Carrie Leahy is chair of the LDFA board.

The council’s meeting was of more than just passing interest to the LDFA board members – because the council voted at that meeting to table a $75,000 contract for business development services with Ann Arbor SPARK, a local nonprofit economic development agency. Ann Arbor SPARK is also the LDFA’s contractor – but not for the same kind of services that SPARK delivers under its contract with the city. The council will likely take up its contract with SPARK again at a future meeting, possibly as soon as July 7.

The city’s annual contract with SPARK, which is paid for with general fund money, is meant to cover the attraction and retention of mature companies to the Ann Arbor area. In contrast, the LDFA contracts with SPARK for entrepreneurial support services – for companies that are in some phase of starting up.

On the LDFA board’s June 17 agenda was the annual contract with Ann Arbor SPARK for entrepreneurial support services – which the board voted to approve. This year that contract is worth nearly $2 million – $1,891,000 to be exact.

An unsuccessful bid by councilmembers made during the city’s FY 2015 budget deliberations would have reduced the total LDFA expenditures by $165,379. The goal of that expenditure reduction would have been to increase the fund balance that was available for infrastructure improvements in the LDFA district – specifically, for high-speed telecommunications. At the LDFA’s June 17 meeting, city CFO Tom Crawford indicated that sometime in the FY 2015 fiscal year, the city would be making a proposal to install fiber throughout Ann Arbor.

The contract between the LDFA and SPARK covers a range of items, with the top two line items consisting of staffing for the business incubator ($420,000) and provision of services to start-up companies in Phase III of their development ($550,000). SPARK classifies its engagement with companies in terms of phases: preliminary screenings (Phase I); due diligence (Phase II); intensive advising (Phase III); and accelerating opportunities (Phase IV). [.pdf of FY 2015 budget line items] [.pdf of LDFA-SPARK FY 2015 contract]

At its June 17 meeting, the LDFA board also approved a routine annual $42,600 contract with the city of Ann Arbor – for administrative support services. Those include items like the preparation of meeting minutes, stewardship of public documents, and preparation of budgetary analyses. [.pdf of FY 2015 LDFA contract with city of Ann Arbor]

The final voting item for the board was approval of its meeting schedule for the next fiscal year. The LDFA board meets in eight out of 12 months, with the next meeting taking place on July 15, 2014, starting at 8:15 a.m. in the city council chambers. [.pdf of 2014-2015 meeting schedule]

These voting items did not, however, generate the majority of the board’s discussion at its June 17 meeting.

The board focused most of its discussion on issues surrounding its application for an extension of the LDFA past its current 15-year lifespan, which ends in 2018. Legislation passed in 2012 allowed for either a 5-year or a 15-year extension – with different criteria for those time periods. The 15-year extension requires an agreement with a satellite LDFA, with two communities currently under consideration to partner with Ann Arbor’s LDFA: Brighton and Adrian. Flint had also been a possibility, but is no longer on the table.

With an extension, the LDFA would continue to capture school operating millage money, which would otherwise go to the state’s School Aid Fund. At least some of the school taxes subject to capture by LDFAs statewide are required to be reimbursed to the School Aid Fund by the state. Questions about how that applies to Ann Arbor’s LDFA have been raised – and a review of the state statute appears to support the conclusion that the key clause requiring reimbursement is inapplicable to the Ann Arbor SmartZone LDFA. That understanding was confirmed to The Chronicle by the Michigan Dept. of Treasury communications staff in a telephone interview on June 23.

The exact nature of that tax capture arrangement and possible reimbursement was also the subject of LDFA board discussion on June 17 – because the LDFA board is being pressed by city councilmembers to account for how the LDFA tax capture impacts the state’s School Aid Fund. Board member Stephen Rapundalo expressed some frustration about that – based on his perception that this material had been well explained in the past: “What’s it take – for them to understand unambiguously how that works? I mean, we have told them. Why is the onus on the LDFA to have to show them that?”

Besides the tax capture mechanism, two other issues raised by city councilmembers are factoring into the LDFA board’s approach to seeking an extension of its term. Board chair Carrie Leahy told her colleagues that she took away two main messages from recent appearances in front of the Ann Arbor city council. Some councilmembers, she said, would like to see: (1) an independent audit of job creation numbers; and (2) a provision for infrastructure investments as part of an LDFA extension.

On the infrastructure side, the LDFA board’s discussion focused on the existing TIF (tax increment finance)/development plan, which provides for investments in high-speed telecommunications (fiber) networks, but not for projects like street construction, sewer construction and streetlight installation. The question was raised as to whether the LDFA could use its school tax capture to pay for a fiber network in the whole geographic district of the LDFA – or if school taxes could only be used to fund a fiber network to an business incubator.

The Ann Arbor LDFA’s district covers the geographic areas of the Ann Arbor and Ypsilanti downtown development authorities – although Ypsilanti’s DDA area does not generate any LDFA tax capture. As a consequence, money captured by the LDFA is not spent in the Ypsilanti portion of the district. But that could change under an extension of the LDFA – based on board discussion at the June 17 meeting.

On the job creation numbers audit, the June 17 board discussion indicated that the LDFA will now be looking possibly to incorporate a job numbers audit as part of an upcoming financial audit. The financial auditing firm will be asked to provide some explanation of how it might be able to incorporate a jobs audit as part of its scope of work for the upcoming financial audit. The board appears to understand that some type of jobs audit would be important for winning ultimate city council support for a 15-year extension of the LDFA.

The city council’s representative to the LDFA board, Sally Petersen, made that explicit more than once during the June 17 meeting, saying that “taking the lead on establishing an independent audit would go a long way towards getting city council support for an extension.”

The LDFA’s deliberations and other agenda items are reported in more detail below.

Ann Arbor SPARK’s Two Roles

Some of the political chaffing surrounding Ann Arbor SPARK involves a lack of clarity about roles played by SPARK – which are, from SPARK’s perspective, clearly separate and distinct: (1) a somewhat conventional economic and business development agency that attempts to retain mature companies in the Ann Arbor area, and also to attract mature companies to locate in this area; and (2) an organization that provides entrepreneurial services to start-up companies and nurtures them toward commercialization. It’s this second role for which the LDFA contracts with SPARK.

At one point during the June 17 LDFA board meeting, Luke Bonner – SPARK’s vice president of business development – sought to clarify these two distinct roles. Bonner heads up SPARK’s efforts to retain and attract new fully-formed companies. Bonner got clarification that Ann Arbor city council’s discussion the previous evening had centered on the $75,000 business services contract between the city of Ann Arbor and SPARK.

The business development team at Ann Arbor SPARK – of which Bonner is a part – is not under contract with the LDFA, he pointed out. Instead, SPARK’s business development team is under contract with Washtenaw County, the city of Ann Arbor, various other municipalities in Washtenaw County, and Livingston County – in addition to all of the private funding received by Ann Arbor SPARK.

Bonner stressed that the business development and the entrepreneurial services teams operate in two different worlds. Bill Mayer, SPARK’s vice president for entrepreneurial services, followed up Bonner’s observation by pointing out that the kind of companies that Bonner deals with are too big for him to be able to help under the SmartZone (LDFA) guidelines. Mayer described the situation at Ann Arbor SPARK as two separate paths, but under one banner.

