contract with Washtenaw County]

Axe did not discuss details of his fees during the working session. Responding to a request from The Chronicle, the county administration provided that information. For bonds less than $500,000, the firm is paid $5,000. For amounts higher than that, the firm is paid a combination of flat rate and percentage of the bond issue. For amounts over $2 million, the flat rate is $12,500 plus .0025% (one quarter of 1%) of the amount in excess of $2 million. Additional fees and expenses may also be incurred, according to the fee schedule. [.pdf of Axe & Ecklund fee schedule]

The fees for this bond issue fall under Axe & Ecklund’s fee schedule for capital improvement bonds, because the state legislature amended the capital improvement bond statute to permit governmental entities to bond for their unfunded actuarial accrued liabilities (UAAL). In addition, Axe & Ecklund’s bond counsel fees are reduced by 15% when the county also hires MFCI as a financial consultant.

In response to a direct question from Dan Smith, Axe replied that his firm’s fee for this bond issue would be about $485,000.

Board Deliberations: Voter Referendum

Dan Smith noted that Axe, as bond counsel, didn’t see any reason to take this issue to the voters. However, as an elected official, Smith said, increasing the taxpayers’ debt load by about $700 per person sounds like a really good reason to ask them for their opinion, “whether we have to or not.” Smith said he understands that the county isn’t required to get voter approval.

Responding to a follow-up question from Andy LaBarre, Meredith Shanle of MFCI clarified that from an historical perspective, if the proposed bond issue takes place, the debt load would be 410% (about four times) higher than the debt that the county carried 30 years ago. During the same period, the county’s taxable value increased 445%.

Andy LaBarre, right, talks with former county commissioner Wes Prater.

Alicia Ping ventured that the county would not be increasing the debt load but simply recognizing it. When Shanle confirmed this assessment, Ping stated that the county is actually reducing its future liability with this approach.

Ping said she initially agreed with Dan Smith about taking this to the voters. Then she was informed that if the county did that, certain commissioners – like Conan Smith, she noted – could advocate to increase the millage rate and use the extra money for other purposes. So she felt that by not going to the voters, the board would be limiting its power to further tax the county’s residents. Shanle said that was correct.

Ronnie Peterson pointed out that the voters could be asked whether this approach – the one being proposed by Axe – is acceptable, capped at a certain amount to cover the VEBA and WCERS liabilities. That is, a voter referendum would not need to be only for an unlimited tax bond. A referendum could be put before voters for the exact proposal that’s now being considered by the board. “That’s not an open-ended bonding proposal,” Peterson said. “I don’t want the public to be mislead by the answer to that last question.”

Axe said that Peterson was correct, and noted that there is no proposal now to levy an additional tax. The proposal, however, “would certainly free up a huge amount of money to use for other projects,” Axe added.

That’s not the question, Peterson replied. The question, he said, is whether voters could have a choice to make this decision – to retire the debt obligation for VEBA and WCERS. And the answer is that they can.

Dan Smith said he wasn’t currently proposing that the proposal be put to voters, but rather he was exploring the board’s options. If commissioners did decide to put a question on the ballot, they’d likely ask voters to levy considerably less than the current proposal, he said. The amount of a new levy plus the bond proceeds would equal the amount required to retire the debt, he said.

In this approach, voters would be asked to approve levying a millage to cover a smaller bond issue, and the county would continue to contribute a portion of the retiree obligations from its general fund. “That keeps those general fund dollars from being directed toward something else,” D. Smith said.

Axe explained that if there’s a voter referendum for a general bond issue, then voters have given the board the power, over the life of the bond, to levy an unlimited tax in any year to pay the debt service due on that bond issue. The current proposal was made, without a recommendation for voter approval, because it’s well within the county’s ability to pay these bonds without levying a tax, Axe said.

On the other hand, if you put a specific millage on the ballot to pay for the bond, Axe said, that’s a different approach and one that wasn’t considered by his firm.

D. Smith reiterated that in the approach he described, the county wouldn’t issue bonds in an amount to cover the entire VEBA and WCERS liability. The bond issue would only be in an amount to manage the county’s current “cash flow crunch,” and the board would be getting the voters’ approval to do that.

Ping gave an analogy of having a $10 budget, and using $2 of that each year to pay back the bonds. If the board decides to do other projects and can afford to only pay back $1, would it be possible to levy a new millage to pay back the additional dollar? Axe replied that this would be possible if the voters approved the bond issue. Ping then stated that under this scenario, the board could spent $9 – knowing that there was a $2 debt obligation – and levy a tax for that additional $1. Axe replied that if the voters approved a bond issue, the board would have the flexibility to do that for the next 25 years.

Ping clarified that if voters don’t approve the bond issue, the board would always be required to make the $2 bond payment from existing funds, without an extra tax. “You got it,” Axe replied.

Yousef Rabhi continued Ping’s analogy, saying that right now, out of a $10 budget the county has a liability of $1.75 for its retiree obligations. Next year that amount could be $2, and $2.10 the following year. But by borrowing to cover those liabilities with a limited tax bond, the variations in those payments will be minimal. It’s money that the county would have spent out of its general fund anyway, he said. “But instead of paying off those liabilities, we’re paying off the bond,” Rabhi said.

With a voter-approved unlimited tax bond, the amount that’s borrowed could be covered in full or in part by an additional millage, Rabhi said. So if the general fund is only paying $1 and the millage is covering the other $1, then an extra $1 has been freed up from the general fund for other uses, he said. That approach would “actually expand the realm of revenue to pay off the bond.” So the potential would be there for taxpayers to end up paying more, he concluded.

At this point, Conan Smith observed that commissioners were blending two different things. “The only person in this room who is at all interested in an unlimited tax bond is me,” he joked. No one is proposing putting an unlimited tax bond on the ballot, he said. Rather, he said, Dan Smith and Ronnie Peterson are asking whether the board would voluntarily put the general obligation bond up for voter approval.

D. Smith and Peterson indicated that this was a correct assessment of their views.

Board Deliberations: Credit Rating

Andy LaBarre asked if the proposed savings anticipated with this bond issue – savings estimated by MFCI to be more than $100 million – would positively affect the county’s general credit rating, possibly getting it to a triple-A status.

Meredith Shanle of MFCI said rating agencies have indicated generally that they’d lower credit ratings if government entities don’t address their pension and retiree healthcare obligations. As far as increasing the county’s credit rating, she said the bond proposal might have a positive impact but that’s difficult to say. It certainly wouldn’t hurt the county, she said. “It will help you.”

From left: Washtenaw County prosecuting attorney Brian Mackie talks with county commissioner Ronnie Peterson.

Conan Smith noted that the county doesn’t have control over the process of moving its credit from a double-A to a triple-A rating. Over the last six months, there have been a number of bonds issued in Michigan – by Oakland County, for example – that have received a triple-A rating. What have those entities done that Washtenaw County could do to get a triple-A rating for this bond issue? he asked. C. Smith also noted that when Axe spoke to the board several months ago, he had indicated that the maximum difference between a double-A and triple-A rating, in terms of the interest rate that could be secured, was one-sixteenth of a percent.

