Yousef Rabhi, right, chair of the Washtenaw County board of commissioners, talks with Shamar Herron, workforce development manager in the county’s office of community & economic development, at the county board’s Aug. 8, 2013 working session. (Photos by the writer.)

A memo prepared by Conan Smith (D-District 9) outlined six options for generating more tax revenue. Three of those options would not require voter approval, because the Michigan statutes that authorize the millages predate the state’s Headlee Amendment. The board already levies two of these types of taxes – for indigent veterans services, and agriculture/economic development – but doesn’t yet levy the full amount allowed by law. The third tax in this category, which the county doesn’t levy now, would pay for road repair.

Other approaches would need voter approval. A Headlee override – allowing the board to raise its operating millage to the cap of 5.5 mills, from the current rate of 4.5493 mills – would result in an additional $13.5 million in tax revenues next year. The rate of 5.5 mills has been rolled back over the years by the Headlee Amendment, which was designed to prevent property tax revenues from increasing faster than the rate of inflation.

Commissioners also discussed the possibility of putting a millage proposal on the ballot for specific purposes, like public safety. Sheriff Jerry Clayton attended the working session and stressed the importance of funding for public safety.

A targeted millage could also pay for annual contributions toward the county’s unfunded pension and retiree healthcare obligations. But that strategy would not eliminate the entire amount of unfunded liabilities, estimated at nearly $300 million. A controversial bond proposal intended to eliminate those obligations was halted in early July. [See Chronicle coverage: "County to Push Back Vote on Bond Proposal."] However, on Aug. 8 some commissioners indicated that bonding was not off the table, and could still be considered. Michigan’s Public Act 329 of 2012, which enables municipalities to issue bonds for these kinds of obligations, has a sunset of Dec. 31, 2014.

In other possible revenue strategies, Conan Smith also advocated to use some of the general fund’s roughly $16 million fund balance, to support one-time investments like capital expenditures or to replenish fund balances in specific departments. He had made a similar proposal at the board’s Aug. 7, 2013 meeting, but did not win support for it from the majority of commissioners.

At their working session, several commissioners expressed general support for seeking some kind of voter-approved tax, either a Headlee override or a targeted millage. There seemed to be less support for tapping the general fund’s fund balance. Yousef Rabhi (D-District 8) described the fund balance approach as “a short-term energy pill. It’ll get us a couple feet down the road, but it won’t give us the miles that we need.”

It’s unlikely that a millage proposal would be put on the November ballot. To do so, the board would need to take action this month, which would require calling a special meeting. The board’s next scheduled meeting is Sept. 4.

The Aug. 8 working session also included a presentation by Mary Jo Callan, director of the county’s office of community and economic development, about current and proposed initiatives related to economic development. The session was attended by Ann Arbor SPARK executives, including CEO Paul Krutko.

This report focuses on the board’s budget discussion.

Sheriff’s Perspective

Andy LaBarre (D-District 7), who chairs the board’s working sessions, told commissioners that he had invited all of the other county elected officials to the Aug. 8 session, but most were not able to attend. Only sheriff Jerry Clayton was on hand, and he joked that he was designated the “sacrificial lamb” by the other electeds. [In addition to Clayton, officials elected to a countywide position are Brian Mackie, the prosecuting attorney; treasurer Catherine McClary; clerk/register of deeds Larry Kestenbaum; and Evan Pratt, water resources commissioner. All are Democrats.]

Clayton told commissioners that although he and other electeds don’t make the final decision about the county’s budget, they are all following the board’s discussions with great interest, because their operations will be affected. Referencing the presentation earlier in the session by Mary Jo Callan, Clayton said he was glad to see the connection drawn between public safety and economic development. Everyone knows that businesses are less likely to locate in communities where there are challenges with public safety, he said. He appreciated that the board recognized this connection, and that commissioners supported public safety in the budget.

Washtenaw County sheriff Jerry Clayton, seated, talks with county commissioner Dan Smith (R-District 2) during a break at the May 16, 2013 county board retreat.

As the board developed the next budget, Clayton hoped they wouldn’t make decisions purely from a financial perspective. It’s important to consider the impact of budget decisions, he said, in terms of the services that the county provides and the people who receive those services. Clayton expressed concern about focusing on short-term outcomes. He noted that some commissioners have talked about positioning the county for the future and thinking strategically, and he supported that approach.

Clayton didn’t want to see the county “spending dollars chasing pennies” – making short-term financial decisions that don’t consider the long-term community impact. As an example, he cited the board’s discussion at its meeting the previous night, on Aug. 7, 2013, about returning money to the fund balances of some departments. He clarified that the sheriff’s office does not have a fund balance, though he wished it did. The community corrections unit, which was transferred from the trial court to the sheriff’s office a few years ago, does have a fund balance. [The discussion at the Aug. 7 board meeting had not made that distinction.]

He noted that the board’s discussion had included some statements that the sheriff’s office and community corrections unit had chosen to use the fund balance to help balance their budget in 2012 and 2013. He argued that this wasn’t the case. His office had presented a budget proposal to fund the level of staffing that was appropriate to meet community needs, Clayton said. However, the county administration set the budget at a lower level, and told his office that the community corrections fund balance could be used to make up the difference. He noted that the county administration doesn’t use the general fund’s fund balance in that way, because from a strategic standpoint, a reserve is needed for unforeseen circumstances.

Using the community corrections fund balance wasn’t something his staff chose to do, Clayton stressed. But they understood the impact on the community if services aren’t provided. It costs about $10 a day to monitor someone on probation, he noted. A recent study showed that for one day in jail, it costs about $85. Clayton said his staff had done its own research and estimates the cost is closer to $130 a day.

The local courts have confidence in the community corrections program, Clayton said, noting that it’s administered by Renee Wilson. “The judges don’t hesitate to send people to community corrections in lieu of sending them to jail, which saves significant dollars,” he said. This is just one example of how a county program impacts the budget indirectly, he noted.

