The direction came after the city council met in a closed session for about half an hour during its Jan. 6, 2014 meeting, and then emerged to pass the resolution. [amended Edwards Brothers resolution on Jan. 6, 2014]

The resolution provides direction to explore options to make the purchase financially feasible. That means finding a way to finance a $12.8 million deal. The sale of the Edwards Brothers property on South State Street is currently pending to the University of Michigan for $12.8 million, in a deal that was announced in a Nov. 27, 2013 press release. The business – a fourth-generation Ann Arbor publishing and printing firm – had signaled its intent to put the property on the market in late July.

But a right of first refusal on the property is held by the city of Ann Arbor as a condition of a tax abatement granted by the city council almost three years ago, on Jan. 18, 2011. Purchase by the university would remove the property from the tax rolls. Washtenaw County records show the taxable value of the property at just over $3 million. In his remarks on the resolution made at Monday’s meeting, mayor John Hieftje cited the city’s clear interest in maintaining the property on the city’s tax rolls.

According to the tax abatement agreement, the event triggering the city’s 60-day right-of-first-refusal window is a formal notification to the city by Edwards Brothers. Some people not affiliated with the city reportedly believe that this took place on Nov. 26 – but as of early December, there was not consensus on the city’s side that notification had taken place on that date. The 60 days in question are 60 business days, so if the council acted by its second meeting in February, that issue would be in any case moot.

Updated at 2:27 p.m. Jan. 9, 2014: According to city administrator Steve Powers: “The City is operating on a timeline to provide notice to Edwards Brothers prior to February 25, 2014. This calculation is made from Nov. 27th, 2013.”

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

Every April, the county’s equalization department produces an annual report describing Washtenaw County’s total equalized (assessed) value of property. The report – part of the state-mandated equalization process – gives an indication of how much revenue the county will receive from property taxes in the coming year. [See Chronicle coverage: "Washtenaw County's Taxable Value Falls"]

In November, the equalization and property description department presents an apportionment report, which gives details of the taxable valuations for property in the county, by municipality. The report also includes the amount of millages levied and the dollar amounts collected in taxes. [.pdf file of 2011 apportionment report] Like the equalization report, the board is required by state law to vote on adopting the apportionment report.

This year, all the taxing entities in Washtenaw County will be levying in total about $622 million in property taxes –a drop from $639 million in 2010. The county alone will levy about $81 million this year, compared to $83 million in 2010.

Raman Patel, the county’s equalization director, spoke briefly to commissioners, saying that the equalization process is underway in preparation for the annual report in April. He said it appears that taxable value won’t be declining as much as it did last year.

This brief was filed from the boardroom of the county administration building at 220 N. Main St. in Ann Arbor, where the board of commissioners holds its meetings. A more detailed report will follow: [link]

Dave Fisher of the accounting firm Rehmann Robson delivered highlights of the Ann Arbor District Library's financial audit at the AADL board's Nov. 15 meeting. (Photo by the writer.)

Dave Fisher of the accounting firm Rehmann Robson was on hand to review the district’s financial audit for the fiscal year that ended June 30, 2010. He described the library as in solid financial shape, especially in relationship to other entities in Michigan that rely on property tax revenues. The library has no long-term debt and its fund balance is strong, he said. But he added a cautionary note that like other taxpayer-funded entities, the library would likely be grappling with a continued drop in property tax revenues in future years.

Property tax revenues emerged again in a discussion during the director’s report. AADL director Josie Parker drew attention to a Nov. 15 column published in The Ann Arbor Chronicle regarding the ongoing negotiations between the city of Ann Arbor and the Downtown Development Authority. The column pointed out an issue that Parker has been tracking as well: the potential for tax increment financing funds captured by the DDA from public entities, including the AADL, to be used to offset a parking fund deficit caused by striking a new parking deal with the city. The board ultimately passed a resolution at Monday’s meeting, directing Parker to seek legal counsel on the issue.

Board member Ed Surovell said he wanted to make sure the board was defending their right to collect taxes, and that they’re being as responsible as possible to the citizens of the district. “I think this is dead serious business,” he said. “The appropriation and misappropriation of tax revenues is the lifeblood not just of this library, but of a democracy.”

Also during her director’s report, Parker described the results of a site review by staff of the Michigan Commission for the Blind, which manages the federal program that the Washtenaw Library for the Blind and Physically Disabled @ AADL is part of. The review, conducted every two years, is the first one since the AADL took over management of the WLBPD from the county, a transition that occurred in early 2009. AADL received several commendations for its approach to providing WLBPD services.

At the end of the meeting, outgoing board member Carola Stearns – who lost her seat in the Nov. 2 election to challenger Nancy Kaplan – gave a poignant speech, thanking the library staff and her colleagues on the board. In connection with a possible downtown building project, she urged the board to explore alternative funding sources, beyond paying for the project solely with taxpayer funds.

City-DDA Parking Contract Negotiations

During her director’s report, Josie Parker alerted the board to a Nov. 15 column published in The Ann Arbor Chronicle. The column, by Chronicle editor Dave Askins, discussed the ongoing negotiations between the city of Ann Arbor and the Downtown Development Authority, and pointed out the potential for tax increment financing funds captured by the DDA from public entities, including the AADL, to be used to offset a parking fund deficit caused by striking a new parking deal with the city.