Mayer stressed that reports required by the Michigan Economic Development Corp. (MEDC) entail reporting different kinds of numbers. The issue of these different numbers from different reports has been raised as a concern by some members of the public, as well as by some councilmembers.

For outside observers, including some councilmembers, SPARK’s two distinct roles are not as self-evidently separate – because they both fly under the same banner of Ann Arbor SPARK.

The $75,000 contract to which Bonner referred was between the city of Ann Arbor and SPARK for its role as an agency that attracts and retains mature companies.  At the council’s June 16 meeting, the parliamentary motion used to deal with the contract was to “table” the question, which is not debatable under Robert’s Rule of order – so the council voted on the tabling motion, without additional deliberations. That vote came out 6-5 in favor of tabling. With that the council moved along on its agenda.

But at the end of the June 16 council meeting, Ward 1 councilmember Sabra Briere brought up the issue during the council communications time, saying that Ann Arbor SPARK CEO Paul Krutko had expected to be asked questions and respond to councilmembers’ concerns – but that had not happened. Briere alluded to the fact that the issue might come back before the council “sooner rather than later,”  but she wanted Krutko to be able answer some questions at that time – as he had remained in the council chambers until that point.

In the course of the back and forth, Ward 2 councilmember Jane Lumm told Krutko that she would have preferred to postpone it. But in talking to her colleagues during the break, Lumm said, there was greater interest in tabling the resolution.

The back-and-forth between the council and Krutko ultimately did not result in a motion by any councilmember to take up the resolution off the table for a vote. It appears likely that the council will consider the question at its July 7 meeting.

Some of the disparity of jobs numbers in SPARK’s reporting, as claimed by SPARK’s critics, appears to be due to reports that cover different activities: SPARK’s overall business development impact, as opposed to reports made to the state legislature and related to various state grants. [Ann Arbor SPARK 2013 annual report] and [21st Century Jobs Trust Fund 2013 Annual Report]

Contributing to the lack of definiteness on the numbers reported by SPARK is the fact that SPARK uses self-reported company figures for projected jobs – as opposed to independently verifying the creation of actual jobs. That independent verification is not necessarily straightforward, because SPARK may not be able to compel a company to disclose records that would allow such independent verification of a company’s self-reported jobs claims.

SPARK as LDFA Contractor

The LDFA board deals with Ann Arbor SPARK as its contractor for entrepreneurial services – not as an attractor and retainer of companies in the area. And the June 17 LDFA board meeting reflected that. On the agenda were three items related to that specific function of SPARK – the treasurer’s report, the report from SPARK, and the annual contract between the LDFA and SPARK.

SPARK as LDFA Contractor: Treasurer’s Report

Eric Jacobson gave the treasurer’s report. As of the end of May, he could report that spending by the LDFA’s contractor, Ann Arbor SPARK, was well below the amount budgeted for the year. There was an overall positive variance of about $76,000.

Eric Jacobson is the LDFA board treasurer.

He noted that Ann Arbor SPARK had exceeded its budget in two categories – but in both categories the amount by which it had exceeded budget is well below the threshold constrained by the contract.

That meant that SPARK could spend up to a certain amount over budget in any line item – he thought it was a 5% variance. First, SPARK had overspent in the internship and entrepreneur-in-residence program. SPARK had also overspent the budget in the line items to cover expenses for administrative costs for the incubator facility at SPARK Central.

He reiterated that both of those variances were very minor, so he could report that – as SPARK has done historically – the agency is spending within its budget overall, as the last month of the fiscal year approached. The fiscal year ends on June 30.

SPARK as LDFA Contractor: Report from SPARK – Interns, Incubator

The report from the LDFA’s contractor was given by Skip Simms, Ann Arbor SPARK’s senior vice president for entrepreneurial services. Simms sits on the LDFA board in an ex officio, non-voting capacity.

Simms told the board that he did not have much report, beyond what the LDFA treasurer, Eric Jacobson, had just covered. Referring to the overspending on incubator expenses, Simms said that if they were going to overspend, that’s where they would want to be overspending. He explained that the CEO-in-residence program was a way to help retain executive talent – keeping CEOs in the community who might otherwise be inclined to leave the community and work someplace else. The CEO-in-residence program allowed someone to be retained and at the same time provide their experience and expertise to start-up companies in the community. The CEO-in-residence program, not the interns, had caused SPARK to exceed that line item.

The definition of interns was an issue that still needed to be resolved for next year, Simms said. The next cycle of interns would actually be employees of Ann Arbor SPARK, he explained. Simms pointed out that on a couple of other different line items, Ann Arbor SPARK was under budget. Money could be moved around so that it would be “a wash” when the board reviewed SPARK’s quarterly report next month.

Board chair Carrie Leahy asked about the occupancy of the SPARK Central business incubator [in the Michigan Square building adjacent to Liberty Plaza, at the corner of Division and Liberty]. Simms responded by saying that SPARK Central on the lower level had more than 90% occupancy. There was an opening for perhaps one additional company, and there were some companies in line for that space. The third floor of the incubator is filling up, he said. On the third floor, there is perhaps room for one additional company, he said.

The third floor space, Simms continued, is finally breaking even on rent compared to expenses, so he expressed some optimism about that. More importantly, Simms said, companies on the third floor are growing and expanding. As an example, he gave Seelio, which has been acquired. The company is staying in Ann Arbor, Simms reported, and they are probably going to add five more people by the end of the year. The company is going to be squeezed for space, he said, so he was not sure if they were planning to move. If they moved, there would be quite a few seats that would need to be filled in the third floor space, he said. There were some companies in line for that space, however.

Simms then described the incubator environment in the community as a whole as growing. There are a couple of new incubators in town, he said, and the space they’re offering seems to be getting absorbed quickly: As soon as space becomes available, start-ups and early-stage companies are moving in. That was a good indicator for the future, he concluded. It reinforced the need for the LDFA to continue to have the kind of facility that Ann Arbor SPARK has created at 330 E. Liberty, Simms concluded.

Leahy ventured that the newest incubator was associated with University of Michigan. Skip Simms indicated that the incubator to which Leahy was referring was still in the works. Ann Arbor SPARK is in dialogue with the university on that. One of the reasons that Ann Arbor SPARK in dialogue with the university about that incubator, he explained, is that SPARK wants to have a clear understanding of what the goals and objectives are of that new incubator, and what kind capacity they are planning for. Because it would be operated by the University of Michigan, access would be limited, Simms said: Some kind of university relationship will be required to use the incubator, which would eliminate about 60% of the market.

Still, Simms ventured that there could be a partnership opportunity there. One possibility is that companies that started in the university’s incubator could be handed off to SPARK as they got closer to commercialization. He was not sure how far the university was planning to take companies in their evolution toward commercialization.

Responding to a question from Leahy, Simms indicated that university’s incubator concept was for relatively early-stage companies. Leahy said she heard the university was planning to take a percentage of ownership of the companies. Simms thought that was still under discussion. They are looking at a model that does take equity, he said. The university is freer to take that approach than the LDFA is, Simms said.