Clayton said he has supported the county’s struggles around the budget, and the sheriff’s office has taken reductions. He’s prepared to take more reduction in the coming budget, he added, but “we’re in the bone, we’re deep in the muscle.” If the budget is cut beyond a certain point, then his office will have to start incurring overtime costs to meet the community’s needs, which will cause them to go over budget. He hoped his office would at least have the opportunity to talk to the board about how any cuts might impact public safety services. “At the end of the day, we know that we’re all in this together,” he said.

The board has established budget priorities, Clayton noted, and the budget for each unit should be evaluated based on those priorities. “Fairness doesn’t mean we’re all going to have the same outcome,” he said. But since he took office in early 2009, there have been a higher level of reductions for the sheriff’s office than in other units, he contended. As long as the board makes its decisions based on the priorities that it has set, and as long as commissioners are open to feedback, “then I think we can move forward in partnership,” he concluded.

Responding to Clayton’s comments, LaBarre said he worried about cutting the sheriff’s office down to a point where it becomes solely reactive.

Felicia Brabec (D-District 4) thanked Clayton, and said she agreed with the need to make budget decisions that reflect the board’s priorities.

Dan Smith (R-District 2) pointed to Clayton’s comments about the board recognizing the importance of having safe communities throughout the county. Crime does not respect municipal boundaries, Smith noted, and having businesses and homes that are safe countywide affects everyone. This board has recognized that for a long time, he said.

Board Discussion: Budget Options

Andy LaBarre (D-District 7) began the main budget discussion by saying this was a chance to assess where the board stood and to get reactions from commissioners. He noted that Conan Smith (D-District 9) had distributed a memo that outlined various budget options for the county, as well as a flow chart showing what needs to happen if the county moves forward with any of the options. [.pdf of options flow chart] [.pdf of budget options memo]

Smith’s memo described four alternatives:

• Issuing bonds to cover the county’s unfunded pension and retiree healthcare obligations – for the Washtenaw County Employees’ Retirement System (WCERS) and Voluntary Employees Beneficiary Association (VEBA).
• Seeking a Headlee override from voters, to raise the cap on the county’s general fund tax rate.
• Pursuing a voter-approved tax for a specific purpose, such as public safety or human services.
• Cutting expenditures.

Conan Smith characterized the flow chart as a decision matrix, so that people can understand what steps are needed to make any of the decisions. The chart includes decisions points for both the board and voters, and what would happen at each of those points, depending on the decision that’s made.

The memo that provides more information about various revenue options also includes a chart listing each non-special election date through November 2014, and the deadlines for getting millage proposals on the ballot.

Chart showing timeline for putting a millage proposal on the ballot.

A mill is $1 per $1,000 of a property’s taxable value. Based on the county’s 2013 total taxable value of $14.21 billion, a levy of 1 mill would generate $14.21 million. A millage can be placed on the ballot in increments of one-tenth of a mill. The lowest amount – one-tenth of a mill – would generate $1.421 million.

Smith noted that due to various exemptions and deductions throughout the county – such as tax capture by downtown development authorities or brownfield tax increment finance districts – revenue to the county from a millage could drop by as much as 18%, depending on the jurisdiction.

Several options for millages could be considered by the board, Smith said. Those include:

• Headlee override: The county was originally allowed to levy up to 5.5 mills, but rollbacks due to the state’s Headlee Amendment have reduced that amount to 4.5493 mills. An override, if approved by voters, would allow the county to levy the original 5.5 mills, bringing in an additional $13.5 million in tax revenue in 2014. Smith pointed out that the board wouldn’t necessarily levy the full 5.5 mills, but an override would give commissioners the option to do that.
• Act 88 (agriculture & economic development): The county is allowed to levy up to 0.5 mills under Public Act 88 of 1913, but currently levies a small percentage of that – 0.06 mills, which will bring in $696,000 this year. It’s used for programs run by the county’s office of community development, and to fund the county’s MSU extension office. Act 88 does not require voter approval. It was originally authorized by the county in 2009 at a rate of 0.04 mills, and was increased to 0.043 mills in 2010 and 0.05 in 2011. Last year, Smith proposed increasing the rate to 0.06 mills and after a heated debate, the board approved the increase on a 6-5 vote. [See Chronicle coverage: "County Board Debates, OKs Act 88 Tax Hike."]
• Veterans Relief: The county currently levies 0.0286 mills for services to indigent veterans, administered by the county’s department of veterans affairs. The maximum allowable tax of this kind is 0.1 mills, which would bring in about $1.42 million annually. Smith’s memo suggests that the amount could be used to support other programs, such as early childhood education for the children of low-income veterans. This tax does not require a vote of the public.
• Act 283 (county roads): The county has previously discussed levying up to 1 mill to fund county roads, bridges and culverts. It has never taken action to levy this millage, which does not require voter approval.
• Conservation District: If approved by voters, the county could levy up to 1 mill for a countywide conservation district, or up to $14.2 million. Smith’s memo indicates that the current conservation district gets $30,000 from the general fund each year. Additional funds could be used to support the budget for the water resources commissioner, which gets $1.887 million from the general fund, or the public works line item, which receives $77,666 from the general fund.
• Additional targeted millages: The board also has the option of putting a millage on the ballot to support specific programs or other expenses. Possible millages might cover: (1) the county’s unfunded pension and retiree healthcare obligations; (2) public safety services; (3) human services or outside agency funding; (4) early childhood education or “college promise” programs; or (5) land bank and blight elimination programs.

Smith described his memo as a brainstorming document. He noted that one thing the memo doesn’t include as an option is the use of fund balance. The county maintains a “remarkably strong” fund balance, he said. “We’re sitting on $16 million of fund balance right now, as of 2012, which is more than we anticipated having.” In the previous budget cycle, part of the board’s conversation centered on how much of a fund balance does the county need, he noted.

It’s true that if the county has a higher fund balance, it supports the chance of getting a better bond rating, Smith said. “But what does that higher bond rating actually deliver you? This tiny incremental change in the interest rate on your bonds.” So unless the county wants to issue a major bond proposal, Smith said, then moving from double-A to triple-A doesn’t really gain much.