Parker told the board that she has been aware of this issue, and is following it closely. She said she has attended DDA meetings at which this has been discussed, and it’s known that the library understands the issue and the impact that the parking agreement might have. It’s known that the library is paying attention, she said.

One of the meetings that Parker attended was a DDA retreat in May, during which DDA board members discussed their approach to negotiations with the city over a new parking agreement. From Chronicle coverage:

Parker’s an interested party to the DDA conversations, not just because of the library’s downtown branch. To the extent that payments by the DDA to the city could involve revenues from the DDA’s tax-increment finance district, Parker told The Chronicle before the meeting, she wanted assurance that any excess TIF revenues were distributed proportionally, according to state statute, to all the taxing authorities whose tax levies were “tiffed” – that is, captured by the DDA. The Ann Arbor District Library is one of those taxing authorities, along with the city of Ann Arbor, Washtenaw County, Washtenaw Community College and the Ann Arbor Transportation Authority.

At Monday’s AADL board meeting, Parker said she wanted the board to know that she is aware of the issue, adding “I will need direction as this moves forward.” As tax revenues decline, it’s important to look at how these revenues are used, she said.

Carola Stearns said she appreciated that Parker was staying on top of the issue. But she didn’t think that the library had any control over the TIF funds, and wondered whether that was, in fact, the case. Rebecca Head said she didn’t know, but that it was certainly something they could discuss with their partners – referring to the other taxing authorities that would also be affected by TIF capture: The Washtenaw Community College, the county government, and the Ann Arbor Transportation Authority.

Saying it seemed that the city was attempting to collect money for its general fund through the DDA in a way that’s not appropriate, Ed Surovell felt the board should seek the advice of legal counsel, and proposed doing that as an agenda item later in the meeting.

The board returned to the issue under items for new business. Surovell made a motion to direct Parker, in conjunction with the board’s treasurer and finance committee, to consult with legal counsel about the city-DDA parking agreement, and to seek a legal opinion about how funds are being allocated that would otherwise be coming to the library.

Margaret Leary made a friendly amendment that the director or treasurer make a preliminary report and recommendations to the board at their next meeting.

Surovell said he wanted to make sure the board was defending their right to collect taxes, and that they’re being as responsible as possible to the citizens of the district. “I think this is dead serious business,” he said. “The appropriation and misappropriation of tax revenues is the lifeblood not just of this library, but of a democracy.”

Outcome: The board unanimously passed a resolution directing AADL director Josie Parker, in conjunction with the board’s treasurer and finance committee, to consult with legal counsel about the city of Ann Arbor-Downtown Development Authority parking agreement, and to seek a legal opinion about how funds are being allocated that would otherwise be coming to the library.

Financial Audit

During Monday’s meeting, Dave Fisher of the accounting firm Rehmann Robson was on hand to review highlights of the AADL’s financial audit for fiscal year 2009-10, which ended June 30, 2010. Prior to his presentation, board treasurer Prue Rosenthal reported that the finance committee had met with Fisher and reviewed the audit report in detail. The committee members are Rosenthal, Ed Surovell and Barbara Murphy. She said that Fisher told them the library is in “wonderful shape,” with no outstanding issues. “We’re in good shape – very good shape,” she said. The committee had approved a draft of the audit.

Fisher told the board that AADL has a “very healthy” fund balance. At the end of the fiscal year, the unreserved fund balance for the library’s general fund – that is, money available for spending – was $7.042 million, or 57% of total general fund expenditures. The combined fund balances of $7.65 million represented an increase of $587,757 over the previous year.

The library’s total net assets were $31.693 million at the end of the fiscal year, an increase of $64,809 from the previous year.

Fisher noted that property tax revenues, which account for 91% of the district’s total revenues, have been declining, as they have throughout the state. “That’s going to be a factor, of course, in future budgetary cycles,” he said.

Total revenues were $12.97 million during fiscal 2009-10, down from $15.94 million the previous year. Of that, property taxes accounted for $11.79 million during 2009-10, compared to $14.62 million in 2008-09.

Despite declining revenues, Fisher said the library has a solid fund balance, which is very good – it’s also something that many other government entities don’t have these days, he noted. Fisher also pointed out that the library has no long-term debt, unlike many other entities. That means they don’t have debt payments to make.

When board president Rebecca Head observed that this presentation was likely different from others that Fisher is making, he agreed, saying that school systems in particular are having some issues right now with their fund balances.

Fisher noted that there were no issues this year related to AADL’s internal controls. He mentioned that the IRS has stepped up its audits of governmental and nonprofit entities, in particular looking at issues related to employees versus independent contractors. He urged the library to be vigilant in following the IRS rules related to independent contractors, and to ensure that W-9 forms are obtained when required.

Board members had few questions. Margaret Leary noted a paragraph in the report referring to a contingent liability that she said she thought they have already addressed. The section she referred to is part of the notes to the financial statements, and reads:

The Library in December 1995, effective for the Library 1996-1997 fiscal year, has executed a Library Services Contract with a Township, for the purpose of providing reciprocal library services to the residents of this Township which has its own library. Because the Ann Arbor District Library overlaps in part with this Township Library territory, the contract states in part that Ann Arbor District Library shall pay over to this Township the portion of property tax received on behalf of this Township.