SPARK as LDFA Contractor: FY 2015 Contract

Board chair Carrie Leahy explained that the LDFA board’s contract committee had reviewed the contract – after Ann Arbor SPARK had reviewed it and proposed updates. A revised draft had then been proposed by the contract committee. That draft was now in front of the LDFA board for its approval, she explained. [.pdf of LDFA-SPARK FY 2015 contract]

Leahy called everyone’s attention to a section that was enclosed in brackets and bolded:

[The reports shall include, as applicable, and only at such times as required, information required to be reported in connection with an extension of the LDFA's term.]

She felt that the bracketed sentence was intended to be included as part of the contract – so it was not meant to actually be in brackets and bold. She checked with Simms to see if it was okay to simply include it. She wasn’t sure if Ann Arbor SPARK had had a chance to comment on the added language. The point of the added language, she explained, was that if the LDFA was awarded an extended term, the required reporting would already be expressed in the contract. She felt that the reporting that was described in the added language was already being done, in any case.

The new contract, Leahy explained, includes updates to the specified years and budget numbers. Another update the contract covers is how the internship program will work, she said. Leahy explained the changes to the internship program. Interns that are being deployed to people now will actually be Ann Arbor SPARK employees, she said. The contract between the LDFA and SPARK is been updated to reflect that arrangement, which has been approved by the MEDC, she said.

Outcome: The LDFA board voted to approve the updated contract with Ann Arbor SPARK.

City of Ann Arbor as LDFA Contractor: Administrative Services

The LDFA does not employ a staff – so it contracts with the city of Ann Arbor for administrative support services. Those include items like the preparation of meeting minutes, stewardship of public documents, and preparation of budgetary analyses. [.pdf of FY 2015 LDFA contract with city of Ann Arbor]

When the board reached the item on its agenda, board chair Carrie Leahy ventured that under the first bullet point, under “services,” the intended word was likely not “secretariat” but rather “secretarial.” There was some lighthearted commentary to the effect that the language had been like that for about 10 years and no one had noticed. [The intended word was, in fact, likely "secretariat" – in the sense of an administrative office or department, especially a governmental one.]

Leahy checked with board treasurer Eric Jacobson that he was OK with the numbers that were included at the end of the contract, and he was. She characterized the contract as the same as in years past, covering administrative support by the city of Ann Arbor for the board of the LDFA.

Outcome: The board approved the administrative services contract with the city of Ann Arbor for support of the LDFA board.

LDFA Extension

At its June 2, 2014 meeting, the Ann Arbor city council had approved a resolution expressing city council support of the local development finance authority’s application to the Michigan Economic Development Corp. to extend the life of the tax capture arrangement for up to 15 years. The MEDC is described on its website as the “state’s marketing arm and lead advocate for business development, talent and jobs, tourism, film, and digital media incentives, arts and cultural grants, and overall economic growth.”

Without an extension, Ann Arbor’s LDFA would end in 2018.

Under a 2012 amendment to the state’s LDFA statute [Act 281 of 1986], the MEDC is empowered to approve extensions of LDFAs for 5 or 15 years. Both extension options would require a greater explicit commitment to greater regional collaboration. But the 15-year option requires the creation of an additional “satellite” geographic area for tax capture:

In addition, upon approval of the state treasurer and the president of the Michigan economic development corporation, if a municipality that has created a certified technology park that has entered into an agreement with another authority that does not contain a certified technology park to designate a distinct geographic area under section 12b, that authority that has created the certified technology park and the associated distinct geographic area may both capture under this sub-subparagraph for an additional period of 15 years as determined by the state treasurer and the president of the Michigan economic development corporation.

The council’s resolution approved on June 2 stated that if the MEDC approves the extension, the city of Ann Arbor will work with the LDFA and the city of Ypsilanti to identify another LDFA – called the “Satellite SmartZone LDFA.” The arrangement will allow the satellite SmartZone LDFA to capture local taxes in its own distinct geographic area for the maximum 15 years allowed by statute.

What is it that would be extended? Ann Arbor’s local development finance authority is funded through a tax increment finance (TIF) district, as a “certified technology park” described under Act 281 of 1986. The MEDC solicited proposals for that designation back in 2000. The Ann Arbor/Ypsilanti “technology park” is one of about a dozen across the state of Michigan, which are branded by the MEDC as “SmartZones.”

The geography of the LDFA’s TIF district – in which taxes are captured from another taxing jurisdiction – is the union of the TIF districts for the Ann Arbor and the Ypsilanti downtown development authorities (DDAs). It’s worth noting that the Ypsilanti portion of the LDFA’s TIF district does not generate any actual tax capture.

In FY 2013, the total amount captured by the Ann Arbor SmartZone LDFA was $1,546,577, and the current fiscal year forecast is for $2,017,835. About the same amount is forecast for FY 2015.

The LDFA captures Ann Arbor Public Schools (AAPS) operating millage, but those captured taxes don’t directly diminish the local school’s budget. That’s because in Michigan, local schools levy a millage, but the proceeds are not used directly by local districts. Rather, proceeds are first forwarded to the state of Michigan’s School Aid Fund, for redistribution among school districts statewide. That redistribution is based on a per-pupil formula as determined on a specified “count day.” And the state reimburses the School Aid Fund for the taxes captured by some SmartZones in the state.

However, the school taxes captured by the Ann Arbor SmartZone are not required to be reimbursed to the state School Aid Fund – which diminishes the amount of funding for public schools statewide. That’s a conclusion based on a reading of the LDFA statute and confirmed to The Chronicle by communications staff in the Dept. of Treasury and the MEDC.

According to the Dept. of Treasury, the Ann Arbor SmartZone LDFA was designated under subsection (8). From the LDFA statute [emphasis added]:

(13) Not including certified technology parks designated under subsection (8), but for certified technology parks designated under subsections (9) and (10) only, this state shall do all of the following: (a) Reimburse intermediate school districts each year for all tax revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation after October 3, 2002.
(b) Reimburse local school districts each year for all tax revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation after October 3, 2002.
(c) Reimburse the school aid fund from funds other than those appropriated in section 11 of the state school aid act of 1979, 1979 PA 94, MCL 388.1611, for an amount equal to the reimbursement calculations under subdivisions (a) and (b) and for all revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation after October 3, 2002. Foundation allowances calculated under section 20 of the state school aid act of 1979, 1979 PA 94, MCL 388.1620, shall not be reduced as a result of tax revenue lost that was captured by an authority for a certified technology park designated by the Michigan economic development corporation under subsection (9) or (10) after October 3, 2002.

A 15-year extension is possible, according to the staff memo accompanying the June 2 city council resolution, “if, in addition to the above requirements, Ann Arbor and Ypsilanti, as the municipalities that created the SmartZone, enter into an agreement with another LDFA [a "Satellite SmartZone"] that did not contain a certified technology park to designate a distinct geographic area, as allowed under Section 12b of the Act…”

A key requirement for an LDFA SmartZone is “significant support from an institution of higher education, a private research-based institute, or a large, private corporate research and development center.” So the possibilities for an LDFA satellite for Ann Arbor’s SmartZone include not just a governmental unit, but also an institution of higher learning.

Currently under consideration for the satellite LDFA are Adrian (Adrian College) or Brighton and Livingston County (with Cleary University). The June 17 LDFA meeting included an update on where Adrian and Brighton are in the process – as they are competing to be the partner designated by the Ann Arbor LDFA.