Shanle replied that she could look into specific examples, but in general rating agencies want an entity to be conservative. In the case of Oakland County, she said, they operate on a three-year budget planning cycle. They’ve made cuts in their budgets – rating agencies like that, she said. Agencies also look at the fund balance as a percentage of expenditures, she noted.

C. Smith said his line of questioning was aimed at budgetary policy. The county administrator, Verna McDaniel, came to the board with a scan of the county’s financial situation, he said. She had proposed increasing the county’s fund balance up to 20% of total expenditures. He said he was skeptical of that move, because it takes away hard dollars from the county’s ability to spend that money on programs and services.

If the county is able to win triple-A rating, C. Smith said, and the interest rate that the county pays on its bond issue drops by one-sixteenth of a percent because of that, then it would take an “awfully big” bond offering to make it a worthwhile investment – one that could result in adding $4 million a year to the fund balance. “Well now, we have an awfully big bond offering,” he said, which might allow for moves like that to make fiscal sense. It would stabilize the long-term prospects of the organization, he said, and allow for more cash-on-hand to spend on programs and services. “This is why I’m keenly interested in that calculation,” he said, and keenly interested in what the county can do quickly to improve its credit rating.

He noted that on May 1, the board authorized McDaniel to develop a four-year budget process, and he hoped that would help the credit rating. He asked Shanle to run an analysis on the interest-rate differential if the county secures a higher credit rating. He also asked for other recommendations for things the county can do over the next several months to increase their chances of a better rating.

Board Deliberations: Unfunded Liabilities

Ronnie Peterson criticized the fact that the board hadn’t been paying sufficient attention to the unfunded pension and retiree healthcare liabilities over the years.

Conan Smith responded to that complaint, saying that the county didn’t deliberately underfund the system. The county has always made its actuarial contributions to the retirement system. There were two contributing factors to the current situation, he said. The most impactful, he said, was that the county re-opened WCERS after it had been closed in the 1990s. “It was a closed plan. We opened it back up. We brought a lot of employees in, and now they’re ready to retire,” he said. “There’s been no time to develop a fund sizable enough to cover those liabilities.” [The decision to re-open WCERS was a board decision.]

The second factor was that in 2008 and 2009, the county lost a lot of money because of the market crash, he said. “It’s only 2013 – we haven’t had enough time to recoup those funds in the market.” It’s not the irresponsibility of government that has led to this point, C. Smith continued. “I want to make that absolutely clear – we have always been fiscally responsible.”

Board Deliberations: Other Options?

Ronnie Peterson asked if Axe and Shanle had looked at other options, such as transferring WCERS to the Municipal Employees’ Retirement System (MERS). Only a small subset of county employees are currently enrolled in MERS. Peterson wondered if it would be possible to do the transfer, and if it would change the county’s contribution for retiree obligations.

Conan Smith said he found Peterson’s suggestion really creative, but added that his gut feeling is there won’t be any savings from it. “We’re not going to be allowed to balance our costs on other people’s incoming employees.” He guessed the costs would remain about the same.

Diane Heidt, the county’s human resources and labor relations director, told the board that the new 10-year collective bargaining agreements specifically call for existing employees to use WCERS as the defined benefit plan. The only thing that the county could explore would be to use MERS for new hires starting in 2014, she said.

She also noted that any changes would require the county to re-open those labor agreements, which would “trigger all of the other issues that we’ve talked about.” [The new contracts, approved by the board on March 20, aimed to protect unions before Michigan’s right-to-work law took effect on March 28, and to cut legacy costs for the county. All but one of the new agreements run for more than 10 years, through Dec. 31, 2023. If the contracts are re-opened before that time, then the right-to-work law would take effect for county employees.]

Dan Smith noted that the board hasn’t been presented with other options, “and we’ve been put under incredible pressure to do this now.” He didn’t put a lot of stock in the argument about interest-rate sensitivity – saying he thought the county would end up borrowing at about the same interest rate that they would get from investing the bond proceeds. He’d like to investigate other options, rather than proceeding “headstrong” down this path. Given the law’s sunset date of Dec. 31, 2014, the board has about another year to look at this, he said.

“This truly is a restructuring of our debt,” D. Smith said. “What we’re really trying to do is to manage our cash flow.” The main concern is how to deal with the roughly $30 million annual contribution that the county would need to make to VEBA and WCERS, if the county didn’t bond. He equated it to refinancing into a 10-year interest-only mortgage. For the first 10 years, the payments are substantially less, but those payments increase when you start paying principal as well as interest.

Conan Smith said it’s important to remember that the board “set the course” when it approved those contracts and closed the define benefit plans earlier this year. He acknowledged concerns about the timing, “but in part it has to move so fast because this board closed the plan, and we’re looking at a $30 million payment in 2014, if we don’t do something.” He continued:

So it was a choice we made willfully and with full knowledge and now we’re designing a fiscal strategy to minimize the severity of the impact on our budget. That’s why we need to move fast, and I think we should move fast. I don’t want to see us taking that full amount out of the 2014 general fund. So let’s find some other way to do it. That’s critically important.”

Public Commentary, Part II

At the end of the meeting, Wes Prater spoke again and cautioned commissioners about the “visions of sugar plums” they were seeing from projected savings. He noted they were operating in a global economy, pointing to the ongoing financial crisis in Greece. All of the assumptions could change “with the line of a pencil,” Prater said. He indicated that the board was moving too fast, with not enough scrutiny and too many unanswered questions. Structural changes need to be made, he said, and the county needs to tighten its belt. He said he planned to be part of the process to help do that.

Doug Gross also spoke a second time, noting that to satisfy current employees, the county is discriminating against younger people, who won’t have access to the defined benefit plan. At a certain point, those new employees will want a better plan and the board might reverse itself and decide to re-open the defined benefit plan again. That’s what happened in 2008, when the board re-opened WCERS and pulled a lot of employees into the plan – when it had previously been closed in the 1990s. “You’re basically laying the groundwork to do the exact same thing all over again,” Gross said. The county needs a sustainable plan it can actually afford.

Thomas Partridge criticized the working session for being an unbalanced, single-issue meeting, even though the residents face multiple other issues, like homelessness, affordable housing, public transportation and health care.

Responding to the public commentary, Andy LaBarre – who chairs the board’s working sessions – said that the purpose of this meeting had been to discuss a single issue, and to have a policy discussion about the bond proposal. At this point, he said, this proposal is a possibility, not a certainty. “The die has not been cast.”

Present: Alicia Ping, Felicia Brabec, Andy LaBarre, Kent Martinez-Kratz, Ronnie Peterson, Yousef Rabhi, Rolland Sizemore Jr., Conan Smith, Dan Smith.