No amounts have been paid over to the Township under the provisions of this Contract. This Township has not since 1996-1997 asserted its right to receive this property tax revenue, and it is unknown what amount, if any, would be required to be repaid in the case this Township elects to assert this right. It is believed that resolution of this matter will not have a material adverse effect on the financial condition of the Library.

Leary wondered whether the report needed to reflect the fact that the library has changed its boundaries. Though board members and staff did not mention the township by name at Monday’s meeting, they were referring to Northfield Township. The board took action at its May 17, 2010 meeting to change those boundaries. From Chronicle coverage of that meeting:

The board voted unanimously to approve a resolution to modify the library district’s boundaries so that there’s no overlap with the Northfield Township Area Library’s district, located north of Ann Arbor. Residents in Northfield Township’s district will continue to have access to AADL resources. [.pdf file of boundary changes]

At Monday’s meeting, Ken Nieman, associate director of finance, HR and operations, pointed out that the issue is addressed in the financial statement’s first footnote. Fisher added that it’s necessary to include this as a contingent liability, to let people know that the situation exists.

Before the vote, Murphy thanked the library staff – in particular Parker and Nieman – for year after year of clean financial audits. Nothing is as damaging to an organization as problems with finances, she said, adding that they’ve now had over 10 years with no problems. [She was alluding to AADL's former finance director, Don Dely, who in 2000 was convicted of embezzling $119,387 from the library between 1997 to 2000. The situation was uncovered in early 2000, when the library discovered that it faced a nearly $1 million deficit. The library director at the time was Mary Anne Hodel – Parker took over as interim director in the fall of 2001, and was appointed director in early 2002.]

Murphy thanked the staff for making the board’s job easier.

Outcome: The board unanimously approved a resolution to accept the financial audit for the 2009-10 fiscal year.

Director’s Report: Games, Kudos

Josie Parker reviewed several items during her director’s report. She noted that for the third year in a row, the AADL hosted the American Library Association’s national gaming day, this year held on Nov. 13. Teens at nearly 50 libraries nationwide competed, and two of the winners – with the user names “Hot_ArmS” and “DingDong” – played at the AADL, defeating players from the Topeka and Shawnee County Public Library. Parker said this pleased Eli Neiburger, AADL’s associate director of IT and product development, since he comes from Kansas. Parker also noted that the platform the libraries use across the country for multi-user gaming – GT System – was developed by AADL staff. [link to AADL's GT System site and to a video of the competition]

Later in the meeting, responding to a query from Jan Barney Newman, Parker reported that the games played were Rock Band and Mario Kart/Super Smash Bros. Brawl. [Here are links to the leaderboards for Rock Band and Smash Bros.] She clarified that teens were in the tournament, not staff. Ed Surovell joked that this kind of gaming isn’t something that happens up at the Soaring Eagle Casino.

Parker also reported on results from a site review by staff of the Michigan Commission for the Blind, which manages the federal program that the Washtenaw Library for the Blind and Physically Disabled @ AADL is part of. The review, conducted every two years, is the first one since the AADL took over management of the WLBPD from the county, a transition that occurred in early 2009.

AADL received commendations for its work, Parker said, which were especially gratifying because there had been skepticism at the state and federal levels about the approach that AADL was taking. Typically, this type of library is handled as a “library within a library,” she said, which is expensive and difficult to administer. The AADL is treating it as a service available throughout the system.

The commendations include:

• Completing comprehensive reviews of patron accounts in 2009 and 2010, and for meeting deployment targets for use of digital technology.
• Taking a proactive stance in managing services, using all of its available staff. “Use of all-staff trainings and development of a staff wiki have provided excellent back-up information to those who do note regularly interact with the WLBPD service population,” the report states.
• Creating outstanding programs and trainings for WLBPD patrons, and for supporting a low-vision book club.
• Assigning specialized tasks to specific employees, to ensure consistent compliance with library standards, as well as best practices for patron services.

Parker said that they cleaned up the database of patrons by calling each entry – about 500 people – when they took over the WLBPD from the county in 2009. That personal touch made a huge difference in how the library was perceived, she said. They also anticipated that the National Library Service, which provides resources to the WLBPD, would transition from tapes to digital recordings, so they made the transition to digital earlier this year. They’re ahead of other libraries in that regard, she said.

The review also included three recommendations for the WLBPD:

• That appropriate staff attend conferences for the Michigan Chapter of the National Federation of the Blind and the Michigan Council of the Blind and Visually Impaired.
• That the library honor volunteers of the WLBPD annually.
• That results of a patron satisfaction survey that’s being developed by library staff be shared with all WLBPD stakeholders.

Parker thanked AADL associate director Celeste Choate, who took the lead on this project, as well as the staff of the outreach, IT and circulation departments, who bear the most responsibility for the WLBPD. The board gave them a round of applause.

“I think it’s truly a model for the future,” said board president Rebecca Head.

Farewell from Outgoing Board Member

At the end of Monday’s meeting, Carola Stearns made a statement, thanking the library staff and her board colleagues and reflecting on her tenure on the board. [Stearns was appointed to the board in mid-2008, following the resignation of Jean King. She ran for a two-year term in the Nov. 2 election, but was defeated by challenger Nancy Kaplan.]

Stearns said she was deeply disappointed that her service would be ending, saying that her voice represented the “politically unconnected, library-loving taxpayer.” She praised AADL director Josie Parker and the library staff, saying that the board had some hard decisions to make, but they always had been provided with the information they needed to make informed decisions. It was impressive that the board’s votes had been unanimous, she said.