Only one of the two communities would partner with the Ann Arbor LDFA SmartZone.

LDFA Extension: Board Discussion

Skip Simms of Ann Arbor SPARK gave an update on the status of other communities that are candidates for the satellite LDFA that would be required for the Ann Arbor/Ypsilanti SmartZone to receive an extension. Right now SPARK is talking to both Brighton and Adrian. Brighton would be a Brighton-Howell satellite. Adrian could turn out to be an Adrian-Tecumseh satellite, he said.

Both communities are rapidly moving forward to complete required tasks as communities and LDFAs to comply as satellites. Flint is off the table – because Flint took themselves off the table, he said, and made it clear that they were not interested. Both Adrian and Brighton are on a fast-track to try to beat each other to meet all the compliance for a satellite. Simms invited Ann Arbor SPARK’s Luke Bonner to walk the board through the details of what those communities need to do.

Bonner told the board that the city of Adrian had gone through the first step of the process to create an LDFA – which was that the city council approved a resolution expressing the intent to create an LDFA and set out the district boundaries. They are moving toward the first public hearing. Adrian should have its final approvals done, he believed, by the first week in September. So this would be a new LDFA, where the city of Adrian would be the lead governmental unit. Tecumseh is going to come in as a partner to Adrian after the LDFA is created, Bonner explained.

In the case of Brighton and Howell, Brighton already has an LDFA, so their approvals are pretty simple. They don’t have to go through the time-consuming process of creating the authority itself. Howell has an LDFA that was never actually kicked off – they don’t have board members or a district. It was just approved and left in limbo, he said. So Howell is going to wait until the process is completed in Brighton and then Howell will put its LDFA together for the sole purpose of being a partner to Brighton and of overseeing the school funds to run the incubator and accelerator program.

In both cases, Bonner said, the communities have an educational institution as a partner. Adrian is working with Adrian College, which has established a business incubator program. They have built a facility and dedicated funds, and personnel are working on that program. In Livingston County, in Brighton, Cleary University is the educational institutional partner. Cleary University has an existing business incubator program that they are continuing to scale up, Bonner explained. So there are university partners in both communities.

Board chair Carrie Leahy asked how the process that Brighton and Adrian are undergoing would integrate into the timing of the Ann Arbor/Ypsilanti SmartZone LDFA extension application. In the case of Adrian, Bonner explained, they will make sure that the very first LDFA board meeting happens immediately following the establishment of the authority. The satellite LDFA has to approve the contract with the host LDFA. So the first order of business for the LDFA in Adrian will be to approve its bylaws and then move right into the approval of the agreement. That should be done by the first week in September, he said.

In the case of Brighton, they are looking at doing some informational sessions with the LDFA and the city council in July. And they look to be taking action sometime at the end of August. So the two candidate satellite LDFAs will be completing their work in roughly the same two-week timeframe.

Bonner explained that Brighton has a couple of other issues with its LDFA because it is “underwater” – as its tax capture is not at the point where it can cover debt service. It falls short by about $5,000-$6,000 annually, he said. That issue will have to be addressed, he said. They’re waiting to see what happens with the personal property tax law in the August election. That will also affect how Brighton does business with its LDFA. Leahy ventured that there could be a situation where both communities form an LDFA. Yes, Bonner confirmed.

Leahy invited attorney Jerry Lax to walk the board through the Ann Arbor/Ypsilanti SmartZone LDFA’s next steps. She knew there was a two-page summary that needed to be submitted to the MEDC. She asked Lax what else needed to be submitted.

Lax told Leahy that the only thing that needed to be submitted to the MEDC promptly by June 30 was the two-page summary. The MEDC guidelines provide that the two-page summary be emailed by June 30. That two-page summary has already been drafted, he said. Leahy told Lax she was not sure if board resolutions needed to be attached to the state summary. The guidelines don’t say so, Lax replied.

Lax continued by noting that the two city councils (Ann Arbor and Ypsilanti) have already passed resolutions supporting a 5-year extension and supporting the contemplation of creating satellites in anticipation of a potential 15-year extension. But with regard to the 5-year extension, the next thing that has to be done is for the cities to amend the existing TIF plan to accommodate a higher degree of regional cooperation. And both city councils have passed resolutions committing to engage in those discussions, he said.

The requirement is that by March of 2015, the amended TIF plan be available for submission to the MEDC, Lax explained. So the first step is just submitting a two-page summary – and everything is all set to do that, he said. And hopefully, once the LDFA is notified that the MEDC has approved the proposed 5-year extension, the next step for the 5-year extension would be the amendment of the TIF plan, he said.

Lax reported that he has communicated with Mary Fales of the Ann Arbor city attorney’s office and also John Barr, who is the city of Ypsilanti attorney – and both of them are on board with jumping into the process and meeting promptly and dealing with potential amendments to the TIF plan. Both of the city councils will have to attend to those details.

Leahy asked Lax what he meant by “attending to the details.” She asked, “What are we proposing to amend in the TIF plan?”

Lax called that a policy question for the city councils. He did not know how much attention the councils had given to the details of what exactly would need to be amended. Tom Crawford, the city of Ann Arbor’s CFO, ventured that procedurally it would be appropriate for the LDFA board to make a recommendation to the city council and then for the council to consider it. Based on his conversations with Fales and with Lax, Crawford felt that the next step would be for the LDFA to articulate changes, by providing a document with tracked changes that the councils would vote on.

Lax agreed with Crawford that it was entirely appropriate for the initial proposal to come from the LDFA board. But then it would need to be discussed by both councils – because it would involve amendments that the councils need to approve. Leahy got clarification from Lax that the TIF plan and the development plan were combined as one document.

Some back-and-forth unfolded about whether an MS Word copy of the TIF plan still existed. Leahy ventured that it could be scanned in and then cleaned up, prompting Skip Simms to observe that Adobe had improved. Steve Rapundalo said he thought he might have some old documents. Leahy ventured that probably the first order of business was to just get their hands on a copy of the old MS Word document.

A question was raised by an LDFA board member about whether the board needed to wait until the MEDC approved the two-page summary before working on amendments to the TIF plan. Lax ventured that if the MEDC did not approve the two-page summary, then any effort the LDFA board put into revising the TIF plan would be wasted.

But on the other hand, even though it looks like March 2015 is a long way off, he thought it made a lot of sense to give prompt attention to amending the TIF plan. He did not know how soon they could expect the MEDC to approve the two-page summary. Leahy wanted to know if Lax knew of any guidelines the MEDC had provided for the kind of amendments to the TIF plan that they would be looking for.

Lax said he was not aware of any additional guidelines beyond the guidelines in the statute that talk about a higher degree of regional collaboration. Even for just a 5-year extension, this higher degree of regional collaboration is something the MEDC is looking for, he said. Leahy asked Skip Simms if there was anything he recalled from his discussions with the MEDC by way of guidelines. Simms said the key point that the MEDC is looking for had been described by Lax – broader regional collaboration.

The other thing the MEDC has said, Simms added, is that this is an opportunity for the LDFA to make changes to elements of the TIF plan that might have been too restrictive. It would be an opportunity to look at the TIF plan and the development plan with a clean slate and change anything and everything that they would like to see changed, he said. You can start with the core document if you’re happy with most of it, he allowed, but this is the opportunity to make changes.