Next regular board meeting: Wednesday, May 15, 2013 at 6:30 p.m. at the county administration building, 220 N. Main St. in Ann Arbor. The ways & means committee meets first, followed immediately by the regular board meeting. [Check Chronicle event listings to confirm date.] (Though the agenda states that the regular board meeting begins at 6:45 p.m., it usually starts much later – times vary depending on what’s on the agenda.) Public commentary is held at the beginning of each meeting, and no advance sign-up is required.

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The resolution authorizes the sale of refunding bonds that would be used to pay the remaining principal on existing bonds that were sold in 2004. That year, the county sold $5.115 million in bonds to help Lyndon and Sylvan townships pay for the sewer. Of that amount, $2.25 million remains to be repaid. According to a staff memo, the project built sewers at Cavanaugh, Sugar Loaf, Cassidy, Crooked, and Cedar Lakes. It’s funded through special assessments on property around those lakes and payments by the Sugar Loaf Lake State Park and Cassidy Lake State Corrections Facility.

The staff memo also states that additional funds might be available from special assessment prepayments and connection fees paid by the state of Michigan. These funds might reduce the total refunding bond amount even more, and would increase the savings.

This sewer system is separate from a controversial water and wastewater treatment plant project in Sylvan Township. For more background on that project, see Chronicle coverage: “County Board OKs Sylvan Twp. Contract.”

This brief was filed from the boardroom of the county administration building at 220 N. Main. A more detailed report will follow: [link]

In May of 2012, the county had picked up a $175,000 interest payment that the township couldn’t afford to make, related to $12.5 million in bonds that were issued 11 years ago – and backed by the county’s full faith and credit – to build a water and wastewater treatment plant in the township. The treatment plant in Sylvan Township that was intended for future development. Under a previous contract with the county, the township was obligated to make the bond payments. [.pdf of June 20, 2001 county board resolution authorizing the bonds] The township expected that connection fees from developers would cover those payments, but the development never materialized and the township has been struggling to make payments.

Township officials put a millage proposal on the November 2011 ballot to levy a 4.75 mill, 20-year tax that would fund the bond payments. But Sylvan Township residents rejected the millage by a vote of 475 to 328. As soon as the millage failed, it became clear that Sylvan Township – located west of Ann Arbor, near Chelsea – would not be able to make its payment in May of 2012. Because the county had backed the bonds with its full faith and credit, it is ultimately responsible for making the payments, even if it isn’t reimbursed for those payments by the township.  The county has an interest in making the bond payments to avoid having its AA+ bond rating negatively affected.

Even if the millage had passed, proceeds alone would not have been sufficient to cover the entire cost of the bond payments, however – forcing the county to tap its capital reserves as well. The millage proceeds were also intended to repay the county to cover any amount used from the county’s capital reserves, as well as interest. The proceeds would also have been used to repay the county treasurer’s office, which advanced about $1.2 million to the township in 2007 and 2008 related to this project.

At their Oct. 19, 2011 meeting, county commissioners gave final approval to a contract with Sylvan Township related to the township’s bond repayment schedule. However, the contract was contingent on voters passing the 4.75 mill tax, so the contract was nullified in the wake of the November 2011 vote. A staff memo accompanying the October 2011 contract resolution indicated that if the millage failed, the county could file suit against the township for breach of contract in failing to meet its debt repayment obligation. Such legal action could result in a court-ordered assessment on township residents. According to a staff memo for the July 11 resolution, the county is still pursuing “legal remedies” to the situation, but hopes to find other ways to resolve the issue.

Currently $9.7 million in principal is owed, plus interest – another $175,000 in November and two payments totaling $350,000 in 2013 – and the $1.2 million that was advanced by the county treasurer. In total, $11.425 million is owed.

The contract authorized by the board on July 11 is nearly identical to the one it approved in October of 2011. It’s contingent on township voters approving a 4.4 mill tax for 20 years that will be on the Aug. 7 ballot. The county will use its capital reserves to make the bond debt payments, and the township will repay the county with proceeds from the millage. The township’s repayments will continue for seven years past the debt repayment schedule, to cover interest as well as the repayment of $1.2 million advanced by the county treasurer.

This brief was filed from the boardroom of the county administration building at 220 N. Main in Ann Arbor. A more detailed report will follow: [link]

University of Michigan president Mary Sue Coleman, chairing the Dec. 17 board of regents meeting. (Photos by the writer.)

Despite some logistical challenges presented by a conference call format – which allowed the other regents to participate remotely – the board dispatched with its last meeting of 2010 in 20 minutes. They approved the schematic designs for two major building projects: a renovation of the Alice Lloyd Hall student dorm, and an addition to the G.G. Brown mechanical engineering building. Regents also authorized the university to guarantee a portion of the debt to be incurred by Merit Network, a nonprofit that provides Internet services for research, government and educational entities. The debt is related to a $102.9 million federal stimulus grant awarded to Merit.

As an information item, the regents received an annual report on leases that the university holds for space over 50,000 square feet. Tim Slottow, UM’s chief financial officer, reported that leased space compared to a year ago is essentially flat. While some units have moved out of leased space and into the North Campus Research Complex – the former Pfizer site – other leases have expanded.

President’s Opening Remarks

UM president Mary Sue Coleman began the meeting by thanking everyone for accommodating the change in date – moving the meeting from its original Dec. 16 date to the following day. It had been postponed so that many of them could attend the funeral of Mark Pescovitz on Thursday, she said. Calling his death a tragic loss, Coleman expressed deep sadness for Ora Pescovitz and her family. “Ora and her family are very much in our thoughts and prayers and will be in the days and months ahead,” she said.

Coleman noted that last week marked the conclusion of the Accelerate Michigan Innovation Competition, held at the university’s North Campus Research Complex. More than $1 million had been awarded, she said, and the top two company prizes went to UM start-ups: Armune BioScience, which received $500,o00; and Arbor Photonics, which got $150,000. In addition, UM student teams swept the student competition, Coleman reported. The results show that “Michigan has a vibrant, innovative future,” she said.

Coleman stated that she was looking forward to UM’s winter commencement on Sunday, Dec. 19, and to the keynote speech by Daniel Kahneman, recipient of the 2002 Nobel Prize in economic sciences. Kahneman received an honorary degree during the ceremony, along with astronomer Sandra Faber and investment manager Charlie Munger.

Finally, Coleman wished the UM football team well in the upcoming Gator Bowl, and gave her holiday greetings to the university’s students, faculty, staff and regents.

New Dean for School of Public Health

As part of their approval for a raft of appointments and promotions, regents approved Martin A. Philbert as the new dean of the School of Public Health. He currently serves as a UM professor of toxicology and the school’s senior associate dean for research. His five-year contract runs from Jan. 1, 2011 through June 30, 2016.

In noting the appointment, provost Phil Hanlon told the regents that the university had conducted a rigorous international search for this position, and that Philbert’s selection was widely supported.

Though it’s common for new deans to attend the regents’ meeting at which they are officially appointed, Philbert was not present at Friday’s meeting.

Building Projects

Regents approved three building-related projects at Friday’s meeting, and heard presentations from architects for two of the projects.