Smith recalled that John Axe, bond counsel for the county, said that a fund balance of at least 10% of general fund revenues is needed in order to keep the double-A rating. For Washtenaw County, that would be about $10 million. So there’s about $6 million of fund balance that could be used for programs and services, Smith said. It wouldn’t be wise to use it for structural activities, like staffing, he said, but it would be appropriate for one-time investments like capital expenditures. He wanted to put that on the table as a possible option when tackling the budget.

Yousef Rabhi (D-District 8) noted that the board has talked about the importance of not forgetting about the county’s unfunded liabilities for pensions and retiree healthcare. The fact that the board considers this one of its top priorities is unique in the state and nation, he said, and they realize that they need to find a way to fund it.

For him, it was clear that the voters should be asked to weigh in, Rabhi said. This isn’t an issue that the current board created, he contended, but they have a responsibility to address it. “If we don’t, Washtenaw County will not be a county that can provide the services that we’ve traditionally provided,” he said. It’s not acceptable to go back on the county’s promises to employees who have dedicated their lives to this organization.

The board needs to think seriously about asking voters for a Headlee override, Rabhi said. He argued that spending the fund balance won’t solve the problem. “Fund balance is a short-term energy pill. It’ll get us a couple feet down the road, but it won’t give us the miles that we need. We can’t do it with fund balance.”

As for bonding, it remains on the table as an option, Rabhi said. But the board should also give voters the option of taking a different route, he added.

Dan Smith (R-District 2) reminded commissioners that the county currently has a policy that allows the administration to borrow from other county departments to meet the general fund’s cash flow needs. One of the reasons to have a healthy fund balance is to eliminate the need for inter-departmental borrowing, he said, so that there’s enough money to meet payroll before the July tax revenues come in.

A healthy fund balance also allows the county to react methodically to circumstances as things change, D. Smith noted, and take a long-term approach to making decisions.

D. Smith also addressed the theory behind the Headlee Amendment. The idea is that a property owner’s taxes increase in line with inflation, which presumably matches an increase in expenses, he noted. From the county’s perspective, when property tax revenues are high, the additional revenues could be set aside in the fund balance so that when a downturn hits, the county has an extremely healthy fund balance that it can use to get through a period of lower tax revenues.

But that’s not what happened – not in Washtenaw County or probably any other Michigan municipality, D. Smith said. “The tendency is that when you have more money, you spend it, not save it,” he noted. A lot of programs were added over the past 15 years that the county no longer can afford, he said.

D. Smith acknowledged that the theory behind Headlee “doesn’t actually play out in practice nearly as nicely as we would like.”

Regarding the possibility of levying a millage under Act 283 to fix roads, D. Smith said the poor condition of roads is something he hears about from constituents. He’s frustrated at waiting for a solution from Lansing, but he balances that with the outcome of a recent vote in his district, when voters in the Whitmore Lake school district rejected a millage by a 2-to-1 margin. People in his district are paying a lot of taxes, and are challenging him to find ways to meet their needs without increasing taxes.

Rolland Sizemore Jr. (D-District 5) responded to D. Smith’s remarks: “Dan, when you figure that out, you let everybody know where you can get all this work done without spending any money. I know you’re a Republican, but that’s gonna be a hard one to pull off.”

As the board’s liaison to the Washtenaw County road commission, Sizemore noted that he serves on a committee that’s exploring the possibility of a millage for road repair.

Sizemore also suggested looking at non-mandated programs that the county funds, which offer services that might be duplicated by other organizations. There might be ways to get rid of some of those non-mandated services, he said, and shift the funding to other programs in the county. He called for public forums so that residents could let the board know their priorities. Such forums would also provide the opportunity to educate the public about the county’s budget, and the impact if certain programs are cut, he said.

Alicia Ping (R-District 3) observed that the board had spent a lot of time this year focused on the bonding proposal, and it’s now behind in pursuing other possible options. She’s opposed to touching the fund balance, and feels that paying down the county’s unfunded pension liabilities should be a priority. Ping agreed with Sizemore about looking at non-mandated programs. Funding for those kinds of programs should be put on the ballot for residents to decide if it’s a priority.

She said she didn’t have any solutions, but felt that “no matter what happens, we’re going to have to put something on the ballot, sooner rather than later.” She described a Headlee override as “kind of a band-aid,” but supported the idea of putting other millages on the ballot so that voters can weigh in.

LaBarre agreed with the need to address the unfunded pension and healthcare liabilities. “I would wager that every one of us – all nine of us – are committed to doing that. We haven’t taken a public vote to say we are, but that’s certainly the sense I get.”

At the same time, he said, “I don’t want to cut Washtenaw County to a skeletal organization.” He added that he doesn’t want it to be a rural county that provides “bare-bones” services. The government here does more than that, LaBarre added, “and I think generally, the citizenry supports that” – either directly, by voting in support of millages, or indirectly by electing commissioners who share those priorities.

LaBarre said he initially thought that bonding was a good solution, but now he has doubts about that. There are risks with bonding that might result in the county losing more than it gains. With a millage, on the other hand, the board gets the buy-in of residents and a relatively stable source of funding, he observed.

Commissioners do their jobs on a part-time basis, LaBarre noted, either in addition to their day jobs or in one case as a retiree. He said he’s not an expert, but everyone is trying to do their best and do what’s right. Having this discussion is important, LaBarre said, and he agreed that the board should get some options out to voters and make their case for supporting those options.

In the short-term, however, the administration is moving forward to develop a four-year budget that assumes that bonding is off the table, LaBarre said.

Kent Martinez-Kratz (D-District 1) spoke next, saying that he thought the county needed a bit more reduction in expenses. It’s also appropriate to consider the definition of a healthy fund balance, he said. For a year or two, he felt the county could reduce the current fund balance by one or two percent. He noted that he works for an institution that for 20 years has had a 3% fund balance, “and we still row the boat every year.” [Martinez-Kratz is a special education teacher with Jackson Public Schools.]