Once the TIF plan has been changed, it’s unlikely that it would be changed again for another 15 years, Simms ventured. So now would be a good time to take the opportunity to insert everything that they wanted to put into a new TIF plan that might have been missed 15 years ago, he concluded.

Rapundalo suggested that the LDFA board, or a subgroup of the board, go through the TIF plan line-by-line from a conceptual viewpoint and ask about everything that’s included: Is this still valid today? If it is, then leave it in – if not, then take it out and perhaps replace it with something else.

A consensus that seemed to evolve from the board discussion was that the LDFA board’s contract committee would be a suitable group to take up the task of reviewing the TIF plan. Leahy said the issue of infrastructure would be a good topic to review in the TIF plan – because the Ann Arbor city council is suggesting it would like to see infrastructure projects undertaken, but there are certain kinds of infrastructure projects that the LDFA cannot undertake, because they are not in the plan.

Rapundalo suggested it would be useful to collect some best practices from other SmartZones in the state as well as other communities with high-tech concentrations, and try to incorporate some of that into the new plan. Leahy asked Lax if he could inquire with Roslyn Zator at the MEDC to get some direction about what the MEDC would like to see in the TIF plan amendments. Leahy also asked Skip Simms which other SmartZones he thought would be good to look at, as far as best practices – Traverse City, Houghton, Grand Rapids?

Simms said that what he heard from everyone else is that they are modeling everything after Ann Arbor SPARK. Nobody is saying they are doing it better than Ann Arbor SPARK is doing it, he said. Nonetheless, Simms allowed, it would still be important to reach out.

Simms said that Grand Rapids was undergoing a revision, so it would be good to contact Grand Rapids. Rapundalo agreed with Simms’ point about Grand Rapids, saying that Grand Rapids is making changes to their SmartZone that would set them apart structurally from other SmartZones. He thought it would be important to take a look at that and see why Grand Rapids is making those changes.

Simms pointed out that Grand Rapids is also considering applying for a 15-year extension of its LDFA. In terms of out-of-state organizations, Simms suggested taking a look at TechColumbus. Leahy asked Simms to see if he could get a copy of the TechColumbus development plan.

Lax circled back to the idea that the LDFA board should make the first proposal to the city councils about the needed changes to the TIF plan. But he also pointed out that the Ann Arbor city council had expressed interest in seeing greater attention paid to issues like infrastructure. He suggested that the LDFA take into account anything the councils might be interested in seeing at the outset. That way, whatever is ultimately proposed would stand a greater likelihood of being approved by the city councils.

At that point, Lax noted that March 2015 seems like a long way off, but given the potential complexity, it creeps up rather quickly. So the discussion should take place sooner rather than later. He suggested getting some clarity about what people may think they want to know, and what topics they have not known enough about up until now. That would help focus the discussion on what information is available, he said.

Although there are different timelines for requirements to apply for a 5-year extension of the LDFA compared to a 15-year extension, the consensus that evolved at the June 17 LDFA board discussion was that they should be handled pretty much simultaneously. Lax pointed out that the 15-year plan would involve a satellite and there would be some coordination among the various municipalities involved, but some room could be left in the 5-year plan extension to accommodate the addition of a satellite LDFA. Jacobson ventured the right approach would be to redline an amended TIF plan for both a 5-year plan and the 15-year plan.

Bonner suggested that everything be done, based on the idea of a 15-year agreement, with language incorporated into the documents to include satellite LDFAs. Then, if it turns out that only the 5-year extension is approved, the additional language due to the 15-year plan can simply be eliminated through an administrative amendment. The idea would be that it would be convertible to a 5-year plan in relatively short order. Lax agreed that much of the content would be the same in either case – 5-year plan compared to 15-year plan. Lax reiterated that he felt it made sense to think of it all as a unified project.

Crawford pointed out that after an amendment is prepared, you have to go through a process of notifications and public hearings – and it was undesirable to have the document change significantly during that process. Lax suggested that the 15-year component of the plan could be separated out as an “add on.”

Jacobson ventured that they need to think it through so that they have two different versions in their back pocket – that can be pulled out, based on what the MEDC approves. Lax also suggested having prompt discussions with the MEDC about other plans that could be used a model. The MEDC might have some guidance about how complex the amendments to the TIF plan might be, related to a 5-year extension, if a community is also contemplating a 15-year extension.

Simms pointed out that the MEDC review would happen after the council action. Lax allowed that was true, but ventured that the MEDC might have something useful to say in advance of that.

The question was raised about whether Houghton had pursued both types of extension simultaneously – but Simms thought that Houghton had pursued a 15-year extension from the get-go. Simms was not sure if everything had been completed in Houghton, but things have been completed in Marquette, which is supposed to be the satellite. He thought that the current status of that 15-year extension was: Discussions are taking place about the agreement between the satellite LDFA, the host LDFA and the MEDC. He pointed out that that was a whole additional agreement that would need to be amended and addressed.

About the timing, Simms said here’s what “your contractor [Ann Arbor SPARK] is prepared to do: We are prepared to have this dialogue with the LDFA relative to the amendments and changes to the TIF/development plan through the summer.” In September 2014, it will be known whether Brighton or Adrian or both are “real.” And they will know by Sept. 30 whether there’s a legitimate 15-year proposal to submit to the MEDC.

At that point, everything could already be in place for either the 5-year extension or the 15-year extension. Then in early October, “Bang, we go forward with either the 5-year plan or 15-year plan, because it will be clear which one it is,” Simms said. By the end of October, there could be a proposal to give to the two city councils for approval.

Jacobson ventured that it would also be clear from the state at that point which option could move forward – the 5-year or the 15-year option. Lax asked Simms if he knew when the MEDC was likely to give a reaction to the two-page executive summary, as related to a 5-year extension. No, Simms told Lax. But as a point of reference, Simms said the MEDC had responded to Houghton’s application very quickly.

Given the relationship between Ann Arbor and the MEDC historically, Simms had no doubt that MEDC would respond quickly. [The MEDC's current CEO, Michael Finney, is the former CEO of Ann Arbor SPARK.] The MEDC recognizes the importance to all parties – including the MEDC – to making this happen as quickly as possible for everybody, he said. So he was confident that the MEDC would respond rapidly. Leahy said she could get the two-page executive summary submitted that very day when she returned to her office.

Jacobson asked if Simms was suggesting that the contract committee wait until September or October to start reviewing the TIF plan amendments. Not at all, Simms replied. Simms thought the LDFA board’s contract committee ought to meet within the next three weeks and begin this process – because the majority of it is relevant, whether it is a 5- or 15-year extension.

Jacobson asked a question on the 15-year extension, which related to some feedback he thought the MEDC had given to the Ann Arbor/Ypsilanti SmartZone LDFA. At one point the MEDC had given the Ann Arbor/Ypsilanti SmartZone feedback, he thought, that in order to include a satellite that is subsidized by a third-party like a university, the MEDC would expect Ann Arbor to funnel 10% of the expenditures to Ypsilanti. He thought that had been presented as an idea by the MEDC, he said. Is that a requirement that should be considered when the LDFA prepares the 15-year application? Jacobson asked.