The next couple of years won’t be easy for the board, she said. They’ll have to resolve a difficult conundrum. On the one hand, she said she’s sure that now is the time to address the inadequacies of the downtown library building. Yet she’s equally convinced that it’s not the time to finance such a project solely with taxpayer money. Stearns said she was dismayed when, prior to the election, a local blogger asked only one question of her –whether she favored renovating the existing downtown branch, or building a new one. That’s missing the point, she said – when the time comes, the board will make a decision that’s appropriate for the library and for the community. The real issue will be how to finance it.

Stearns urged the board, at their next retreat, to explore alternative funding sources for the downtown library project. It won’t be easy, she said, and it’s not clear that funds are there to be solicited. Yet it is important to keep the library strong, to continue to evolve, and to minimize the financial impact on the individual taxpayer. Future Ann Arborites deserve a strong library as well, she said.

The board and staff gave Stearns a round of applause, and the meeting was adjourned.

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

Next meeting: Regular board meetings are typically held on the third Monday of the month, with the public portion of the meeting starting at 7 p.m. in the library’s fourth floor board room, 343 S. Fifth Ave. The board’s next regular meeting is set for Monday, Dec. 20, 2010. [confirm date]

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

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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

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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

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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.)

A sampling of the questions and ideas generated from a recent meeting of Main Street businesses, who gathered to discuss the concept of a Business Improvement Zone for that area. (Photo by the writer.)

About a dozen business owners, managers and others from the Main Street area gathered last Thursday morning at Conor O’Neill’s to talk about an idea being floated for that district – a self-taxing entity called a business improvement zone, or BIZ. It’s a way to pay for services – things like snow or litter removal, or flowerbeds – to make the district more attractive and bring more shoppers downtown.

This isn’t the first time we’ve encountered the Main Street BIZ. In April, the Downtown Development Authority awarded $83,270 to the group – spearheaded by Ellie Serras and Ed Shaffran – to help get it going. Since then, Main Street BIZ has hired a consultant – Betsy Jackson of The Urban Agenda – and is holding meetings with stakeholders to pitch the idea and get feedback.

That’s what was happening on Thursday. The meeting was one of three planned so far: Earlier in the week, organizers met with property owners of buildings along a three-block stretch of Main Street, where the district is proposed. And on Tuesday, June 30, they’ve scheduled a similar presentation for residents and others who patronize Main Street area businesses. That meeting starts at 6 p.m., also at Conor O’Neill’s.

What’s a BIZ?

Michigan law allows property owners within a specified district to tax themselves, with the funds designated for economic development purposes within that district. The proposed Main Street BIZ would stretch from the south side of Huron to the north side of William, and would include a “wrap” down Washington and Liberty on both sides of Main, running to (but not including) the alleys.

Betsy Jackson, the consultant hired for this project, walked The Chronicle through the process required to set up a BIZ – organizers have already taken initial steps, including setting up a nonprofit and forming a transitional board. Next, they’ll need to get 30% of property owners to sign a petition stating their intent to form a BIZ. (That 30% is based on a formula which gives weight to a vote based on the value of an owner’s property. That is, they could reach the 30% mark without getting 30% of the individual property owners. Additionally, there’s a maximum weight of 25% for any one individual.)

After the petition is filed, the city schedules a public meeting of property owners, who will vote on a detailed business plan for the BIZ. The business plan specifies exactly what the collected funds can be used for. (After the BIZ is approved, it would require another vote to spend the money on services not covered by those categories. For example, if snow removal isn’t initially designated as a category for the BIZ funds, then the district can’t spend the money on snow removal.) The business plan would also give details about a budget, frequency of services, a formula for assessment, governance structure and other information.

At the public meeting, if a majority of property owners approve the business plan, then the city schedules a public hearing within 45 days, and the city council votes on the plan. If council approves it, an election is set. The election is administered by the city via mailed ballots. This time, 60% approval is needed – and again, the votes are weighted based on the value of the property. If 60% or more votes approve the BIZ, then all property owners within the district will be assessed, with the exceptions of  nonprofit property owners (like religious organizations or the university), government properties and owner-occupied housing units. The BIZ requires renewal every seven years.

Why Form a BIZ?

At Thursday’s meeting, Ellie Serras said some of the Main Street property owners decided they needed more control over the district’s future. “We want to make this good thing even better,” said Serras, the long-time executive director of the Main Street Area Association who stepped down from the post last year. Her husband, Dennis Serras, is a partner with Mainstreet Ventures, which owns several restaurants in Ann Arbor, including Palio, Gratzi, Real Seafood Co., The Chop House and La Dolce Vita – all operating on Main Street.

Five property owners got this project off the ground: Ed Shaffran of Shaffran Companies, Rob Spears of Cabrio Properties Amvest Properties, Mike Martin of First Martin Corp., Jeffrey Harshe of MAV Development and Jim Curtis of Curtis Commercial. Each of them contributed $5,000 to the effort, which will be repaid from BIZ funds if the entity is formed. They are also part of a transitional board – other board members are Alan Freedman of Four Directions, and Ron Dankert of Swisher Commercial. Keith Orr of the Downtown Development Authority board (and co-owner of the \aut\BAR and Common Language Bookstore in Kerrytown) is a tentative board member. If the BIZ is formed, property owners in the district would elect a new board at their first annual meeting. The city’s mayor would also be entitled to appoint one board member.