The county will see some significant savings, thanks to the long-term labor agreements it reached with unions earlier this year, Martinez-Kratz noted. But there are still a couple of rough years to get through, he added. So he’d like to trim a bit out of the structural costs, and use some money out of the fund balance.

Rabhi spoke again, noting that residents of Washtenaw County are attuned to what’s happening. They understand what the unfunded liabilities mean to the budget, he said, and the potential that addressing those liabilities can have on future budgets. More education needs to happen, he added, and now is the time to do it because so much education and engagement have already taken place.

For most of this year, there were only two options on the table, Rabhi said: bonding, or budget cuts. There are other options, but those are limited to millages. State revenues are decreasing while the county’s cost of providing services is increasing, and the unfunded liabilities continue to put pressure on the budget, he said. If the board does nothing, in the long term the county won’t even be able to provide an adequate level of mandated services.

Rabhi talked about the need to put the county back on track to being an entity that provides first-class services to its residents. “I’m 25 years old,” he said. “I’m going to be in this community for a long time. I want Washtenaw County to be here for a long time, and to take care of my fellow citizens.”

Balancing the budget by just cutting services doesn’t seem like a productive way to help people, he said. He asked other commissioners and residents to think about the long-term health of the county.

It’s short-sighted to think about using the fund balance as an option, Rabhi said, because it’s not a long-term solution. It can be part of the equation, but “we need to be thinking bigger.” Talking about a millage is important, he said. These are tough issues, and it would be easy to put off making decisions. “That’s not the option we’re taking. We’re taking the hard road, we’re taking the long road of fixing this problem.” It’s going to take the time and energy of every commissioner and the community, he said.

Rabhi concluded by stressing the importance of allowing voters to weigh in on a possible millage.

Felicia Brabec (D-District 4) noted that the upcoming budget will include cuts, but those cuts need to be balanced by looking at the services that the county provides. Those services are why some people moved here. She was glad that the board is tackling the issue of unfunded liabilities, although “it feels like a Goliath.” She found the idea of a Headlee override “enticing” and definitely worth exploring, and liked the idea of looking at other potential millages too. “The one that seems to provide the revenue without some of the drawbacks and specificity … is a Headlee override.” She said she’s open to other options as well.

Conan Smith (D-District 9), left, talks with Pete Simms of the county clerk’s office at a May 16, 2013 county board retreat.

Conan Smith said he wanted to clarify an issue regarding the unfunded liabilities. There’s only one way to take care of the full amount, and that’s by bonding to cover it, he said. To make it disappear, the county would need the full amount as a lump sum. “Otherwise, what we’re talking about is the annually required contribution toward that unfunded liability and toward the benefits that we have to provide,” he said.

For many years, the county handled the annual contributions as part of the regular budget process. But when the board voted earlier this year to close the defined benefit plans as part of the long-term labor agreements, that action ratcheted up the amount of the annual required contribution. “That’s what we’re grappling with,” he said. Rabhi had stated that the board didn’t cause this situation, C. Smith noted. “Well, in fact, we did cause this.”

C. Smith noted that he’d supported closing the retiree health care plan, but he said he had disagreed with closing the pension plan. He had wanted to close only the VEBA, because those costs are so variable.

To decrease the required annual contribution, C. Smith said the board could consider re-opening the pension plan and bringing those employees “back into the fold.” Then, the employees’ contributions to the plan would lower the county’s required contribution from the general fund.

So the board’s three options are to find new revenues, cut costs, or transform the retirement system, he said.

Returning to the topic of using the county’s fund balance, C. Smith argued that budget reductions are not inevitable. Every budget cycle, the county makes millions of dollars worth of one-time investments in non-structural, single-purpose expenditures. “That’s a completely legitimate use of fund balance in a down economy,” he said. That’s especially true if those fund balance investments are designed to rebuild the local economy and bring in more tax revenues, he added. He gave some examples of such investments – neighborhood stabilization programs, or workforce development programs to help people find jobs so that they’ll have more discretionary spending.

He also suggested the possibility of using the county’s pension funds to invest in local businesses so that they grow and employ more people. “That’s a budget-neutral approach – that doesn’t take any additional tax money at all,” he said. The board should be thinking of strategies like this as the budget is developed.

“So it doesn’t have to be a cuts-only budget, and it doesn’t have to be a budget that’s framed around paucity,” C. Smith said. “We can be strategic about rebuilding prosperity in the community.”

C. Smith said he doesn’t want to use general fund revenue to pay for the roughly $3 million in additional required pension and retiree health care contributions. He’d still like to pursue the bonding option, “but you’re going to get my support for any strategy that stops us from snagging general fund money for that.”

The Headlee override “is like a dream for a public official,” C. Smith said, because it provides maximum flexibility for how the tax dollars can be spent. But it’s also the hardest thing to sell to voters, he added, “because it’s so vague.” Unlike a targeted millage, the additional operating revenue wouldn’t be dedicated to a specific purpose. The Michigan Municipal League and Michigan Townships Association have found that millages are most likely to pass if the tax is tied to a specific use, he said, like the public safety millage passed earlier this month in Ypsilanti Township.

C. Smith said he was becoming more inclined to support a millage for public safety. Public safety services represent 45% of the general fund budget, including about $11 million for the sheriff’s road patrol. “It is a tangible benefit to the community,” he said. “It’s something that any citizen out there can understand.” He noted that it’s been a contentious issue in the past, and that officials with other local municipalities would like to see the matter settled. If the county were to provide a secure revenue source for public safety, it would stabilize the budgets of other municipalities and also would provide increased flexibility for the general fund.

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

Absent: Ronnie Peterson.

Next regular board meeting: Wednesday, Sept. 4, 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.

The Chronicle could not survive without regular voluntary subscriptions to support our coverage of public bodies like the Washtenaw County board of commissioners. Click this link for details: Subscribe to The Chronicle. And if you’re already supporting us, please encourage your friends, neighbors and colleagues to help support The Chronicle, too!

The city of Ann Arbor's CFO, Tom Crawford, prepares his laptop to make projections – which were blue, in both senses. (Photo by the writer.)