Simms said it was something that needed to be looked at and discussed, adding that the LDFA probably needed to go back to the MEDC to get some definitive language.

The idea of funneling money to Ypsilanti had come up in a discussion between the two CEOs – Ann Arbor SPARK CEO Paul Krutko and MEDC CEO Michael Finney, Simms said. Whether that would be a firm position or not has not been clarified. Jacobson wondered if that would be clarified before a 15-year proposal would be submitted. Yes, Simms said, that will be clear. The other thing that MEDC is pushing is the idea of collaboration.

Ypsilanti has been in the Ann Arbor/Ypsilanti SmartZone all along, Simms said, but “Ypsilanti has gotten squat.” Collaboration would mean that it’s a way to get something, he said. What the LDFA has been providing needs to extend outside the city limits, Simms said. So that needs to be considered in thinking about the modified development plan, he said.

The overwhelming benefit at the end of the day, Simms continued, is a significant sum of money that is coming to benefit the city of Ann Arbor that would not be coming at all – not a dime of it – if the LDFA did not get the 15-year extension. The benefit to the city is still enormous, Simms said. So to extend a little bit of that to Ypsilanti seems like a reasonable action, he concluded.

Leahy came back to the point that the next step is to submit the two-page executive summary to the MEDC. She told her board colleagues that she would submit that to Roslyn Zator. The next steps would be for city of Ann Arbor financial services staffer Ken Bogan and Ann Arbor SPARK – as well as Stephen Rapundalo – to look for the MS Word version of the TIF/development plan.

In the next three weeks, the contract committee would schedule a meeting to start going over the changes to the TIF/development plan that they think are appropriate to take to the city councils. Bonner ventured that the satellite LDFA communities might need some support as they go through their process – and he thought it might be appropriate for the LDFA to provide that support in the form of legal counsel from Jerry Lax. That way they could make sure that the resolutions and the agreements are in line with what the Ann Arbor city council would want to see.

The contract committee set a meeting for Tuesday, July 8 to start going over the TIF plan.

Politics of an Extension

The LDFA board’s June 17 discussion included acknowledgment that an extension of the LDFA’s term would likely need to satisfy recent concerns expressed by the Ann Arbor city council:  (1) investments in high-speed fiber telecommunications; (2) audit of jobs creation figures; and (3) clarification of school tax capture by the LDFA.

Politics of an Extension: Jobs Audit

Based on LDFA board chair Carrie Leahy’s conversations with Paula Sorrell, the MEDC ex-officio representative on the LDFA board, and some email exchanges with Rosalyn Zator, it does not look like any other SmartZones are doing audits of job creation numbers. Sorrell said the MEDC would be looking specifically at its grant to SPARK– and not all of Ann Arbor SPARK – just those things that are associated specifically with the grant.

Sorrell explained that there are process audits and financial audits – and they take place every 2 to 3 years. Those are audited by the state, she said. As far as job creation numbers go, those are collected monthly, she said, and those are specific to grants. Spot-checking is done on those numbers as well.

Stephen Rapundalo asked Sorrell to describe how the spot-checking was undertaken. He ventured that all of the numbers are essentially self-reported by the companies. So are you randomly calling companies and saying, “Hey, you said this,” and verifying the numbers? Is that how it works? he asked.

Sorrell told Rapundalo that in a start-up tech company, it would be typical to see a few jobs added at a time. Eventually the only thing that can be done is to just work down the list of all the companies that had been served and to verify whether the numbers that had been quoted were in fact accurate or not. Sorrell said the MEDC also gets reporting from multiple areas, and most of the companies use three or four other grantees at a time, so they can check to see if anybody is reporting different numbers.

Petersen also noted that the previous evening’s council meeting had included quite a bit of discussion about the appropriate metrics – in terms of return on investment. The question had arisen with respect to projected job creation as opposed to actual job creation, she noted.

Tom Crawford, Ann Arbor’s CFO, said he’d heard some the comments about projected versus actual jobs created and he was not sure exactly how that applies. When a company comes in, they are not necessarily incentivized to give you a number that they would overshoot. The system is designed so that they give you a higher number. That’s not a detriment to the entity that is providing the incentive, Crawford said, because the incentive is based on the actual jobs that are provided. He wasn’t sure that everyone understood that point. Historically the state has paid grants based on actual jobs. Companies were only paid tax credits for actual jobs, he said.

For SPARK’s business development team, Luke Bonner said, its metrics for counting jobs are based on what the company says it will do in a public announcement – based on a tax abatement application, or a state grant they are receiving. And those numbers are what are included in Ann Arbor SPARK’s successes annually, Bonner explained.

For example, the company says that they are investing $2 million and creating 75 jobs in Ann Arbor, and that goes into SPARK’s annual report for successes, he said. SPARK continues to meet with that company over time. However, SPARK does not have to track what that company does over time, because they are not committed to SPARK to report anything. If it is a tax abatement, it’s part of the letter of agreement that you can go back and ask them how many jobs they have created. Or if it’s a state grant, the company has to report the actual jobs that they create to the state.

What SPARK’s business development team has been doing that is a little different now, however, is starting to look at the number of jobs a company has created this year as opposed to last year, Bonner said. That allows the business development team to start to measure the health of the local economy. So if a company adds 100 jobs last year and 200 this year, SPARK want to be able to show that difference.

But the LDFA uses really different metrics, Bonner said. LDFA metrics are those from the SPARK entrepreneurial services team. Those are two different areas, he stressed.

Sally Petersen, the city council’s representative on the LDFA, ventured that the council would like to see metrics that show projected versus actual jobs created. Bonner told Petersen that the LDFA should work with Skip Simms and Bill Mayer to look at the programs they’re running, and to figure out the best metrics to report that would satisfy the MEDC, the LDFA board and the city council.

Crawford added that projected jobs numbers are typically associated with incentive-based financial support – which is not what the LDFA board deals with. Stephen Rapundalo pointed out that the LDFA board’s own metrics committee had reviewed the kind of metrics that SPARK reports – and SPARK is already required to report a great deal of information to the MEDC.

Bonner went on to explain that internal to SPARK, they use a different nomenclature to talk about “retained jobs.” The entrepreneurial services team will say that “retained jobs” mean one thing, whereas for the business development team, “retained jobs” mean something else. For the business development team, Bonner continued, if a company says they’re going to move out of this state with their 100 employees and add another 200 employees elsewhere, and through the efforts of SPARK the company were to actually stay, the business development team would characterize that as 100 jobs retained – if not for the effort of the community and the state.

But for the entrepreneurial services team, when a company comes to SPARK, with, say, two employees, then that is their baseline – two retained jobs for when SPARK entrepreneurial services started to work with the company. Mayer added that he refers to the “retained jobs” in entrepreneurial services as a “snapshot” of the growth curve of a start-up. At a moment in time when SPARK “touches” the company, they say the retained number of jobs was three. And then six months later the retained number of jobs is four. That equates to one job created, Mayer concluded.

Board chair Carrie Leahy noted that the  issue of an independent jobs audit had been brought up in multiple city council meetings. Petersen said that a lot of the “noise that is out there” has to do with accountability. Putting aside accusations about whether SPARK is or is not inflating job creation statistics, it’s important to focus on the interest in accountability, she said.

