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.)

Library board members Jan Barney Newman and Prue Rosenthal confer before Monday's board meeting at the Malletts Creek branch.

Ann Arbor District Library board meeting (April 27, 2009): The proposed 2009-10 budget for the Ann Arbor District Library would lower the tax rate that the library levies – a decision that’s in response to the stressed economy, board members said during their monthly meeting on Monday. The board will vote on the budget at its May 18 meeting.

The budget proposes levying 1.55 mills for the fiscal year, which begins July 1, 2009. Currently, the library levies 1.92 mills. (One mill equals $1 for every $1,000 of a property’s state equalized value, or SEV.) The library projects its fund balance will be $6.6 million at the end of this fiscal year (June 30, 2009) and that it will remain at that level next year – at about 52% of AADL’s $12.7 million operating budget.

Prue Rosenthal, the board’s treasurer, characterized the budget as “very conservative,” citing the economy and a concern for keeping taxes as low as possible while maintaining the library’s services. That means the library won’t be putting money into its capital building fund or fund balance, she said, “but we all believe that is the appropriate and right thing to do.”

In presenting the budget in more detail later in the meeting, Ken Nieman, AADL’s associate director, said the tax base is essentially flat, which is good news, considering the economy. [Other tax-funded entities, including Washtenaw County and the city of Ann Arbor, are struggling to balance their budgets for the coming year.]

The library has also needed to plan for a potential loss of $240,000 from taxes that Pfizer pays – the pharmaceutical is appealing the value that the city has placed on its research campus, and Nieman said he expects Pfizer will win its appeal.

On the expense side, Nieman said they’re proposing an average wage increase of 2% for full-time employees with benefits – in recent years, it’s been 3%. The budget also allows for a nearly 10% increase in health insurance costs.

Nieman cautioned that although they’ve dropped the millage rate this year, next year the tax base is expected to fall 4% to 6%, which means they’ll likely need to consider bumping the millage back up from 1.55 mills, if they want to maintain services. The original millage approved by voters was 2.0 mills.  That amount has gradually been rolled back to 1.92 mills this year due to the Headlee Amendment, which was passed to offset property assessment increases.

Trustee Carola Stearns asked where the money would come from if the downtown facility needed major repairs. (Until late last year, the board had been preparing to construct a new downtown branch, but tabled that plan in light of economic conditions.) AADL director Josie Parker said if they needed to fund major repairs, they’d be able to use money from the fund balance. That move would require board approval, she said.

Rosenthal, as chair of the budget & finance committee, pointed out that Parker and Nieman had originally proposed dropping the millage rate even lower, to 1.525 mills. Rosenthal said she had initially argued for levying the full 1.92 mills – the voter-approved maximum – but was persuaded that the library could remain an “amazing resource” even at the lower rate.

After the meeting, Parker told The Chronicle that in past years AADL had levied the 1.92 mills to build its fund balance, which has been used to build new branches without incurring debt. Those new branches include the Malletts Creek branch, where the board held its Monday meeting. Under current conditions, and with no capital projects in the works, there’s no need to continue adding to the fund balance at this time, she said.

Other Board Business: Evaluation, Updates, Awards

In addition to the budget, the board covered several other agenda items during its 45-minute meeting.

Director’s Evaluation: Board chair Rebecca Head said that the board had discussed Parker’s annual evaluation in a closed session and would be sharing that information with Parker during another closed session in May. They will then present some of their conclusions during the board’s public meeting on May 18.

Friends of the AADL: Trustee Margaret Leary said that she, Jan Barney Newman and Prue Rosenthal had met with three board members of the nonprofit Friends of the AADL to develop a new agreement between the Friends and the library. She said she hoped to share that agreement at the May board meeting.

Director’s Report: Parker reported that she’d held a staff meeting in the morning, attended by more than 120 employees, to talk about the proposed budget. She said there were a lot of questions and engagement, and she felt it had been a good meeting. [The library employs about 250 people, including about 100 who are full-time workers with benefits.]