Ann Arbor City Council work session (Aug. 13, 2009): Towards the end of the city council’s Thursday evening work session on a possible city income tax, city administrator Roger Fraser asked the council for some direction. Here’s what he wanted to know: Should city staff place an item on the council’s Aug. 17 agenda that would allow the council to put the tax before the voters in November?

In response to Fraser, Marcia Higgins (Ward 4) said she wanted more dialogue on the exact percentage of the tax to be levied, even if the ballot language specified “up to 1%.” Carsten Hohnke (Ward 5) followed by saying it was clear that his colleague, Sandi Smith (Ward 1) had requested additional case-study scenarios for individuals and that he himself had wanted some cross-checking of commuter numbers with the city’s transportation staff. “We don’t do the community any favors by taking the conversation to the next level without more information,” Hohnke said. Sabra Briere (Ward 1) then advised that she thought an emotional reaction could be addressed, if people first became more knowledgeable – she herself had had problems correctly interpreting the charts in the city income tax study.

Finally, Tony Derezinski (Ward 2) declared, “Let’s cut to the chase. I think there’s a consensus we should not have it before us on Monday.” And no one disagreed with him.

Barring surprise, then, the Aug. 17 council meeting will end without the council authorizing the placement of a city income tax on the November ballot. That will be the last opportunity council has to make such a decision. It’s therefore almost certain that the ballot in November will not include a question on a city income tax for Ann Arbor. Based on council discussion during the work session, a city income tax will, however, eventually be given serious consideration as a May 2010 ballot issue.

In light of the prospect of a May 2010 ballot question, it’s worth noting the kinds of issues councilmembers raised with Fraser and the city’s CFO, Tom Crawford. We’ve also folded into this report an account of a recent meeting sponsored by the Ann Arbor Area Chamber of Commerce about the proposed tax.

Rather than portray the content of the work session chronologically, we’ve grouped topics thematically, and included the issues that councilmembers raised with city staff.

Ann Arbor city administrator Roger Fraser, at the city council work session on the city income tax. (Photo by the writer.)

What’s Behind Consideration of Alternative Funding?

Fraser sketched out briefly the rationale behind holding the work session about the possibility of a city income tax. Sabra Briere (Ward 1) had indicated her concern, Fraser said, that the council had not had a chance to talk amongst themselves about the implications for such a tax.

The current conversation about such a tax, Fraser said, could be traced back to at least December of 2008 when the city staff had indicated that they felt there were serious implications in the second year (FY 2011) of the two-year budget cycle they were planning at that time. The challenge they faced back in late 2008 and early 2009 was to trim 10% of expenditures over the course of two years. That strategy already included such measures as the closing of the senior center, the closing of Mack pool, and the elimination of 14 firefighters.

“We owe it to the community to describe what we’re facing,” Fraser said. The choice, Fraser continued, was to “live with these changes, or pony up more.”

When Would a City Income Tax Start to Help?

In light of the dire forecast for FY 2010, which Crawford had given at the council’s last meeting, Sabra Briere (Ward 1) wanted to know what kind of projection Crawford could make about when the implementation of an income tax would have an impact.

After implementing a city income tax, Crawford said, he estimated something like 70% compliance in its first year. It might take two, three, or even four years to achieve full compliance – that would depend on the effectiveness of the system. When could it be implemented, assuming it were on the ballot and passed in November 2009? Not until January 2011, said Crawford, which is already into FY 2012, leaving the projected hole in the budget for FY 2011 unaddressed. Briere suggested that this meant that passage of a city income tax in November 2009 would have no impact on the elimination of the senior center, closing of Mack Pool, or the reduction of the firefighting force by 14 people.

While Crawford agreed with Briere’s characterization of how the timing of additional revenue would work, he said that the anticipation of revenue could have an impact on how they treated the FY 2011 budget. Staff would not necessarily recommend cuts that could easily be undone the next year.

Leigh Greden (Ward 3) asked whether the implementation of a city income tax would have an impact on plans to lay off 14 firefighters. Was this a means to fill that gap in a short time? Crawford stressed that the point of his presentation to council at its previous meeting was to make clear that even after eliminating firefighter positions, there’d be a new problem to deal with.

Crawford stressed that an income tax is a tool to fix a hole, not a means to get revenue to undertake new things.

Fraser added that there was nothing on the horizon to give them optimism, and that the city needed to plan for something it could live with for the next 3-5 years.

Sandi Smith (Ward 1) chats with Lisa Allmendinger of the Ann Arbor Journal before the start of the Aug. 13 city council work session on the city income tax. (Photo by the writer.)

Alternative for Raising Revenue: Headlee Override

The Headlee Amendment limits how fast property tax revenue can rise to no more than the rate of inflation. The effect is that even though a millage rate of N might be authorized, only some percentage of N is actually collected. It’s possible to override the Headlee Amendment and restore the full millage rate of N. In Ann Arbor’s case, the authorized millage is 7.5 mills, but Headlee has reduced this to around 6.8 6.1682 mills.

Sandi Smith (Ward 1) confirmed with Crawford that the Headlee override, if passed in November 2009, would be effective July 2010. Crawford pointed out that even if the Headlee override were passed, revenue would remain subject to the same state laws and would thus consistently go down. He characterized a Headlee override as doing more of the same thing that they were already doing. On the other hand, an income tax, said Crawford, would stabilize things. Fraser added that the greatest benefit to an income tax is the redistribution of the burden, with the achievement of the greatest chance that revenues would keep pace with inflation.

However, along with the possibility of implementing a city income tax, Fraser said, it was also fair to contemplate asking voters to override the Headlee Amendment. That would restore the millage rate collected for general operating expenses to the full 7.5 mills specified by the charter.

Smith wanted to know how much additional revenue a Headlee override would mean for the city. Answer: $6 million.