Alice C. Lloyd Hall Renovations

In June 2010, regents gave general approval for a $56 million “deep” renovation of Alice C. Lloyd Hall, a dorm located on South Observatory that houses about 560 students. On Friday, regents were asked to approve schematic designs for the project.

Paul Stachowiak, president of Integrated Design Solutions, gave a presentation on the schematic design for Alice Lloyd Hall renovations.

Paul Stachowiak, president of the Troy-based architectural firm Integrated Design Solutions, presented the designs and an overview of the project.

In addition to updating the building’s infrastructure, the project includes repurposing the former dining hall that was vacated when the Hill Dining Center opened in 2008. More spaces for living-learning activities will be created, as well as areas for dance practice, art studio space and music practice rooms. The building will be designed to meet Energy Star guidelines, Stachowiak said – the only other UM residence hall to meet those standards is Couzens Hall on East Ann, which is currently being renovated.

Before the vote, Mary Sue Coleman commented that the new design gives the building a cleaner, more coherent look. She clarified that the new main entrance would be off of the Palmer Field side of the building, rather than from Observatory. The renovation will be a huge, positive change to the campus, Coleman said.

The project is expected to be finished by the fall of 2012. Coleman noted that it’s the last significant renovation planned for a student residence hall, part of a major multi-year overhaul known as the Residential Life Initiative. She observed that this will be a relief for Royster Harper, UM’s vice president for student affairs. Harper laughed at the statement.

Outcome: Regents unanimously approved the schematic design for Alice Lloyd Hall renovations.

G.G. Brown Building Addition

At their June 2009 meeting, regents gave initial approval for a $56 million, 66,000-square-foot addition to the G.G. Brown Memorial Laboratories, which was built in 1958 on UM’s north campus and houses the Department of Mechanical Engineering. Since then, the project has been scaled back – the addition is now expected to cost $46 million, adding 62,500 square feet. The addition will house research labs, and faculty and graduate student offices for emerging research areas, including bio-systems, energy systems, and nano-systems.

Robert Goodwin, a principal of the New York architectural firm Perkins + Will, gave a brief presentation about the project. He said that part of the project’s design was an effort to connect UM student housing to the north, with the rest of the north campus buildings located south of G.G. Brown.

Another element that Goodwin highlighted is a proposed LED light display on the western facade of the addition. In the evening, the lights would create an abstract image derived from actual images of research that’s occurring in the building, he said, adding that the display would be a distinctive element for north campus.

The project is expected to be finished by the winter of 2014.

Slottow clarified that this project is separate from a renovation of the existing G.G. Brown building that recently received $30 million in funding as part of the state capital outlay bill. He told regents that they’d be asked at a later date to approve that project – an estimated $50 million effort. Mary Sue Coleman commented that the building is currently in “terrible shape.”

Outcome: Regents unanimously approved the schematic design and revised scope and budget for the G.G. Brown building addition.

Edward Henry Kraus Building Renovation

Regents were also asked to approve a $1.7 million project to renovate 4,200 square feet of lab and support space on the second and third floors of the Edward Henry Kraus building, located at 830 N. University Ave. The space is used by the Department of Molecular, Cellular, and Developmental Biology. The project is expected to be finished in the fall of 2011.

Outcome: Regents unanimously approved the $1.7 million renovation project of labs in the Edward Henry Kraus building.

Merit Network Debt

At Friday’s meeting, regents were asked to authorize a guarantee of debt for Merit Network. Merit is a member-owned organization that was founded by the state’s public universities, including UM, to provide computer networking services for its members as well as other research, government and educational entities.

In introducing the item, Tim Slottow – UM’s chief financial officer – called it a “phenomenal opportunity” for the nonprofit. Merit has been awarded a $102.9 million federal stimulus grant under the American Recovery and Reinvestment Act to build roughly 2,300 miles of an advanced fiber-optic network throughout Michigan. The network, called the REACH Michigan Middle Mile Collaborative, will focus on underserved and remote areas. As part of the award, Merit must cover $8.2 million in cost-sharing expenses.

According to a cover memo regarding this item, the Michigan Strategic Fund, a state economic development entity, plans to issue up to $8 million of limited obligation tax exempt bonds at an estimated interest rate of 3.2% – the MSF would lend the funds to Merit, which would be responsible for the bonds’ debt service.

JP Morgan Chase Bank plans to purchase and hold the bonds. The bank has asked that the members of Merit – including UM – guarantee the loan through an assessment agreement. The agreement requires that each Merit member would pay, as part of its annual fee, an additional assessment called the Member Debt Service Amount, which would be a guarantee to cover the debt service of the bonds.

UM’s portion of the guarantee would be $470,000 for five years, after two years of interest-only payments of $70,000. The maximum annual liability of the university could reach $870,000 of debt service for $4 million of secured debt, plus interest and fees.

According to the cover memo, Merit expects to pay for the project’s debt service from increased demand for its fiber-optic network, savings in current circuit expenses, and the paydown of an existing loan.

Slottow told the regents that this agreement, by guaranteeing the debt, will allow Merit to reduce its financing fees by $1.7 million.

Regent Andy Richner, a partner with the law firm Clark Hill, recused himself from the vote, without citing a specific reason for his recusal.

Outcome: Regents authorized a guarantee of debt for Merit Network. Andy Richner recused himself from the vote.

Leased Space Report

The university staff must make an annual report to the regents regarding leases it holds for space exceeding 50,000 square feet. Tim Slottow, UM’s chief financial officer, reported that there are currently five locations in that category. Four of those locations are in Ann Arbor:

• 214,773 gross square feet at the Domino’s Farms complex is used by several University of Michigan Health System (UMHS) departments, including Sports Medicine, Plastic Surgery, Preventive Cardiology, and various Medical School groups, including Internal Medicine.
• 125,815 gross square feet at the KMS Building on South State Street is leased from Kosmos Associates for Hospital Clinical Billing and other UMHS groups.
• 65,693 gross square feet on East Eisenhower Parkway is leased from Burlington Property LLC for use by Physical Medicine and Rehabilitation, Spine Rehabilitation and the Dental School.
• 63,920 gross square feet at 2301 Commonwealth Boulevard is leased from First Properties Associates for use by various UMHS groups.

The university also leases 51,534 gross square feet at 1051 North Canton Center Road in Canton from Saltz Center for the UMHS Canton Health Center.

Slottow mentioned that while some leases were reduced as units moved into the North Campus Research Complex – the former Pfizer facility acquired by UM – leases had increased in other areas. The result is that the university’s lease obligations are essentially flat, he said.

Conflict-of-Interest Disclosures

Regents authorized three items that required disclosure under the state’s Conflict of Interest statute. The law requires that regents vote on potential conflict-of-interest disclosures related to university staff, faculty or students. Often, the items involve technology licensing agreements or leases.