In addition to forming a board, organizers plan to use the DDA grant to set up office space, do website design and cover administrative costs, Serras said.

Jackson said that BIZ districts are typically set up in response to dwindling public sector resources. Business districts have special needs that aren’t necessarily covered by the city’s general fund – standard “common denominator” services aren’t sufficient, she said. Downtown shops and restaurants can’t compete on price with big box stores and malls, Jackson added, but what they can offer is a distinctive, positive experience and ambiance – that’s their competitive edge.

Organizers have identified three potential categories for which BIZ funds could be earmarked, Jackson said, though these could change based on feedback. All of them are aimed at improving people’s perception of the Main Street business district – they are the first things people encounter, she said. The potential categories are 1) snow removal from sidewalks and curb cuts, 2) sidewalk cleaning and litter removal, and 3) landscaping/maintenance.

Questions and Concerns

After a presentation by Serras and Jackson, they opened the floor for questions – and there were many. Several people expressed concern that Ann Arbor city council would not provide basic services if they knew that Main Street BIZ had the money to pay for them instead. Jim Beuche, an attorney with Hooper Hathaway who’s doing work for the BIZ, said that while city council is hard to predict, they “can’t foist off more on us than they will on everyone else.” That said, the reality is that the council defines what services are provided in the city, Beuche said, and those can change at any time.

This prompted Newcombe Clark, president of the Main Street Area Association board, to say: “If you pay more for a cabin on the Titanic, you’ll still sink like everyone else.”

Serras responded by saying that the city can – and has – been pulling back services for the past decade. When the city decided to stop taking care of flowerbeds downtown, the Main Street Area Association stepped in to pay for that, she said. A few years ago, the South State Street merchants paid for security because the city removed its beat cops, she said – a scenario that’s playing out again. Having the BIZ in place would make it possible to respond when the city changes its service levels. (Clark later reminded the group that Ann Arbor’s beat cops would no longer be patrolling, as of this week.)

Derek Davis, marketing manager for The Melting Pot restaurant on South Main, wondered how expensive this would be for his business. The Melting Pot pays rent, he said – would the BIZ mean that their rent will be raised?

At this point it’s unclear how much the property owners will be assessed, Jackson said. The business plan would have to specify the formula used to calculate an assessment, likely based on a property’s value and perhaps its streetfront footage. But the BIZ has no authority to prevent landlords from passing along the costs to their tenants, she added.

Davis noted that some landlords do take care of services like sidewalk snow-shoveling and flowerbeds. But for the building his restaurant rents, he said they have to pay for that kind of thing themselves. It sounded to him like within the organization of the BIZ, tenants had little power.

The issue of tenant power came up again in a discussion of the BIZ board, which would be elected by property owners and include one mayoral appointee. Several people suggested that the board include at least one business owner/tenant, to give that group a voice.

Parking was another issue raised during the discussion. Caroline Kaganov, general manager of Conor O’Neill’s and a Main Street Area Association board member, joked that she feels she’s been working for the city – she’d spent the past four days helping people figure out how to use the new parking meters installed downtown. She said the perception is that parking is scarce. Davis said there was plenty of parking, but there needed to be ways to lower the price. Perhaps the BIZ could subsidize customer parking for businesses that can’t afford to comp it on their own, he suggested.

Some people were concerned because alleys aren’t going to be included within the BIZ district – that’s where a lot of the problems are, they said, citing litter and snow removal.

Angela Pierro of Zero Gravity Designs said aesthetics were important, like putting in flowerbeds and cleaning up cigarette butts. She also said sidewalks need to be in better shape – uneven sidewalks, which cause little kids to trip or which make it difficult to push strollers – deter families from wanting to come downtown.

Davis said that in general he felt the city was very safe, but the biggest security complaint he heard from customers related to panhandling. Being approached by panhandlers affects the perception of whether Ann Arbor is a family friendly place, he said.

Next Steps

The goal would be to have a BIZ assessment on the July 2010 tax bills, Jackson said. That means they’d need to have a draft of the BIZ plan adopted by the board and start circulating petitions in September, she said. They hoped to have enough signed petitions to submit to the city clerk in October.

Meanwhile, they’ll be gathering information about similar zones in other cities. More outreach efforts are planned, too, including a website (to be designed by Angela Pierro of Zero Gravity Designs) and online survey to get more feedback about what services the district needs. They’re also working with the city attorney’s office and city clerk to ensure that all the proper steps are taken, since the city hasn’t done anything like this before. “We want to make sure there are no hold-ups related to process,” Jackson said.

Last year, Pfizer contested the assessed value that the city of Ann Arbor set for the drugmaker’s former research campus here. Pfizer, which closed its massive local R&D operation last year, argued that its Ann Arbor properties should be given a dramatically lower assessment – less than half of the value assigned by the city for 2008 and 2009.

A settlement reached earlier this month between Pfizer and the city of Ann Arbor is a compromise that’s now being reviewed by the Michigan Tax Tribunal. It lowers Pfizer’s assessment for 2008 and 2009, but not by as much as Pfizer requested. If approved, it will represent a total loss of roughly $10 million in tax revenues over the tw0-year period for all local entities that received taxes from Pfizer, including the city, Washtenaw County, Ann Arbor Public Schools, Washtenaw Community College and the Ann Arbor District Library. The tribunal is expected to make a ruling in the next few weeks, and is expected to approve the deal.