General Constraints on Revenue Generation

The city is also constrained – like all other municipalities in Michigan – by state law, which prohibits the city from enacting anything other than property or income taxes. People often suggest, said Crawford, that the city apply a tax to University of Michigan football tickets – but state law would prohibit the application of such an entertainment tax. The replacement of a portion of the property tax with a city income tax, Crawford said, would mean a re-balancing of the tax burden – away from property owners.

Comparison to Other Communities

Sandi Smith (Ward 1) requested a comparison for similar cities like Madison, Wisc. and Austin, Texas, both for individuals and small/medium-sized companies on the overall tax burden. With respect to individuals, Crawford said that there’d been a 10-city comparison for individuals – including Chapel Hill, N.C., Boulder, Colo. and Madison, and that Ann Arbor was somewhere right in the middle with respect to disposable income and property tax burden.

In response to a question from Tony Derezinski (Ward 2) about what Ann Arbor might learn from a comparable city like Lansing, Crawford said that Lansing had been particularly useful in benchmarking the cost of administering the income tax. According to the city’s income tax study, the estimated cost of administering the city income tax would be around 7.5% of receipts.

In response to questions from Margie Teall (Ward 4) and Derezinski, Fraser and Crawford explained that it was difficult to benchmark – even against similar communities. Fraser said that Wisconsin works out support services for communities like Madison in a way that Michigan did not. Asked whether Madison had a city income tax, Crawford was not sure.

[When The Chronicle followed up by phone with the Madison city clerk's office, we learned that Madison does not levy a city income tax – it's precluded by state law. Wisconsin cities do, however, have the ability to increase the state sales tax for their benefit.]

University of Michigan’s Role

Crawford gave a quick overview at the start of the work session before fielding questions from council members. One highlight was the fact that 40% of the land inside the city is not subject to property tax. That 40% is owned either by the University of Michigan or the city itself.

Tony Derezinski (Ward 2) did a quick ballpark calculation on the $12 million to $14 million expected to be generated by collecting an income tax from non-residents: roughly 1/3 of those non-residents were UM employees, so that meant roughly $4 million to $5 million in additional revenue would be attributable to UM. Derezinski wanted to know from Crawford how that stacked up against the projected revenue loss as a result of the Pfizer property sale to UM, which took it off the tax rolls. Answer: Around $2 million per year was lost by the city of Ann Arbor with that sale.

Fraser emphasized that UM is an asset to the community – its main economic and cultural strength. UM generates around 1,600 to 2,000 new jobs every year, he said, adding that a city income tax could take advantage of that job growth.

Stephen Rapundalo (Ward 2) wanted to know what kind of fluctuations in revenue from a city income tax there’d been in communities without as strong a university presence as Ann Arbor. Crawford pointed to the stabilizing effect of not just UM, but also the fact that Ann Arbor was the county seat. Crawford said that they’d focused just on Ann Arbor, and looked at tax return data in Ann Arbor from 2001 through 2007, the last year data was available. There’d been a steady 1-2% taxable income increase each year, Crawford said. That did not take into account the impact of the Pfizer departure, which happened after the last year when data was available.

Crawford also explained with respect to Pfizer’s departure that private activity on the property, which now belongs to UM, could not have a property tax applied. That was different, Crawford said, from a situation in which the city of Ann Arbor leased property to a private enterprise – that private activity would be subject to property tax. But personal property that a company might bring into the former Pfizer space – if they were renting it from UM – would be subject to personal property tax.

City Income Tax from Different Groups’ Perspectives

-

Commuters

Tony Derezinski (Ward 2) focused Crawford’s attention on the non-resident scenario on page 53 of the city income tax study, which indicated that between $12.4 million to $14.8 million would be collected from the 75,000 commuters who come to Ann Arbor to work – 21,000 of them at the University of Michigan and 54,000 at other workplaces. Derezinski noted that the other 22 cities in Michigan who taxed city income levied the tax on non-residents as well. [It's not required that a city income tax be applied to non-residents.] Derezinski said that he’d worked in two other cities where he’d not lived at the time: Lansing (living in Ann Arbor) and Grand Rapids (living in Muskegon).

Crawford said Ann Arbor was a good candidate for an income tax because of the number of commuters.

Carsten Hohnke (Ward 5) also focused in on Derezinski’s point of asking commuters to contribute to fund services in the city where they work, but do not live. If that was a rationale, then accuracy of information about the number of commuters is important, Hohnke said.

So Hohnke wanted to know how confident Crawford was in the estimate that there were 75,000 commuters. Crawford explained that the consultant on the study started with census data from the year 2000 and used formulas for inflows and outflows.

Hohnke pointed out that the number of commuters is also a statistic that comes up often in connection with transportation planning, so he wanted to know if the figure of 75,000 had been synched up with the transportation numbers for a reality check. Crawford indicated that this comparison hadn’t been done, but that he’d make a note to do it.

Seniors and Students

Leigh Greden (Ward 3) asked for clarification about what income is subject to a city income tax. Specifically, Greden was interested in understanding whether pension and retirement benefits would be subject to the tax. Crawford began his response by emphasizing that the city does not give tax advice to individuals. The basic picture, said Crawford, was that all salary, bonuses, wages, and commissions would be subject to a city income tax. That would not, Crawford said, include pensions.

Greden asked for clarification about whether this applied to private as well as public pensions or Social Security benefits. Crawford said he’d follow up on getting specific answers to Greden’s question as well as one from Sabra Briere (Ward 1) that came right on its heels: Are Pell Grants and other student loans subject to the tax? Crawford will be checking into that.

A rule of thumb on what tax was owed, Fraser said, was that whatever income is taxable for federal income tax purposes would also be taxable for a city income tax.

Before the working session started, Sabra Briere (Ward 1) shared a light moment with Kathy Griswold, former member of the Ann Arbor Public Schools board. (Photo by the writer.)

Sandi Smith (Ward 1) also wanted to know if residency for purposes of paying a city income tax was determined by where you vote. Crawford explained there were two basic ways of determining residency: (i) voter registration, and (ii) whether a homestead exemption for state taxes was claimed.

Smith explored with Crawford the possibility that a city income tax might encourage students not to register to vote.