This month, the disclosures involved deals with the following entities:

• An agreement between UM and Internet2, a nonprofit consortium of universities and industry focused on high-speed computer networking infrastructure and services. UM president Mary Sue Coleman serves on its board, and Doug Van Houweling, Internet2′s CEO, is also a UM professor and associate dean of the university’s School of Information. Internet2 is providing $18,000 for a project by Daniel Atkins, a professor at the School of Information and UM associate vice president for research cyberstructure. Called CI Days at UM, the project aims to raise awareness of new cyberinfrastructure services available on campus.
• A license agreement between UM and Fusion Coolant Systems, a company owned by Stephen Skerlos, a UM engineering professor. The company plans to license technology developed at the university to cool manufacturing casting and tooling systems.
• A license agreement between UM and Ascentage Pharma Group Corp., a business which is owned in part by UM medical professor Shaomeng Wang. The company wants to license technology to commercialize compounds with potential anti-cancer applications.

There was no discussion about these items.

Outcome: Regents unanimously approved the full slate of conflict-of-interest disclosures.

Another item that was initially on the agenda was withdrawn from consideration during the meeting by Stephen Forrest, UM vice president for research. The item had been for the approval of a license agreement between UM and Life Magnetics Inc., partially owned by Brandon McNaughton, an assistant research scientist in biomedical engineering. The company is planning to commercialize a device to measure the growth of bacteria, using technology licensed from UM. There was no explanation given during the meeting for this item’s removal.

Present: Mary Sue Coleman (ex officio), Julia Darlow, Kathy White. Also participating via conference call: Larry Deitch, Denise Ilitch, Olivia (Libby) Maynard, Andrea Fischer Newman, Andrew Richner and Martin Taylor.

Next board meeting: Thursday, Jan. 20, 2010 at 3 p.m. at the Fleming Administration Building, 503 Thompson St., Ann Arbor. [confirm date]

The board dissolved the land bank – a tool used to help the county deal with foreclosed and blighted properties – at their March 2010 meeting, but commissioner Ronnie Peterson has pushed to bring it back. He initially proposed putting a resolution on the June meeting agenda, but later agreed to a request by board chair Rolland Sizemore Jr. to hold off until July. But at the June 29 briefing, Sizemore and Conan Smith, who chairs the board’s Ways & Means Committee, said they were not putting a resolution on the July 7 agenda either, though discussion on the topic is scheduled for the meeting. Peterson did not attend the briefing.

A range of other items are on the agenda, including a public hearing on possible expansion of the county road commission, and a resolution regarding a transparency initiative that’s been in the works for several months. Led by commissioner Kristin Judge, the effort aims to put more of the county’s public documents, especially financial information, online.

Commissioners expressed some concern over one agenda item: Restructuring the debt for a Dexter Township wastewater system, with the goal of lowering payments – payments the township might otherwise have trouble making. The item led some commissioners to ask for a report on debt held by local townships that’s backed by the county’s credit.

Land Bank: Unresolved Issues

The board of commissioners authorized the Washtenaw County Land Bank Authority a year ago, at their July 8, 2009 meeting. In general, land banks can be used to take temporary ownership of tax- or mortgage-foreclosed land while the county works to put the property back into productive use. “Productive use” might mean selling it to a nonprofit like Habitat for Humanity to rehab, or demolishing a blighted structure and turning the land into a community garden.

The idea is to provide some options to deal with blighted properties. In the case of a tax foreclosure, for example, the county treasurer must auction off the parcel to the highest bidder – often, that’s an out-of-state buyer who’s looking for cheap rental property, sight unseen. That scenario often results in a high likelihood that the cycle of foreclosure will repeat itself.

Before it was formed last year, several commissioners voiced concerns about establishing a land bank, citing issues of governance, control and liability for the county. Ronnie Peterson was among the more vocal in his doubts, saying the board wouldn’t have sufficient control over the land bank authority, other than appointing some representatives. He was also worried about maintenance of the properties acquired by the county, and who would manage and pay for that. Ultimately, though, the resolution to form a land bank passed unanimously.

The land bank authority was chaired by county treasurer Catherine McClary, who had championed the proposal. But commissioners never came to agreement about who to appoint to the authority’s board, and didn’t receive the amount of federal support they’d anticipated would help fund the effort.

Citing these concerns, commissioners voted to dissolve the land bank at their March 17, 2010 meeting. Peterson was the lone vote against that decision at the March board meeting. He asked instead that McClary and others involved in the effort be given more time to address these issues. However, Peterson was not able to persuade other commissioners to table the resolution that dissolved the entity.

Then, at the board’s May 19, 2010 meeting, Peterson told his colleagues that he wanted to reestablish the land bank, and intended to bring a resolution to that effect in June. “I’m going to get this passed,” Peterson said at the time. “I’m going to get this passed at all costs to me.” Peterson represents a district that covers Ypsilanti and parts of Ypsilanti Township, which have a high number of foreclosures.

But by June, board chair Rolland Sizemore Jr. had convinced Peterson to wait another month. From Chronicle coverage of the June 2, 2010 meeting:

Peterson told commissioners he’d subsequently had a breakfast meeting with the board chair, Rolland Sizemore Jr., who had asked him to wait until July 7 before proposing a land bank resolution.

Peterson said that he’d be respectful of that request, but that on July 7 “I’ll be aggressive.” Jessica Ping, who chairs the board’s working sessions, pointed out that the topic of a land bank was on the agenda for the July 8 working session. Peterson said he didn’t have a problem with that – they can discuss the resolution that they’ll pass on July 7. He said he had delayed it until July 7, but would not push it back until August. [In the summer, the board meets only once a month.]

Sizemore said the land bank is a good idea, but there are still some glitches to work out. He encouraged commissioners to attend a seminar on land banks being held next week in Lansing.

Ping proposed shifting the discussion from the July 8 working session to the July 7 meeting of the Ways & Means Committee, which is held immediately prior to the regular board meeting. That way, they could talk through the issues they needed to discuss, then vote on the resolution that same evening. Conan Smith, who chairs Ways & Means, agreed.

Administrative Briefing: Questions about Land Bank Remain

At the June 29 administrative briefing, when commissioners got an advance look at the July 7 agenda, Conan Smith explained why a land bank resolution wasn’t on it. He described the land bank as a surgical tool, not something to use broadly. Commissioners hadn’t yet agreed about exactly how the land bank would be used, and that has caused a lot of consternation among the group, he said. It’s worth talking about what unique functions of a land bank should be applied in Washtenaw County, he added, so that they can fine tune it before moving forward.

Rolland Sizemore Jr. told his colleagues that a lot of questions still needed to be answered. He knew that McClary had been working on it, he said – she also attended the briefing. Foremost among the unanswered questions, he said, were 1) Where will the funding for a land bank come from? and 2) What should it be used for? He wanted to see it be more of a countywide tool, not just something used for properties in Ypsilanti, Ypsilanti Township, Ann Arbor and Superior Township – all areas where there are higher concentrations of foreclosures.

Wes Prater said they shouldn’t forget that the land bank can also be used to deal with abandoned property that’s bringing down the value of surrounding property. The big value, he said, is in keeping other properties from losing their taxable value.