County administrator Bob Guenzel mentioned the settlement at a budget forum Tuesday morning for members of the business community, which The Chronicle attended. The county would take a nearly $1 million hit over the two years, he said – collecting $426,948 less in 2009 and owing Pfizer $557,989 from 2008.

Tom Crawford, the city’s chief financial officer, said Pfizer’s original proposal asked that taxes paid to all taxing authorities be lowered from a total of $12.5 million in 2008 and the same amount in 2009 to roughly $6.4 million in 2008 and $3.1 million in 2009. The compromise settlement does lower Pfizer’s taxes, but not by the full amount it requested.

For the city of Ann Arbor alone, Pfizer has been the largest taxpayer, bringing about $4 million in taxes to the city each year. If Pfizer had been 100% successful in its appeal, the city would have had to refund to Pfizer $2.1 million for 2008 and would have received $2.1 million less than expected for 2009. As a result of the settlement the city won’t lose that full amount, but it is getting nearly $3 million less over that two-year period. About half of the taxes from Pfizer are allotted to the general fund – the remaining taxes are paid to AATA, parks and other city entities.

Pfizer made its appeal in October 2008, so local entities were prepared for some kind of revenue loss. A May 18, 2009 memo from Ann Arbor city administrator Roger Fraser indicated that the city had budgeted $722,000 from its general fund reserve for fiscal 2010 to cover the potential Pfizer tax revenue loss to the general fund. And, in fact, under the settlement the city’s general fund will receive $695,494 less from Pfizer for that timeframe – an amount covered by the $722,000. [A complicating factor in this discussion is that tax years are based on calendar years, while the city's fiscal year runs from July 1 through June 30.]

Crawford said that a motivation for settling was the prospect of the appeal being dragged out over several years, with an unknown outcome.

As for other entities, Ann Arbor schools will get $3.38 million less than originally expected from Pfizer over the two years, while WCC will see a drop of $636,000 during that period. The library will receive $332,000 less.

Here’s how the settlement will be handled, according to a memo sent to local taxing entities on May 18 from Matthew Horning, the city’s treasurer:

For tax year 2009, the changes will be relatively easy to implement. Changes will be reflected in tax bills, and will be handled in the normal course of tax collection and distribution. The 2008 tax year is a bit more complicated. For real property, changes will be handled through the County Treasurer’s chargeback procedure. For personal property, changes will be handled by the City Treasurer.

An even bigger blow to tax revenues is yet to come, when the University of Michigan completes its purchase of the 174-acre Pfizer site next month. When that occurs, the property will be removed from the tax rolls completely, as the university is a tax-exempt institution.

This also comes at a time of overall significant decline in tax revenue. At Tuesday’s budget forum, Guenzel told the group that Washtenaw County’s three largest taxpayers have been General Motors, Pfizer and Ford/Visteon. Pfizer is gone, he noted, GM is on the brink and former Ford/Visteon plant in Ypsilanti is closed. Residential property tax revenues have fallen sharply too, and the county faces a possible $26 million deficit in the coming two years.

A temporary sign taped to the permanent Community Television Network sign was guiding hundreds of residents to the Board of Review, which met last week at CTN's offices on South Industrial. More meetings are set for early next week.

One Ann Arbor resident had just refinanced in January, and politely told the city Board of Review she was “shocked” when she got her assessment in the mail this month – the city had valued her home far higher than had the appraiser, and she didn’t think that was fair. She handed the three board members a copy of the appraisal.

It didn’t take much more to convince them to lower her assessed value. “You did it!” board member Doris Preston told her.

“Really?” she said, looking startled.

Preston said that most people don’t bring in such good data to back up their appeal. “We really appreciate that very much,” Preston said. “Thank you.

“Thank you,” said the resident, smiling as she left the room.

Last week, The Chronicle spent part of an afternoon watching the review process unfold in a room at Ann Arbor’s Community Television Network headquarters on South Industrial. It’s fair to say that not everyone left with a smile. Landlords, attorneys, first-time homeowners, people hoping to sell their homes – each got about five minutes to make their case to the Board of Review: Doris Preston, Walt Hancock and Bob White, joined by city assessor David Petrak.  Board members were cordial and attentive, but the appeals they heard mostly reflected frustration, anxiety, annoyance and confusion. A lot of confusion.

An example of a 2009 city of Ann Arbor assessment notice. For this proeprty, the top line shows an increase in taxable value, while the second line indicates a drop in assessed value. (image links to higher resolution file)

So let’s start there. Two main points of confusion surfaced in the appeals that The Chronicle observed. First, some homeowners were asking to have their taxable value lowered – and were disappointed to learn that the Board of Review had no control over that. This was a message that board members had to give repeatedly. (More on how that works below.)

Second, many Ann Arbor property owners were confused by a counterintuitive scenario in their 2009 assessments: an increase in taxable value, coupled with a decrease in the assessed value of their property. They didn’t understand why their taxes would go up while their home was worth less.

It’s a phenomenon due to Proposal A. This ballot initiative, which passed in 1994, severed the direct link between taxable and assessed value. To get an idea of why a property’s taxable and assessed values might be headed in opposite directions, it’s important to look at those values when a property is purchased.