She reported the library had received several awards, including one from the University of Michigan’s Ginsberg Center, recognizing the work AADL had done partnering with Michigan Community Scholars and Michigan Television. The project – the University-Community Social Justice Film and Discussion Series – received the Rosalie Ginsberg Award for Community Service & Social Action’s Outstanding University Program Award, for excellence in combining social action and learning. The library was also recognized by the Ann Arbor Public Schools Partners for Excellence Program for 10 years of continuous partnership with the schools.

Library for the Blind and Physically Disabled: Celeste Choate, associate director of services, collections and access, updated the board on the Library for the Blind and Physically Disabled, which opened at the AADL in February. AADL staff completed a database conversion from the system that the LBPD used when it was operated by Washtenaw County. They called patrons listed in the database and discovered that some had died or moved – they’ve now updated the listing. They’ve also taken detailed inventory of the 20,000 items transferred over from the county, she said. Regarding outreach, she said that AADL staff visited all libraries in the county to let them know about available services. They’ve also sent letters to school principals, making them aware of services for their students with special needs. Choate reported that the library has ordered a braille embosser that translates text into braille copy. When that arrives, patrons will be able to bring in items – anything from a personal letter to the library’s annual report – and get a copy of the item in braille.

Board member Carola Stearns asked if they had software that would add closed captioning to films. Choate said that they didn’t, but that she’d look into that.

Resolutions: The board approved two resolutions: 1) revising AADL’s family medical leave policy to conform with federal law, and 2) granting an easement to the city of Ann Arbor for sidewalks along the Traverwood branch on Huron Parkway. Regarding this latter resolution, Parker said it was part of the site plan agreement with the city, which the board had previously approved. The paperwork had been on “someone’s To Do list” at the city, she said, and was just now being formalized. The easement would allow the city to do underground work, if necessary, that might require temporarily removing the sidewalks.

Present: Rebecca Head, Margaret Leary, Jan Barney Newman, Josie Parker, Prue Rosenthal, Carola Stearns, Ed Surovell.

Absent: Barbara Murphy.

Next meeting: Monday, May 18, 2009 at 7 p.m. in the library’s fourth floor meeting room, 343 S. Fifth Ave. [confirm date]

County administrator Bob Guenzel and his staff also presented various scenarios for increasing revenues, as points of discussion, not recommendations. Those included a couple of options to raise or reapportion taxes that would require voter approval and appeared to have little traction among commissioners at this point.

The discussion was part of an ongoing effort to deal with a budget crisis faced by the county and other local governments as the economy brutalizes this region and the nation. Two weeks ago, Guenzel gave commissioners a best case/worst case budget scenario that included potential deficits of up to $28 million for 2010-11, unless revenues increase or expenses are slashed.

Revenue Projections

At Wednesday’s meeting, Guenzel began by reminding commissioners that projections could change as the months progress. He described the 16 revenue sources that account for about 95% of all general fund revenues. They include property taxes (by far the largest source), fees collected by the registrar of deeds and drain commission, state revenue sharing dollars, state cigarette and liquor taxes, court fees, ordinance fees and interest income, among others.

The county’s treasurer, Catherine McClary, was on hand to discuss the interest income piece of the budget’s revenue. Two factors are at play, she said: Interest rates, and the amount of county funds available to invest. In both cases, the news isn’t good. Interest rates fell by half over the past year, from just over 5% to 2.5%. A three-month Treasury bill is under 1% now, she said. The county’s investments are still holding at about 2%, she said, thanks to prior investments. Her staff is working on interest income projections for the coming budget cycle.

A state-mandated change in the timing of local tax collection is also having an impact. Over the past few years, county tax collection has shifted from December to July. Today, all county taxes are collected in July. That’s causing cash-flow issues, as the county must spend money before its mid-year tax collection. To deal with that, the county borrows money from its state revenue-sharing reserve fund, transferring it into the general fund to cover expenses.

Foreclosures are also an issue. McClary told commissioners that earlier in the day, she’d had to file property tax foreclosures on 102 properties – a record number, despite her office’s efforts to work with homeowners to prevent that from happening. (The owners have until March 31 to redeem their property by paying their tax bills, so the final number will be lower, she said.) Last year, the treasurer’s office foreclosed on 26 properties, with 16 ultimately not redeemed.