Crawford said that with respect to students, who might not necessarily be earning large amounts of money, their income might not rise above whatever minimum threshold was established above which taxes would be owed – especially in light of the application of exemptions. Smith requested that another scenario be developed by Crawford for a student who was just on the edge of the income threshold.

Greden confirmed with Crawford that for seniors who were disabled, there could possibly be a double-exemption that applied.

Other Government Agencies: DDA and LDFA

Sandi Smith (Ward 1) asked about the effect on two entities that rely on the capture of tax-increment financing – the Downtown Development Authority (DDA) and the Local Development Finance Authority (LDFA). Crawford said that an income tax would mean about $700,000 less for the DDA, but that the LDFA would not be affected – they don’t capture any of the general operating millage levied by the city of Ann Arbor. Crawford added that there is no automatic provision for reimbursement of money to the DDA.

Businesses: Donuts?

Stephen Rapundalo (Ward 2) focused on the 54,000 commuters out of the total of the estimated 75,000 who are not UM workers. He acknowledged that for those businesses there existed the possibility that they might be scared away from locating within the city. They might choose instead to set up just across the line and still enjoy the cachet of an Ann Arbor mailing address. In response to Rapundalo’s request for an assessment of that kind of impact, Crawford characterized the issue as a difficult topic to get into, because there was no definitive data. Take Grand Rapids, Crawford said, which is “a lively city,” where there was no “donut effect” of businesses locating outside the city boundaries. For some businesses, Crawford said, an income tax would be beneficial – if the business owns its own building.

The question of whether a city income tax would force employers to increase wages was somewhat parallel, Crawford said, to the question of whether a property owner would lower rents when the general operating millage part of the property tax was eliminated. In the specific scenario involving a renter, which is laid out in the city’s 2009 income tax report, an estimated 50% of the property tax savings enjoyed by landlords would be passed along to renters due to market forces. The 50% estimate reflects an approach of “minimizing the maximum error.”

Sandi Smith (Ward 1) elicited from Crawford the clarification that personal property taxes pay into the general operating millage, and that this kind of tax on corporate entities would also be reduced. Asked whether this contributed to a burden shift away from corporations, Crawford allowed “That’s fair to say.” But Crawford stressed that any change in burden occurs because the same rules apply to everyone.

Mike Anglin (Ward 5) asked Crawford to lay out the corporate tax changes. Answer: Corporations would pay a 1% tax on earnings for business that occurs inside the city. Fraser added that businesses are free to define what business occurs in the city. He also pointed out that for businesses that own property in the city, it’s a benefit – their property taxes would decrease in the same way as those of individuals.

Chart from the city income tax study showing a burden shift among residents, non-residents and corporations. (Chart links to the city's 2009 income tax study.)

Carsten Hohnke (Ward 5) focused on the roughly $6 million currently contributed by corporations to the city’s general operations fund through property tax, which was estimated to drop to $3 million in the chart on page 36. Crawford stressed that the situation for every corporation would be different – corporate entities that owned their own buildings would benefit by not having to pay the general operating property tax millage, but those that did not wouldn’t necessarily benefit.

It is residents, said Crawford, that are the interesting category – it includes both renters and homeowners as well as landlords of residential property. Note: In terms of direct payment of taxes, the property-tax bar (blue) for “Residential” includes property taxes paid by people who live in their own homes and by landlords of residential properties in the city. The income-tax bar (yellow) for “Residential” includes income taxes paid by people who live in their own homes in the city, and by people who rent their homes in the city.

Hohnke returned Crawford’s focus to the burden-shift issue: “Is there not a net decrease in burden to corporations [that aren't in the business of providing housing]?”

Crawford explained how the projections of income tax that corporations would pay are just an estimate – to which Hohnke responded, “I understand it’s an estimate.”

Hohnke confirmed with Crawford that given the parameters that could be changed under Michigan’s Uniform City Income Tax Ordinance, there was a lack in flexibility to dial the burden up and down across various categories – residents, non-residents, and corporations.

Constraints on Mechanics of City Income Tax Implementation

-

What Are the Parameters?

With respect to how the income tax would be implemented, Crawford reiterated a couple of times during the session that there was a limited set of choices to make: (i) exemption rates, (ii) the minimum level of income above which the tax would be applied, and (iii) the rate of taxation – which is prescribed by state law at a maximum of 1% for residents and 0.5% for non-residents.

Tony Derezinski (Ward 2) wanted to know why some of the other Michigan cities on page 16 of the city’s income tax study were levying rates greater than 1%. Crawford explained that those rates had been grandfathered in when the state law had changed to limit the rate to 1%. From the report:

2008 Tax Rates  

               ADOPTED      RES     CORP       NON      EXEMPT

Albion            1972     1.00     1.00     0.500     $   600
Battle Creek      1967     1.00     1.00     0.500     $   750
Big Rapids        1970     1.00     1.00     0.500     $   600
Detroit           1962     2.05     0.20     1.025     $   600
Flint             1965     1.00     1.00     0.500     $   600
Grand Rapids      1967     1.30     1.30     0.650     $   750
Grayling          1972     1.00     1.00     0.500     $ 3,000
Hamtramck         1962     1.00     1.00     0.500     $   600
Highland Park     1966     2.00     2.00     1.000     $   600
Hudson            1971     1.00     1.00     0.500     $ 1,000
Ionia             1994     1.00     1.00     0.500     $   700
Jackson           1970     1.00     1.00     0.500     $   600
Lansing           1968     1.00     1.00     0.500     $   600
Lapeer            1967     1.00     1.00     0.500     $   600
Muskegon          1993     1.00     1.00     0.500     $   600
Muskegon Heights  1990     1.00     1.00     0.500     $   600
Pontiac           1968     1.00     1.00     0.500     $   600
Port Huron        1969     1.00     1.00     0.500     $ 1,200
Portland          1969     1.00     1.00     0.500     $ 1,000
Saginaw           1965     1.50     1.50     0.750     $   750
Springfield       1989     1.00     1.00     0.500     $ 1,500
Walker            1988     1.00     1.00     0.500     $   750

-

Which Constraints Are Specified in the Ballot Question?