If Ann Arbor were to be the first SmartZone in Michigan to do an independent audit, that would reflect positively on Ann Arbor, Petersen said. That would show that the Ann Arbor/Ypsilanti SmartZone is not afraid of being accountable, she added. The components of such an audit are still unknown, because no one else has done it before, she said. So she felt it was important for the LDFA board to pursue that direction with an intention to do such an audit.

Eric Jacobson asked if Petersen was talking about an audit of metrics or a financial audit of the dollars. Petersen explained that the interest was an audit of the job creation numbers. Stephen Rapundalo ventured that such an audit would have financial implications. How much would it cost? In addition, was the LDFA also planning to do a financial audit?

Jacobson explained that the financial audit is to be done about every two years and usually in the fall. He then explained that a financial audit of the LDFA is done every year in conjunction with the city of Ann Arbor’s audit. Another kind of audit is an audit of the LDFA’s contract with SPARK – which is an audit on contract compliance.

Jacobson said that the firm that had done the financial audit last time had done a great job from his perspective, so he would like to use the same firm again – Abraham & Gaffney. It would be an audit by the LDFA of Ann Arbor SPARK, using a third-party, to go through and check all the LDFA dollars that are going to SPARK, to check to make sure none of the funds had been misappropriated according to the terms of the contract, he explained.

Rapundalo suggested that the scope of the financial audit could be expanded to include the jobs numbers. Leahy asked if an inquiry could be made with Abraham & Gaffney to see how they would propose to check those numbers. Petersen asked if Abraham & Gaffney could be used just because they had done the audit previously – and wondered if they needed to use a bid process and accept the lowest responsible bid.

Jacobson told Petersen that Tom Crawford, the city of Ann Arbor’s CFO, was checking into that issue. Some back-and-forth between Petersen, Leahy and Jacobson led to a tentative consensus that the auditor would be asked to develop a proposal.

But SPARK’s Simms expressed some skepticism: “Wait, wait, wait!” Earlier in the meeting, Bonner had done a nice job of explaining that the job numbers that are projected come from SPARK’s business development team, Simms said. Entrepreneurial services has never provided the LDFA or anybody else “projected” jobs, Simms added. [The LDFA-SPARK contract approved by the LDFA board at the June 17 meeting includes a requirement for reporting to the LDFA "projected new employees" for Phase IV companies: "These reports shall include but not be limited to the following ... 4) the companies that receive Phase IV assistance, description of assistance, number of full time equivalent employees and projected new employees."]

Rapundalo told Simms that they were talking about the metrics that SPARK’s entrepreneurial services team does currently report, which includes jobs created and jobs retained. Petersen explained that this audit was not focused on the city’s contract with SPARK for the business development services. Leahy said that what they were hearing from the city council is that the LDFA is just accepting what SPARK says with no verification.

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

Simms replied that there has in fact been an audit: “We somehow allowed the thought to occur that there has never been one.” Leahy told Simms that they reported to the city council that there had been a contract audit. But Simms told Leahy he was not sure the council had actually heard that.

So this won’t be the first audit, Simms concluded. Rapundalo felt the council had heard clearly that there had previously been a financial audit. Leahy said they had reported to the council that SPARK has undergone a financial audit, and they were clean and that the results of that audit have been posted.

Petersen wrapped up by reiterating the importance of doing an independent audit of the metrics. The LDFA needs to provide documentation, she said. She wanted an independent audit, even if that meant the Ann Arbor/Ypsilanti SmartZone was the first in Michigan to do it. Ann Arbor would be putting its best foot forward and saying: Here’s what an independent audit of job creation numbers actually looks like. The Ann Arbor/Ypsilanti SmartZone needs to focus on the accountability outcomes first, Petersen concluded.

Politics of an Extension: Infrastructure, City Fiber Initiative

With respect to infrastructure, Stephen Rapundalo asked if the MEDC could provide information about what other SmartZones and LDFAs had done in the way of investing in infrastructure. Paula Sorrell said she had put Carrie Leahy in touch with MEDC contacts. And by-and-large, there are not a lot of SmartZones that have undertaken infrastructure projects.

Leahy reported that so far she’d found the use of TIF for infrastructure on road improvements and sewer connections in Grand Rapids. In Grand Rapids, TIF had also been used for marketing in the SmartZone and for equipment and furniture – updates to their business incubator – which the Ann Arbor/Ypsilanti SmartZone already uses money for. Leahy ventured that furniture in incubators is not what the Ann Arbor city councilmembers mean when they talk about infrastructure. She also described a bridge project in Grand Rapids where there was a question about whether TIF funds were used – and it turned out that TIF funds were not used.

The Ann Arbor/Ypsilanti SmartZone development plan, Leahy continued, states that infrastructure such as roads and sewers and certain other infrastructure are already complete in the SmartZone. So if there were some kind of project like that, she ventured that the development plan would need to be changed.

The one kind of infrastructure project that keeps coming up, Leahy said, is high-speed fiber telecommunications. That seems to be the only type of infrastructure project that has been floated that is specifically addressed in the current development plan for the Ann Arbor/Ypsilanti SmartZone, she said. If that were something the LDFA wants to pursue, then it would not require altering the development plan, she said.

Leahy wondered who would initiate that kind of project. Is it the LDFA that says, We should put money toward fiber? Or does the Ann Arbor city council tell the LDFA to pursue it? “That’s a good question,” allowed Sally Petersen, who is the Ann Arbor city council’s representative to the LDFA board. Like Leahy, she wondered what the next step might be toward high-speed fiber. If it would be helpful for the city council to pass a resolution on the topic, Petersen said she would be willing to try to move that forward.

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

City of Ann Arbor CFO Tom Crawford told Petersen that the city staff was working on a proposal for high-speed fiber that would be brought forward. Asked what the timeframe for that project would be, Crawford said it would be some time during FY 2015. [That means before June 30, 2015.]

As for details about projected costs, Crawford told the board that it was a proposal that would be “worthy of this group.” Rapundalo recalled Ann Arbor’s ultimately unsuccessful Google Fiber initiative, toward which the LDFA board at the time had pledged $250,000.

Rapundalo wondered how the LDFA could reach out to the high-tech community to get input on what that community feels is lacking in terms of high-speed infrastructure. Crawford responded to Rapundalo by saying that he would look to Skip Simms specifically, or Ann Arbor SPARK generally to facilitate that inquiry. He ventured that Ann Arbor SPARK conducts that kind of inquiry as a matter of course.

But Simms told Crawford that Ann Arbor SPARK does not do that in a formal way – characterizing it more as an ad hoc approach. The main mechanism for that is through the business development team, Simms continued, through their conversations with the more mature technology companies about their needs. “So far, quite honestly, we’re not hearing any outcry that we need a bigger pipe,” Simms said.

What SPARK is hearing, Simms continued, is “I need job training. I need people with skill sets. I need office space downtown. Those are the things we’re hearing from those companies. They’re not saying … fiber.”

But Simms allowed that could change in five years. Video technology is requiring more capacity – more storage space. So maybe what is needed is more online technology facilities, as opposed to fiber – but who knows? Simms said. He added that it’s important to be careful going forward that the LDFA doesn’t lock itself in and limit itself. Whether the proposal comes from the city council or from Ann Arbor SPARK or from city staff, Simms urged that the approach be kept fairly broad that whatever unfolds 10 years from now – and no one knows what that might be – it can be accommodated.