McClary said the county is working under tremendous constraints right now, and to the extent commissioners can make budget decisions as early as possible, “the county will be in a much better position.”

Shifting The Fiscal Year – Or Not

Jennifer Watson, the county’s budget manager, presented two options related to shifting the county’s fiscal year, which is currently tied to a calendar year. She noted that the county doesn’t receive its equalization report – which tells them how much they’ll be collecting in taxes – until April. That means they’re already four months into the fiscal year before they have firm revenue numbers, and if the projected revenue turns out to be lower than expected, they’re forced to cut expenses to balance the budget. Guenzel said the options were in response to at least two commissioners who’d wondered whether shifting to a fiscal year that started in July or October would help with these issues.

Both options would result in financial challenges, however. Starting the fiscal year in July would mean that the first six months of the year would be unfunded initially. Starting in October means the county would go through seven months of its fiscal year before getting the April equalization report, which could then require significant adjustments.

Commissioner Mark Ouimet, a former banking executive, expressed concern about the county’s cash position. Shifting the fiscal year would mean that the county’s cash needs would be even greater. And noting that he’d made this point before, he said that focusing on the balance sheet – rather than on the county’s income statement – would be critical in the planning process.

Commissioner Kristin Judge, in a comment that garnered some laughs, asked if she’d missed something in the analysis of fiscal year options: “It sounded like one was bad and the other one was bad.”

Later in the meeting, McClary told commissioners she would not recommend shifting fiscal years, calling it a gimmick the state already used that’s resulted in cash-flow problems. McClary also pointed out that general fund revenues – about $104 million – accounted for only half of the county’s budget, though the other half consisted primarily of  restricted funds. However, she said those non-general fund monies are being invested and used to help manage cash flow.

Several commissioners weighed in against making any changes to the fiscal year. “I don’t think we can take the risk,” Leah Gunn said.

Other Revenue Factors: CPI, Property Taxes

Guenzel said the county looks at several factors when trying to project property tax revenue. Among them are changes that occurred the previous year, housing values, building permits, median income and general economic indicators like unemployment and the stock market. They also project changes in the CPI (the consumer price index, an indicator of inflation), which they estimated to be 4.4% this year, though that shows signs of dropping. Later in the discussion, commissioner Conan Smith cited the importance of CPI, noting that a higher CPI results in more revenue for the county. However, annualizing the data based on the first part of this year, the CPI would come in at only 1.6% for 2009.

Guenzel also talked about property tax projections, noting that residential property taxes account for about 65% of the total property taxes collected. Here again, the news was not good. The county projects a 10% drop in residential SEV, or state equalized value – the amount at which a property is assessed. In addition, new residential construction has stalled – only 238 residential building permits were issued in Washtenaw County last year, down from a peak of 2,758 in 2004.

Also important is the gap between SEV and taxable value. For about 49% of properties in the county, SEV equals taxable value, Guenzel said. That means if a property owner’s assessment decreases, so will their taxes. For all other homeowners, even if their assessment goes down, their taxes could increase as much as the rate of inflation. [The Citizens Research Council of Michigan, an independent nonprofit, provides a decent primer on Michigan's tax system, including information on Proposal A, which places a cap on taxable value.]

The county’s commercial tax base is also a challenge. Top taxpayers in that category include Pfizer, General Motors and Ford/Visteon. Pfizer’s sale of its Ann Arbor research campus to the University of Michigan will take it off the tax roles completely.

Property Tax Assumptions

Guenzel presented a range of revenue projections, and asked commissioners for their feedback – i.e., what projections would commissioners like the staff to use when preparing their budget:

• CPI in a range of 3.5% to 0%
• Percentage of properties in which SEV equals taxable value. County staff estimates that the current 49% will increase each fiscal year as property values decline.
• Projected percentage changes in SEV for 2010 through 2012. For the total county SEV, the ranges are: -6.8% to -9% in 2010, -5% to -10% in 2011, and -3% to -8% in 2012.
• Estimated change in taxable value, which is the most important factor, Guenzel said: a range between -3.75% to -8% in 2010, -3% to -10% in 2011, -2% to -7% in 2012, and 0% to -3% in 2013.