Barbara Bergman said she’d like to see a grid that compares the uses of a land bank to those that are provided by the Washtenaw Urban County, a consortium of local governments that receive federal funding for low-income neighborhoods. Smith noted that the main interest for Peterson – who did not attend the briefing – is in keeping people in their homes. There are a lot of other programs that have the same goals, Smith said, including some operated by the treasurer’s office aimed at preventing mortgage foreclosure and tax foreclosure. The joint county/city of Ann Arbor Office of Community Development also has programs providing assistance to low-income homeowners, he said.

McClary told the board that she was not promoting the land bank – she was just hoping to provide answers to the questions that commissioners had. She said she had pushed for the land bank last year, after seeing the number of tax foreclosures in the county climb – from 11 two years ago, to 100 last year, to nearly 400 this year. That’s why she had originally approached the board about starting a land bank, because she thought they could make a go of it and deal with some of those properties. But at this point, she said, it didn’t matter whether they considered it at their July meeting, or pushed it back to the meeting in August.

She clarified that the land bank authority would be an independent entity from the county. That meant that the county wouldn’t be responsible for the authority’s debt or other obligations, she said. McClary explained that some communities funded their land banks from a portion of the interest payments on forfeited properties – the board of commissioners could choose to do that as well, she said.

[In response to a follow-up email from The Chronicle, McClary explained that the state's General Property Tax Act allows the county to collect 1% interest per month from delinquent taxpayers. That interest is credited to the county's delinquent tax revolving fund to pay delinquent tax notes. Taxpayers also pay a one-time administrative fee of 4%, which also goes to the delinquent tax revolving fund. After delinquent tax notes are matured and paid off, any leftover funds are transferred to the county’s Capital Improvements Fund (CIF) and used to pay the debt service of other bonds committed by the board of commissioners. McClary wrote that for a small sub-set of properties that enter forfeiture – the first step in foreclosure – an additional ½% interest is added to the parcel and goes to the delinquent tax revolving fund.]

Bergman pointed out that the land bank authority wouldn’t really be independent, if the county were providing a revenue source.

Sizemore wrapped up the land bank discussion by saying that he thought the land bank was a good idea, but they still needed to work through some of these issues. He said if someone wants to fight about it at the July 7 meeting, he wouldn’t be supporting it at this point.

Though there’s no resolution on the agenda, Peterson – or any commissioner – has the option of bringing a resolution from the floor during the meeting.

McClary thanked the commissioners, saying that this had been the most productive discussion they’d had on the land bank issue so far.

Transparency Initiative

At the June 29 briefing, commissioner Kristin Judge passed out a draft copy of a resolution she intends to bring forward at the July 7 Ways & Means Committee meeting – a committee of the whole board that meets immediately prior to the regular board meeting. The resolution would establish “Open Book eWashtenaw.org,” providing online access to county data, including more detailed budget and expenditure information.

Judge said a team of people – including commissioner Wes Prater, the county’s knowledge manager Andy Brush, and Pete Collinson, interim finance director – had been working with department heads and others on this project. Brush and Collinson attended the briefing.

Rolland Sizemore Jr. asked Judge why she feels they need to do this. Judge replied that it’s the right thing to do, giving the taxpayers access to information about how their money is being spent. It’s also a directive of the Obama administration, she noted. Though the county already does a good job at this, they can do more, she said.

Check registers will be first to go online. Next will be credit card and P-card (purchasing card) information, as well as salaries.

Barbara Bergman expressed some concern about privacy issues. Judge pointed to one of the Whereas clauses, which states:

” [...] the presumption of openness does not preclude the legitimate protection of information whose release is exempted by the Michigan Freedom of Information Act, or in any other way protected by any applicable federal law, would threaten security, invade personal privacy, breach confidentiality, or in any way damage other genuinely compelling interests.” [.pdf file of full resolution]

Conan Smith suggested that they monitor the amount of staff time it takes to put this information online, and how many hits it gets. Tracking the number of Freedom of Information Act requests before and after the data goes online is another way to monitor its effectiveness, he said.

Judge agreed that it was good to monitor those things, but reiterated that the public owns the information, and government should make it as accessible as possible.

The board will consider the resolution at the July 7 Ways & Means Committee meeting. If approved, it will come before the board for final approval at their Aug. 4 board meeting.

Other Items on the July 7 Agenda

The board will consider and vote on several other items at its July 7 meeting, including the following:

Public Hearings: Road Commission, Brownfield Plan

The board will hold two public hearings on July 7, seeking input on: 1) possible expansion of the Washteanw County Road Commission from three to five members; and 2) a brownfield plan for the Mellencamp Building in downtown Ypsilanti.

No additional action is expected regarding the road commission on July 7.

In addition to the public hearing, the board is scheduled to vote on approval of the Mellencamp Building brownfield plan. [.pdf file of Mellencamp brownfield plan] The developer is buying and rehabbing three vacant buildings at 120, 122 and 124 W. Michigan Ave., between Huron and Washington, and converting them to residential and commercial space. The $2.2 million project is seeking brownfield status as a “functionally obsolete” property, which will make it eligible for Michigan Business Tax credits. [For more details on how the brownfield process works, see Chronicle coverage: "Zingerman's Project Seeks Brownfield Status"]

Portage Lake Dam Repairs

The board is being asked by the office of the water resources commissioner to authorize maintenance and repair costs for Portage Lake Dam. The estimated cost is $184,690 over a three-year period, from 2010 through 2012. In addition to monitoring several potential problems – including a crack in the right downstream retaining wall and a downstream retaining wall on the left embankment that’s leaning towards the river – the project includes updating the electrical control system and adding “No trespassing” signs, among other changes. [.pdf file of suggested maintenance and repairs]

At the June 29 administrative briefing, the item prompted Rolland Sizemore Jr., the board’s chair, to ask county administrator Verna McDaniel for an update on the dams along the Huron River in Washtenaw County. He suggested a working session with the Huron River Watershed Council and the county’s water resources commissioner, Janis Bobrin.

The request prompted Conan Smith to quip: “Let the record show that Rolland wants another dam meeting.” The comment was met with a certain number of good-natured groans from his colleagues.

Bond Refunding for Dexter Township

The board will vote to authorize the sale of refunding bonds for Dexter Township – debt that was originally incurred in 1994 to build the Multi-Lakes wastewater system, in partnership with Lyndon Township, and with Putnam Township in Livingston County. The system initially served portions of North Lake, Silver Lake, Half Moon Lake and Blind Lake. A later phase added service to Island Lake, Ellsworth Lake, and portions of Bruin Lake and Joslin Lake in Lyndon Township and Patterson Lake in Putnam and Unadilla townships, as well as the village of Gregory.

In 1999, Washtenaw County had issued refunding bonds of $6.53 million for Dexter Township’s portion of the debt. Now, $3.05 million in debt remains – restructuring it would entail reducing the township’s payments by extending the debt for another five years, a move that’s expected to save the township $38,000.