When a property is purchased, the taxable value is reset to be equal to assessed value. And the assessed value is an  amount set at roughly 50% of market value. But in years subsequent to that purchase, the assessed value of the property will increase or decrease, depending on overall market conditions.

If the market goes up after the purchase, then the assessed value goes up, and intuitively, taxes paid on the property (that is, the taxable value) should increase, and they do. But Proposal A puts a cap on how fast the taxable value can increase.  That cap is 5% or the rate of inflation, whichever is lower.

Suppose you buy a home for $200,000. If you’re paying the “right” price, based on the assessor’s assumptions, then the assessed value and the taxable value would be $100,000. Further, suppose that the following year, the properties in your neighborhood appreciate by 10%, putting the assessed value at $110,000. And suppose that inflation for that period  is right at 5%. The difference between the 10% appreciation and the 5% overall inflation means that for that year the taxable value can’t increase to match the assessed value . Due to Proposal A, the maximum taxable value for the property would be $105,000. On that scenario, the property would have an assessed value of $110,000 and a taxable value of only $105,000.

In a market that goes up more than inflation year after year, the gap between a property’s assessed value and a property’s taxable value would continue to increase. In the real-life example above (see image), over a period of 10 years in a upward market, the gap grew to be a $85,773 taxable value compared to a $124,700 assessed value.

Based on that gap, Proposal A still allows taxable value to rise in a given year, even if assessed value decreases – just as long as the increase is not more than 5% or the rate of inflation. This year, the rate of inflation used for Ann Arbor was 4.4%. Doing the math on the real-world example, 4.4% of $85,773 is $3,774, which is the amount that homeowner’s taxable value increased.

It’s one thing to know that the market has “gone down,” but it’s another to figure out by how much for assessment purposes. So how does the assessed value get evaluated in a given year?

The city does not appraise each individual property. Rather, the city does an annual sales study, by neighborhood, to set the assessed value of local properties. In a declining market, Petrak said, the neighborhood study looks at the previous year only. For current assessments, the period of the study was from October 2007 through September 2008. When the market is appreciating, as it has until recently, the analysis is based on a two-year study. That results in assessments going down quickly, but increasing more gradually.

The Ann Arbor Board of Review, from right: Robert White, Walton Hancock and Doris Preston. Far left: David Petrak, city assessor. White also serves on the city's Historic District Commission.

Even though taxable value and assessed value aren’t directly linked, it’s clear why people care about appealing their assessed value.

When assessed value is equal to or lower than taxable value, your taxable value won’t increase in any given year – so there’s incentive to keep your assessed value down. Or if you’re trying to sell your house in the current market, a lower assessed value might help. That’s because when a property changes hands, taxable value is reset at the assessed value – this “uncapping” is a factor that potential buyers evaluate.

It’s in this context that the Board of Review operates. Appointed by the mayor, the board hears each appeal, and after the property owner leaves, they reach a consensus – fairly quickly, during the time we observed – about whether to adjust the assessed value as requested. These changes, if any, are recorded and in two to three weeks the owner is mailed a letter stating the board’s decision. In some cases, as in the one described at the start of this article, the board tells the owner immediately.

The city does about 36,000 assessments, including commercial and residential properties, Petrak said. Last year, after the board made its adjustments, the taxable value of properties in the city totaled $2.996 billion. This year, prior to board review, that amount was $3.039 billion. Petrak said he expects that following adjustments made by the Board of Review, taxable value citywide will remain flat.

As they sit through hundreds of appeals – more than 80 per day, meeting all last week and early next week – the board sees a broad slice of Ann Arbor, and hears dozens of different stories. Here are just a few:

• One man bought his house a couple of years ago. He came to the board last year and got them to lower the assessed value to reflect the amount he paid for the house. When he got this year’s assessment, it had gone up dramatically again. “I don’t know why I had to come back,” he said. “What do I have to do so I don’t have to come back next year?” Walt Hancock told him that the board’s decisions only applied for one year. Next year, the city’s sales study would likely cause the property assessment to increase again, and the homeowner would have to return if he wanted to appeal. The man sighed. “So see you next year,” he said.
• One homeowner brought a detailed report listing private sales and foreclosure sales in her neighborhood, which she passed out to the board.”Will this be shared with the powers that be?” she asked as she was leaving. “We are the powers that be,” Doris Preston said.
• The board had a few extra minutes, and accommodated a landlord who hadn’t made an appointment to meet with them, but who was hoping to appeal as a walk-in. He said he had a three-story house that he’d had to alter to comply with city code, and it had caused him to lose some square footage. He wanted his assessment lowered on that basis. How many units were in the building? Petrak asked. Four, he replied, the same as before. How many bedrooms? Seventeen, rented at $700 a month per bedroom. When board members expressed surprise at this, he said ,”Did I get myself in trouble?” (He returned an hour or so later, asking that his appeal be withdrawn.)
• Another landlord came in, asking for adjustments on his own home as well as eight other properties he owned. “I’ll bet you guys are getting bombarded,” he said as he was getting settled. “Yes, we are,” Preston said. He hadn’t brought any documentation to support his request, and offered estimates when asked about market value for these properties. He expressed frustration that they didn’t have the power to lower his taxes. “I’m so tired of this – the taxes, the permits. Please do whatever you can do.”
• A man who owned a condo in the Northbury subdivision on Ann Arbor’s north side presented a detailed analysis of properties in that area, noting that it was difficult because not many homes had sold recently, though several were on the market. “It’s really brutal, no matter how you look at it,” he said. After his appeal, he also asked for time to talk about the University of Michigan, saying that “local taxpayers are taking care of the university,” which is tax exempt. Preston told him that only the state legislature can address that situation. The man said the university is “taking over like alligators,” specifically citing its pending purchase of the large property owned by Pfizer.
• A non-native-English speaking couple, for whom it was a challenge to express themselves, said they didn’t understand why their taxes went up and their property value went down. They had made improvements to one of the rental properties they owned, yet still the assessed value went down. They said they’d tried to get an explanation by calling the city assessor’s office, but that each time they called, different employees told them different things. Reviewing their assessments, Walt Hancock said, “You’re getting a pretty good deal, to tell you the truth.”
• An attorney representing a family that owns a local auto dealership came in on their behalf, challenging an assessed value of a home sold between family members. It was not an “arm’s length” sale, but she noted that they’d had the property independently appraised. The issue of “arm’s length” sales came up a few times in other appeals, with the board discussing how if the property is sold to family or friends (i.e., not at arm’s length), it’s fairly easy to get appraisals that reflect a lower, favorable value.
• A woman came in to appeal the assessment of her Geddes Lake home, which had recently been converted from a co-op to a condo. She described how other condos had sold much lower than what hers was assessed for, even though hers was in poorer condition. After her presentation, the board told her they had no questions. “That’s it?” she asked. “That’s all you want?” Yes, they said. Then Walt Hancock asked, “Do you still have problems with ducks out there?” “I like them!” the woman exclaimed. Doris Preston observed that the excremental mess created by the ducks added an element of privacy protection, deterring people from walking through the yards.

More information about Ann Arbor tax and property assessments is available on the city assessor’s website.

Ken Nieman, the library’s associate director, gave his monthly update on the current budget with a summary of January’s financial statement. He noted that AADL’s cash balance as of Jan. 31 was about $11.5 million. The library received a $30,000 grant from the Friends of the Ann Arbor District Library, prompting a thank-you from board president Rebecca Head.  Nieman said the roughly $46,000 in capital outlays for the month included the final amount paid to Luckenbach Ziegelman Architects, for work done on the proposed downtown library building project, which was halted last November.

After Nieman’s presentation, Ed Surovell gave a brief report from the budget and finance committee. He said the committee met with staff earlier this month  and had an extensive discussion about the economy and what might happen to the library’s revenue base. Projections are going down, not up, he said.

[All local governments are facing lower revenues, primarily due to a drop in the property tax base. The impact of Pfizer's departure was another blow, coupled with the likely acquisition of Pfizer's Ann Arbor property by the University of Michigan, which is tax-exempt. What's more, Pfizer is appealing the taxable value of its land for 2008 and 2009. The library board's packet for Monday's meeting contained a letter to Ann Arbor taxing authorities, which includes the AADL, from city treasurer Matthew Horning, city assessor Dave Petrak, Ann Arbor chief financial officer Tom Crawford, and city administrator Roger Fraser. The letter stated that Pfizer is appealing the taxable value of its land for 2008 and 2009, and if the company is successful in its appeal to the Michigan Tax Tribunal – a process which could take several years – the library could lose $242,072 already received in 2008 and the same amount anticipated for 2009. Starting in 2010, the AADL will also stop receiving roughly $456,000 annually as a result of UM's purchase of the Pfizer property.]

The economy came up again in Josie Parker’s director’s report. She said that earlier in the day the library had an all-staff meeting that more than 110 people attended, focused on the local economy and its impact on the library. Describing the meeting as very productive, open and straightforward, Parker said they discussed the fact that revenue projections are down. Following Monday’s board meeting, Parker added that they’ve made no decisions about how to deal with the decline in revenues yet, and that a draft of the library’s annual budget will be ready in April.

The meeting included two other staff reports: Ken Nieman gave the last in what had been monthly updates about the new Traverwood branch, reporting that a dedication plaque will be installed there later this week. Celeste Choate gave an update on the Library for the Blind and Physically Disabled, which opened at the AADL earlier this month after transitioning from operation by Washtenaw County. She said there are 482 registered patrons, and that library staff will be calling each one to welcome them to AADL and update their profiles on things like author and topic preferences. Parker gave Choate a shout-out for managing the transition.

The board also unanimously passed resolutions to revise AADL’s exhibitions policy and to approve $235,000 for the purchase and installation of two air handlers for the downtown building. The issue of replacing outdated air handlers had been discussed at the board’s January meeting, as had the proposal to change AADL’s exhibits policy to eliminate specific references to the application process. Both resolutions were passed without comment on Monday.

Present: Rebecca Head, Margaret Leary, Josie Parker, Carola Stearns, Ed Surovell.

Absent: Barbara Murphy, Jan Barney Newman, Prue Rosenthal

Next meeting: Monday, March. 16, 2009 at 7 p.m. in the library’s fourth floor meeting room, 343 S. Fifth Ave. [confirm date]

Reaction to the news from Ward 5 councilmember Carsten Hohnke was unambiguous: “The impact of removing $1.5 million from our tax rolls can not be overstated. I’m extremely disappointed that the University could not find a way to be a more creative and equitable partner with the city in this.”