Commissioner Discussion

Leah Gunn said the county should be “ultra, ultra conservative” in terms of its revenue projections, noting that if they aren’t, they’ll be making major budget adjustments as each year unfolds. “It’s easier to adjust up than to adjust down,” she said.

Barbara Levin Bergman agreed, saying that they need to prepare for the worst-case scenario. She also said she hoped that budget cuts would be applied surgically, rather than across the board.

Jessica Ping, one of only two Republicans on the 11-member board, joked that she was a bit surprised to hear Commissioner Gunn use the word “conservative.”

Mark Ouimet, the board’s other Republican commissioner, agreed that they should err on the side of caution. He added that if they select the lower revenue target, the result will be a fairly significant burn rate on capital. They need to plan for that soon, or they won’t have the capital to “ride this thing down.”

When Ouimet ended his comments by saying he was trying to come up with something positive to say, Conan Smith quipped: “You could go with, ‘See? The conservatives are right!’”

After commissioners Kristin Judge and Ken Schwartz said they agreed with setting cautious projections, Jeff Irwin voiced a slightly more moderate view. He said that although almost 50% of homes will have their taxes lowered, that means the other 50 percent still have the “Proposal A spread” and will see a tax increase, which translates to more revenue for the county. He said that taking the worst-case scenario might lead to shortchanging departments and services, when the county doesn’t need to go that far. And some indicators, he noted, aren’t as horrific as others.

Smith asked if anyone wanted to estimate the impact that the federal stimulus package will have on CPI, to which Wes Prater replied, “Not as much as you’d think.” Smith added that he thought the CPI will be strong enough to pull the county’s revenues into the middle-low target area.

Bergman asked Guenzel to comment on the 2009 budget, wondering whether they should start looking at cuts now. “I’m no longer sanguine that we’re ok in ’09 when we’re so not ok in the future,” she said.

“We may not be ok for ’09,” Guenzel replied. They won’t know the county’s property tax revenue for the year until April, he said, and might have to make adjustments based on those numbers. He said he didn’t think the board could wait until Jan. 1, 2010 to take action.

Rolland Sizemore Jr., the board chair, had the last word in this discussion, saying that he promised that they’d look at cuts from the top levels of the administration to the bottom. He said they needed to start talking about those decisions now.

Options for Revenue Reforms

Guenzel asked the county’s corporate counsel, Curtis Hedger, to go over some possible longer-term changes that could help on the revenue side.

Headlee Override: Hedger began with a bit of history, noting that the county’s 5.5 millage rate was set in 1964. But since the Headlee Amendment passed in 1978, that rate by law has been gradually rolled back to offset property assessment increases. The current rate is 4.5493 mills.

An override, which would need to be approved by voters, could reset the millage up to its original rate of 5.5 mills. To do that, the county would have to specify what those funds would be used for. But as soon as the rate was reset, it would again be subject to the gradual Headlee rollbacks. And it’s unclear whether voters would give their approval.

Millage Reapportionment: Countywide, there’s a limit of 18 mills in total that can be levied by all taxing entities, including the county, townships and others. In 1964, Hedger said, a county tax allocation board was formed to determine how to allocate the 18 mills – of that total, the county’s rate was set at 5.5 mills. Commissioners could reconstitute that board, Hedger said, to allocate new rates. The risk, of course, is that the allocation board could set the county’s rate at a new, lower level.

In addition to the two longer-term options described by Hedger, Guenzel said that other revenue-generating options include a new millage dedicated to operating costs, and, more broadly, sustained economic growth. County departments could also consider increasing fees, increasing their rate of collections, and adding programming. Outside funding opportunities include anticipated funding from the federal stimulus package, federal and state earmarks and grants, among others.

Guenzel also said that staff was looking at generating revenue from within the county’s infrastructure, such as selling buildings, renting out unused county-owned space, and decreasing or eliminating its leased spaces. “We’re seriously looking at our space issues,” Guenzel said, noting that the building on Zeeb Road was only half full, and that the 15th District Court will vacate the county courthouse sometime in 2010, and would be available for use in 2011.