Commissioners were told that without the restructuring, the township would potentially not have sufficient funds to make its debt payments.

Rolland Sizemore Jr. pointed out that the board took similar action for Sylvan Township earlier this year. In March 2010, the board approved the sale of $10.4 million in refunding bonds to restructure debt from construction of that township’s water and wastewater systems. From the cover memo of the Sylvan Township resolution:

On July 18, 2001, the Washtenaw County Board of Commissioners approved a Resolution (Resolution #01-0138) to sell $12.5 million in bonds to assist Sylvan Township in the construction of a water and wastewater system. Although the bonds were issued by the County, the Township contractually agreed to be responsible for making the required bond payments. In recent years, the economic difficulties that have beset Michigan have also affected the ability of the Township to generate cash flow for debt service through new connections to the system. However, those same economic conditions have reduced interest rates and provided an opportunity to restructure the original debt to provide cost savings for the Township and additional time for economic recovery.

Sizemore asked McDaniel that the board be given a review of debt incurred by these and other townships, which have used the county’s full faith and credit. Barbara Bergman agreed, wondering how many similar projects there are. It was scary, she said, to think what the county’s responsibility would be if a township defaulted.

Council must act to amend the recommended budget by its second meeting in May – or the administrator’s recommended budget is automatically adopted, a provision of Ann Arbor’s city charter. There are thus possibly two more caucus meetings before council makes its decision on the recommended budget, which contains a number of proposed cuts.

One of the possible functions of council’s caucus is to assemble “caucus questions” – questions from council to city staff about issues they are going to be considering. Some council members have contended that electronic mail is a far more efficient method of communication, and that caucus is not an efficient use of their time.

Recognizing  that the work that would otherwise be accomplished at caucus can achieved via electronic mail, The Chronicle asked all councilmembers and the mayor to forward their caucus questions to us, in an effort to move the more mundane and tedious work of council more squarely into public view. We report below the responses we received, plus the questions The Chronicle has identified in connection with the city’s budget – some of which have already been answered.

Background on Caucus

Attendance at caucus meetings is optional for councilmembers. For the public, the gatherings provide an opportunity to see councilmembers work through questions with each other in an informal public setting. Caucus also provides an opportunity for members of the public and the media to ask questions of councilmembers in a public setting, or to share their views in a publicly accessible back-and-forth conversation – in contrast to the public commentary segments of formal council meetings, when councilmembers do not offer direct responses at the time of the commentary. On occasion, councilmembers will respond to speakers’ sentiments during their deliberations or during the section of the meeting assigned to council communications.

Councilmembers’ Caucus Questions

We heard back from 5 councilmembers in the time frame we set (noon Monday) in response to our request for the questions they’d come up with: Mike Anglin (Ward 5), who expressed his support of caucus, but did not forward any questions; Leigh Greden (Ward 3), who said it was a reasonable request, but who also did not forward any questions – he suggested that by waiting until around 3 p.m. The Chronicle could on a regular basis obtain a comprehensive list of the questions, plus responses in the form of the staff memo; Christopher Taylor (Ward 3), who said that he had not initiated any questions this week; Sabra Briere (Ward 1), who forwarded a message she’d sent Saturday afternoon to Tom Crawford, the city’s chief financial officer; and Carsten Hohnke (Ward 5), who  sent along some questions.

We’ve interpreted Greden’s comments as a suggestion that we might consider initiating a request to create a future standing procedure whereby staff or councilmembers could forward the staff response memo to The Chronicle. We’ve begun exploring that possibility. For now, we present questions posed by Briere and Hohnke.  First, Briere.

Dear Tom,

I’ve been going over the budget, and I have a couple of questions.

On page 56 of the binder, the figures representing the general fund dollars for Planning and Development Services are:

FY09 $2,104,163 FY10 $2,273,907 FY11 $2,331,658

On Roger’s presentation, these same figures are:

FY09 $2,104,163 FY10 $2,611,699 FY11 $2,592,084

1. Which set of figures is correct?

2. In the first set of figures, the projection calls for an 8% increase for the first year followed by a 2.5% increase for the second year. This is not out of line, when coupled with a projected decline of .5 FTE during the first year and an additional 4.5 FTE for the second year — with VEBA and medical insurance increases factored in.

However, I cannot account for the numbers in Roger’s presentation. This projection calls for nearly a 25% increase for FY10 with a slight (just over 1%) decrease in expenses in FY11. If Roger’s presentation is correct, what accounts for these expenses?

Please break the numbers out in exquisite detail for me.

3. If Roger’s presentation was incorrect, please help me understand how this affects the bottom line and the proposed cuts.

Carsten Hohnke forwarded these questions, which he’d sent to staff in connection to DS-1 on Monday’s agenda. That item relates to a FY 2010 allocation from the general fund to nonprofit entities for human services, totaling $1,268,092 in grants with a $7,652 human services contingency fund. The questions reflect the fact that the allocation is being approved before the budget for that year is adopted.

1. We are acting on this now (as opposed to after consideration of the FY10 budget) due to the requirement for submitting the FY 10 One-Year Action Plan to HUD by the end of April. What are the consequences of approving a budget in May that differs (e.g., increases) from the one assumed here for purposes of submitting the Action Plan? Are mechanisms provided by HUD for amending the AP?

2. The currently proposed FY10 allocation, including contingency, is unchanged from FY09 (and FY08). How does the contingency amount, specifically, in FY10 compare to FY09? Same also?

3. What are the numbers of non-profit entities receiving grants, and the average and median grant amounts, for FY10 compared to FY09?

We’ll follow up with answers to these questions as they become available. Two additional, regularly scheduled caucus meetings could be held between now and the point at which council needs to act on the budget – at its second meeting in May, about a month from now.

Chronicle Questions: Senior Center

Since the April 14 town hall budget meeting, The Chronicle followed up on some questions of our own about the budget, some of which we’ve already reported on in connection with the proposed closing of the senior center in summer 2010. We’ve heard back from city staff that they’re working on getting answers to the items still labeled as “pending answers.” As of this writing, those answers remain pending.