Stephen Rapundalo (Ward 2) wanted to know which of the three parameters had to be specified in the ballot language. Fraser explained that the ballot language would simply ask the community whether it wanted to implement an income tax of up to 1%, which would be augmented by some additional language to the effect that the implementation of the income tax would thereby eliminate the general operating millage. The three choices, Fraser said, would not typically be ballot items.

Asked by Margie Teall (Ward 4) if they could not put the exemption levels in the ballot language, Fraser said that he was not sure, but that generally it’s not done.

Putting the Income Tax on the Ballot: If and When

Tony Derezinski (Ward 2) pointed out there were two questions concerning whether to put the city income tax on the ballot: If and when.

Should the Question Be Put on the Ballot?

Stephen Rapundalo (Ward 2) said that implementation of a city income tax would reflect “a fundamental shift in how we do business.” He contrasted the greater importance of that shift with the importance of one-time major capital expenditures, which were already sufficiently difficult and complex that it was crucial to study all of the facts and information surrounding them.

He concluded that it was important to get the information out in front of the residents – even though the question on the ballot would be simple, the implications would be complex. “We owe it to the public to put it out there,” he concluded.

There seemed to be a general sentiment in the room that the question should be put before voters.

When Should the Question Be Put on the Ballot?

Tony Derezinski (Ward 2) got clarification from Crawford that the soonest a city income tax could be placed on the ballot would be November 2009, when another tax proposal – the Washtenaw Intermediate School District (WISD) millage – would also be voted on.

The first date that such an income tax could be implemented is January of 2011 – which is the 2012 fiscal year. Implementation in January 2011 assumes that the ballot question would appear for the November 2009 election. In response to questions from Margie Teall (Ward 4), Crawford clarified that a January 2011 implementation date would also be consistent with passage of an income tax measure at the May 2010 election as well. The reason that some amount of time was required between passage of the measure by the voters and implementation, said Crawford, is that there is currently no system in place for actually collecting the tax.

Derezinski characterized the “when” question as a matter of choosing between November 2009 and May 2010. May 2010 would be “tight but doable” as far as implementing in January 2011, Derezinski said.

Derezinski said he thought that the more people looked at the numbers, the more support there’d be for the proposal and that it would “sell itself.” Derezinski said he thought it would have less chance of passing in November due to the short time frame for making the case for the tax, as well as the fact that there was already a tax proposal on the ballot for November – the WISD millage. So it was in part a strategic consideration, he said.

Teall clarified what impact a positive May 2010 vote would have on the implementation of a city income tax. Could it still be implemented in January 2011? Crawford said that it would still be possible. Missing a January 2011 implementation, he clarified for Teall, would mean that the next opportunity would be in January 2012 – it’s an annually collected tax.

Marcia Higgins (Ward 4) noted that there needed to be a decision Monday, but she did not think they had a consensus about what the correct percentage should be that would be specified on the ballot. Fraser pointed out that the ballot language would simply specify “up to 1%.”

Meta-Talk about Council’s Work Session

Christopher Taylor (Ward 3) and Mayor John Hieftje did not attend the work session.

In Hieftje’s absence, Marcia Higgins (Ward 4) chaired the meeting as mayor pro tem. Prompted by a question from an attendee in the audience about whether the meeting had been publicized, Higgins opened the meeting by asking city administrator Roger Fraser whether it had been posted. Frazier indicated that the meeting had been noticed on the board downstairs in the lobby as well as published on AnnArbor.com and the city’s website. A voice from the audience cheerfully reported: “I saw it on the web this afternoon!”

Ann Arbor Area Chamber of Commerce

Earlier this week, the Ann Arbor Area Chamber of Commerce held two information sessions about the city income tax, inviting local CPAs to explain how it would work and to field questions from chamber members. The Chronicle attended a session on Tuesday, where the half-dozen people who showed up expressed concerns about the tax.

Brad Smith, an attorney with the Ann Arbor office of Brinks Hofer Gilson & Lione, said he was shocked at how candid the feasibility study was about the goal of “sticking it to commuters.” His office employs between 30-35 people – most of them commute, he said, so they would pay the tax and not get any benefit from a property tax break.

Eric Sosenko, another attorney with Brinks Hofer, noted that their business wouldn’t get a break either – they rent their office on South Main, so they wouldn’t see a savings in property taxes to offset the income tax. They love being downtown, he said, but if the tax is passed, they’ll take a serious look outside the city as they grow and require larger space.

Some people at the chamber session expressed skepticism that landlords would pass along their property tax savings to tenants, which they said seems to be an assumption in the feasibility study. However, Ron Dankert, president of Swisher Commercial, said it’s possible the income tax would dampen downtown office rates for a different reason. If the tax prompted tenants to consider moving, he said, landlords might respond by lowering rents.

Several people commented on the administrative fee mentioned in the feasibility study, saying that it seemed like a large percentage and wondering why it was so high. Sue Biondi of Wright Griffin Davis and Co., who gave Tuesday’s presentation to chamber members, agreed that the fee seemed significant, and didn’t know what would account for that.

When the chamber meetings took place, the organization was still gathering feedback through an online survey sent to its members. Late in the week, the chamber announced some of the survey results: About 300 members took the survey, and 57% said that a city income tax would affect their decision to work at a place of employment in Ann Arbor. Of the respondents, 62% said that such a tax would affect their decision to operate or expand their business in Ann Arbor. On the question of whether they’d support a city income tax, 74% of respondents indicated that they would not.

Kyle Mazurek, the group’s vice president of government affairs, said that if city council votes to put the tax on the November ballot, the chamber’s public policy committee would weigh in on whether to support or oppose it. The chamber did not endorse city income tax proposals that were floated in 1997 and 2004.

Work can result in clutter, but councilmembers are admonished to clean up their own mess. To be fair, a few months ago, these signs showed up in several places around city hall, suggesting that the issue of clutter is a building-wide issue, not limited to the city council. (Photo by the writer.)