Selling property might be helpful, he said, but it’s not a structural savings. However, he added, reducing the county’s building footprint would save on operating expenses. Guenzel said he’d asked some local brokers, on a pro bono basis, to look at what county properties might sell.

Sizemore said he wanted to see a plan related to property sales sooner rather than later. Ouimet said they’d probably hear from brokers that it’s not the right time to sell because of the market, but he said it’s a good time to assess the county’s future space needs, while getting rid of excess real estate.

Ping wanted to know what county-owned space is being used by other organizations at no charge, and to see what they could ask in rent instead.

At the end of their discussion, Guenzel said his staff would bring back a plan for revenue projections based on what they’d heard from commissioners, noting that it was always subject to revision based on changing conditions.

Smith said that this was the only substantive discussion the board had planned related to the revenue side of the budget. Ping, who chairs the board’s working sessions, said they could always discuss budget issues at that venue, if needed.

Sizemore asked Washtenaw County sheriff Jerry Clayton, who was in the audience, whether he could give commissioners an update on how the county’s criminal justice system would be affected by Gov. Jennifer Granholm’s proposal to cut the state’s Department of Corrections. Clayton said he expected it would have some impact locally, but that the proposal would undoubtedly be changed as the budget moved through the state legislature, so it was too soon to tell. He said his department would plan some kind of strategic response, whatever those final numbers are.

Sizemore said he’d like to hear from other elected officials too, including county prosecutor Brian Mackie, treasurer Catherine McClary and water resources commissioner Janis Bobrin. Smith reported that Guenzel was already setting up those meetings.

Bergman said she felt she must fire a shot across the bow, stating that it wasn’t right that the commission – before it even dealt with the 2010 budget – had already approved a rate for what the county charges the townships for police services. She said she used to read her children a book about a lion and an alligator in a swamp. The lion said to the alligator: “There is an old saying, I know that it’s true, you can’t have your friends and eat them all too.”

Gunn cited several examples of nonprofits that are struggling to keep up with demand for their services. “It’s getting tough out there,” she said, later adding, “we are the government of last resort.”

Public Comment

The only person to comment during the times set aside for public comment was Tyrone Bridges, who runs a program in Ypsilanti that teaches at-risk youth how to build computers. He said he’d recently tried to apply for a $6,500 community development block grant, and was told that he wasn’t eligible because his group hadn’t been audited. “I’m asking someone to help me,” he said, saying he was tired of having doors slammed in his face as he was trying to help kids who might otherwise get into trouble.

Several commissioners expressed sympathy and support for Bridges and his program, and said they’d do what they could but that they couldn’t promise him money. Commissioner Ronnie Peterson, whose district represents Ypsilanti, said that perhaps it was time to review this policy of requiring an audit. Saying that Gunn had whispered into his ear, Peterson informed Bridges that the two of them would pay for an audit, and that he’d provide a referral to an accountant. Referring to the other commissioners, Peterson quipped, “We’ll give tonight – we’ll ask them next time.”

Executive Session

At the end of their meeting, the board went into a closed session to discuss the settlement strategy for its police services litigation with Augusta, Salem and Ypsilanti townships. The county has not publicly announced how it will respond following a legal victory in the case. The state Court of Appeals ordered a lower court to calculate how much the townships owe the county for unpaid services, plus interest – an amount could top $2 million, not including legal fees. However, the townships have the option of appealing to the state Supreme Court. The board emerged from its executive session with no announcement about the case.

Present: Barbara Levin Bergman, Leah Gunn, Jeff Irwin, Kristin Judge, Mark Ouimet, Ronnie Peterson, Jessica Ping, Wes Prater, Ken Schwartz, Rolland Sizemore Jr., Conan Smith

Next board meeting: Wednesday, March 4 at 6:30 p.m. at the County Administration Building, 220 N. Main St. The Ways & Means Committee meets first, followed immediately by the regular board meeting.  [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 comment sessions are held at the beginning and end of each meeting.