• What will happen to the senior center programming? At the town hall meeting, Fraser stressed that the closing is proposed for the second year of the plan. Built in to the proposal was the assumption that a year would be spent working out a transition for people who are involved at the senior center, Fraser said. Later, mayor John Hieftje contended that no decision needed to be made this year, because there was a year to work through the various issues. Fraser allowed that the network of people was something that could not be replicated with a strategy of finding alternate places for certain activities.
• What will happen to the senior center facility? Answers pending.
• Will there be a citizens committee involved in the transition work? Fraser said that if council were to decide to move forward with the closing, then his assumption was that there would be an advisory group that would work with staff on that transition. [The city's website indicates a Senior Center Advisory Board consisting of  Dean Cole, Mary Hill, Lois Johnson, Lois Tiffany, Nancy Wiernik, Leona Yuerhs and Cecile Frogh.]
• Wasn’t the land for the center donated specifically for a senior center? At the town hall meeting, there were no definitive answers, although Hieftje said his recollection was that there was a connection to the Ann Arbor Public Schools system. [Online archives of council minutes show that on October 2, 2000, city council voted to take over the management of the senior center from the school system, citing the financial difficulty of the school system. On June 3, 2002, council voted to establish the advisory board for the center. A history of the center written in 1985 by a University of Michigan student, Diane Crane, traces the history of the structure as a barn for the horse races in Burns Park, but does not – as far as The Chronicle can discern – include a bequest stipulating the land be used for a senior center.] Answers pending.
• What about the $100,000 gift that was made to the center? At the town hall meeting there was some uncertainty regarding the possibility that the Ann Arbor Area Community Foundation might be administering the gift. [This confusion could be due to the fact that James Harmon Flinn, Jr. bequeathed two gifts of $100,000 –  one to the Ann Arbor Area Community Foundation and another to the Ann Arbor Senior Center.] Answers pending.

City staff are currently putting together, for publication on the city’s website, the figures on expenses and revenues (class fees and renting out of space) that yield the projected $141,000 cost savings. Further, they’re getting numbers on annual usage of the facility. We’ll update as that information is available.

In perusing the white binder of budget information through the week, we noticed a line item in the section for Financial and Administrative Services Area, Revenues by Fund, showing $5,000 for Senior Center Endowment, which we speculate could reflect interest on the $100,000 gift that was bequeathed to the senior center by James Flinn, Jr.

Chronicle Question: Parks

Under the “Revenues” tab of the white budget binder are proposed fee increases across a variety of services, from dumpster service, to traffic signal studies, to park shelter fees. Park shelter fees vary according to the kind of day – weekdays, holidays, and weekends are charged different rates. Different rates also apply for residents versus non-residents.

As an example, the current fee for an Ann Arbor resident to rent a park shelter for a weekend day is $125. That’s proposed to be increased to $137. City staff offer comparative data that ranges from a low of $125 in the Washtenaw County parks to $181 in Madison, Wisc., to  a high of $600 for four hours in Columbus, Ohio.

Also proposed to increase are the daily rates for renting a Farmers Market Stall [Farmers Market is administered through Parks and Recreation Services]. They currently range from $2.57 to $3.67 a day, and are proposed to be increased to $3.09 to $4.41.

Question: For many of the proposed fee increases, there’s a column indicating the anticipated impact on revenue. But for park shelter fees and for Farmers Market stalls, no column for those numbers is included. As a matter of public policy, how are are these items typically evaluated – with respect to their revenue potential, with respect to comparative communities, with respect to an assumption that revenues should cover some fraction of cost?

The regular meeting of the Park Advisory Committee takes place on Tuesday, April 21, at 4 p.m. in council chambers in county board of commissioners chambers at the County Administration Building, at 220 N. Main St. when PAC will be considering the proposed budget.

Chronicle Follow-up: Debt Coverage Ratio

At the town hall meeting, held last Tuesday to introduce the budget, one resident asked about the city’s overall debt. Neither the question nor the response were included in our original report, because both seemed vague enough that reporting just the words exchanged would not serve Chronicle readers’ interest in clarity. On the night of the town hall, we put the general issue to Tom Crawford, chief financial officer for the city of Ann Arbor, and he followed up by tapping the city’s treasurer for a more detailed answer.

The city treasurer’s memo [scanned .pdf] discusses the question of the city’s overall debt in three ways: (i) the legally allowable debt, (ii) the  “debt coverage ratio” and (iii) bond ratings by Moody’s and Standard & Poor’s rating indices.

The state of Michigan sets a legal limit on how much debt the city can incur. This legal limit is expressed in terms of the  state equalized value (SEV) of all the property that the city taxes: 10%. The city’s tax assessment roll, as of 2008, has an SEV of a bit over $6 billion. That means that legally the city of Ann Arbor could take on up to around $600 million worth of debt.
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The City may not issue qualifying debt in excess of 10% of the SEV
(state equalized value) of its assessment roll.  Some forms of bonds,
such as revenue bonds for water and sewer, do not qualify.

2008 SEV                                $6,077,168,500
Debt limit                                 607,716,850
Debt subject to limit                      108,740,000
Additional debt that could be incurred     498,976,850

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The law applies to certain kinds of debt and not others (like water and sewer revenue bonds). The roughly $100 million worth of city debt to which the law applies reflects 17.9% of the city’s legal debt capacity. If all debt, not just the qualifying debt, were included in the calculation, the city would be at 36.7% of its legal debt capacity.

The Chronicle has not  explored in detail how Ann Arbor stacks up against other communities in Michigan with respect to its percentage of legally allowable debt. The only city’s numbers that came up on a cursory internet search was Troy, Michigan, which has debt equal to about 7% of its legal capacity.

Relevant to the evaluation of the city’s debt burden in terms of its legal limit are city staff projections for the SEV, which is expected to decrease at least over the next two years. As the SEV value of the city’s tax rolls decreases, the legally allowable debt, expressed as 10% of that number, also decreases.

The blue line shows projections for the SEV of the city's tax rolls. SEV stands for state equalized value. TV is taxable value. (Image links to higher resolution file.)

A second way of evaluating certain kinds of debt is the debt coverage ratio: (net income before debt)/(debt service requirements). A number less that 1.0 would indicate that there is insufficient revenue to cover the debt service. The treasurer’s memo states that this number is generally not assessed in aggregate across the entire municipality, but rather by individual fund. The treasurer’s memo lists out examples for debt coverage ratios for different funds in the city of Ann Arbor.

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Water         1.7
Sewer         4.5
Storm Water  15.9
DDA Parking   1.9

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The final way that the treasurer’s memo evaluates the city’s debt burden is terms of rating services, which assess the quality of the city’s bonds.

On Standard & Poor’s rating scale, the water, sewer, and city bonds are rated AA-, AA+ and  AA+, respectively.

On Moody’s scale, ratings for water, sewer, and city bonds are rated Aa3, Aa3 and  Aa2, respectively.

In the chart below, we provide those ratings in order of best to worst of investment grade ratings.

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S & P's             Moody's           

AAA                 Aaa
AA+                 Aa1
AA                  Aa2
AA-                 Aa3
A+                  A1
A                   A2
A-                  A3
BBB+                Baa1
BBB                 Baa2
BBB-                Baa3

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The scales extend lower into C and D ratings, but these are considered speculative grade ratings.

Chronicle Question: Local Development Finance Authority

Richard King, chair of the Local Development Finance Authority, which contracts with Ann Arbor SPARK to provide economic development services, will be making a presentation to council during the Introductions section of its April 20 meeting. He’ll be presenting the LDFA’s annual report and budget proposal. By way of background, the LDFA is funded through a mechanism similar to the Downtown Development Authority – capture of the taxes on the increased value of property.

Question: How much additional economic activity has been generated locally as compared to the economic activity the area would have seen absent any investment of tax money in this way? What are the range of ways that the LDFA measures the notion of economic activity?