Crawford agreed with Simms’ remarks. The existing tech companies, Crawford said, are currently very well served – because if you want very good high-speed service, you can just pay for it. What the city has been considering is a broader look that would not necessarily address the issues of technology companies, but that would be a real asset and attraction for new companies to come in and other kinds of companies to start up. So the city’s fiber initiative would not necessarily address the need that existing companies have.

Crawford characterized it not as “incremental” but rather as “supplemental.” It would not take away from anything that Ann Arbor SPARK is already doing, Crawford said. Petersen ventured that there would be some “positive externalities” that would come from the installation of high-speed fiber, which would benefit residents as well. So if this project were viewed as affecting “community prosperity,” it would also help start-ups. Petersen thought there were also a lot of existing, mature businesses and residents who would be helped as well.

Crawford responded to Petersen by saying that it’s somewhat of a chicken-and-egg problem. Without high-speed fiber, innovations are not occurring and we are falling behind worldwide on innovation in this kind of thing, Crawford said.

Responding to a question about whether the city’s high-speed telecommunications fiber project would extend to the neighborhoods or just to the downtown area, Crawford explained that the concept is to include the entire city. Eric Jacobson said that his “gut feeling” was that demand for high-speed fiber capacity from residents would be possibly more than the demand from businesses – just because at home, people are pulling down massive amounts of bandwidth for video programming and things like that.

For a business, there’s some of that, Jacobson added, but perhaps not as much as for residents. He works for a software company [Amplifinity] and all of his company’s bandwidth to the outside world is provided by its hosting facility. But for his company’s office space, the bandwidth requirements are more than met by commercial providers, he said.

Crawford responded by adding that the price point that Americans are paying for the service they get is high compared to international standards, and speeds are uneven for uploading compared to downloading. Improving bandwidth in both directions has the potential to change the way that people do business, Crawford said. It’s not just about adding bandwidth to the business that you have – it’s potentially changing the way you use bandwidth.

Leahy brought the conversation back to the concerns of the Ann Arbor city council.

Leahy told Jerry Lax that she understood the current TIF/development plan limited how TIF funds could be expended on infrastructure. She asked him to provide some additional background. Lax told her he wanted first to look at the TIF/development plan a little more closely, because he has not investigated it in detail. Whatever conclusions might be drawn about its current limitations, he said, the real question is: What would the LDFA board like it to see? The next question is whether there are concerns either in the enabling legislation or elsewhere that would make it difficult to have the TIF/development plan say what the LDFA board has concluded that it wants the plan to say.

Lax wanted some additional time to take a look at what the constraints are in the current TIF/development plan, and also the question of whether in general there might be some limitations on altering the TIF/development plan. Right now, Leahy said, the TIF/development plan says that the roads and sewers and lighting are complete and basically done in the Ann Arbor/Ypsilanti SmartZone district. The only real item that is addressed is high-speed telecommunications fiber.

Lax cautioned that even if that was an accurate statement at one point in time, it might no longer be accurate. Leahy thought that the enabling legislation does in fact permit infrastructure investments, pointing out the Grand Rapids had done it. Lax allowed that his recollection of that portion of the enabling legislation was that there is not a constraint, but he would like to take another look at that.

Luke Bonner then interjected, asking if he could be a “wet blanket” based on his experience. If you look at the local development finance authority legislation that was put together in the 1980s, it’s important to note that’s when things were terrible in Michigan, he said. An LDFA was a tax increment financing mechanism that allowed for reimbursements of infrastructure costs to spur certain kinds of investments – basically for manufacturing in high tech, engineering, and alternative energy, he said. And that is the only type of project that those TIF dollars could be used for – it was very specific.

Then came along the amendment to the LDFA legislation in 2000 that created SmartZones, Bonner said. What the state did was create a new kind of TIF that was a “certified technology park.” That basically meant that if you had an existing LDFA, or if you wanted to create one, you could apply to the state to have a certified technology park designation – and that certified technology park designation basically allows an LDFA to capture school taxes to support business incubation and acceleration services.

The deal that has been put together on almost all of the certified technology parks, Bonner continued, is that if the state is going to contribute funding, there has to be some kind of local contribution – a local match. So if an LDFA already existed, and the LDFA had debt obligations – because it had built roads and bridges and sewer pipes – then the state treasury considered that to be the local commitment: Your local taxes are being used to create local economic development, and so you are allowed to capture school taxes, Bonner said.

In the case of Ann Arbor, there was a downtown development authority (DDA) district that was already established and that was already investing money. The infrastructure in which the Ann Arbor LDFA could invest could serve an incubator or an accelerator program. For example, an incubator could be built and you could run high-speed telecommunications fiber to that incubator. You could, under the enabling legislation [even if not under the Ann Arbor LDFA TIF/development plan] build a road or a sewer connecting to the incubator.

Where the challenge comes is trying to use school millage capture to build out general infrastructure that is not tied to an incubator. Bonner reported that the city of Rochester Hills was actually refused by the Michigan Dept. of Treasury, when the city wanted to use school taxes to help build out local infrastructure. The treasury had said: No way, you have to use the DDA, or a [non-SmartZone] LDFA to do that. The school millage can be used by a SmartZone LDFA to do infrastructure improvements – just as long as it is for an incubator, Bonner contended.

Leahy ventured that the restriction was not that specific and that it could be for infrastructure improvements anywhere in the SmartZone district. That’s what Grand Rapids had done, she thought. Bonner questioned whether what had happened to Grand Rapids was infrastructure improvements through a SmartZone LDFA or through an already-established LDFA.

Stephen Rapundalo said he knew some of the background of the situation in Grand Rapids and characterized the interpretation of the statutory language in that case as “rather liberal.” Grand Rapids had somehow got away with something, Rapundalo said. He told Bonner that he was on the right track in describing how things were supposed to function according to the statute. How Grand Rapids had done what they did, Rapundalo had no idea. Bonner pointed out that Ann Arbor’s LDFA is set up only to manage the use of the school taxes.

The LDFA in Ann Arbor is not set up in the original sense of the LDFA Act passed by the state legislature in the 1980s – which was to set up a mechanism to fund infrastructure improvements to attract manufacturing high-tech and engineering companies. But what Ann Arbor does have is a DDA that can make those improvements as well, Bonner pointed out. He had never looked at the Ann Arbor DDA plan before, but he knew that the DDA built parking decks and made road improvements.

The DDA has a lot of flexibility to make infrastructure improvements within the district, he said – whether it’s high-speed fiber or parking decks or roads or sewers. He noted that the geographic area of the LDFA and the DDA in Ann Arbor are the same district. He suggested again that it would be a good idea to develop an LDFA 101 presentation for the city council to explain how all these entities are very separate and distinct from one another.

Lax pointed out that one question is how the existing enabling legislation is interpreted. He also pointed out that legislation can be changed – although he would not want to suggest that as anyone’s first line of attack – because that is a “forever project.” Leahy ventured that right now the plan does not allow for the funding of the kind of infrastructure projects that the city council is interested in. Bonner thought that the state treasury would challenge an attempt to use LDFA school millage capture to run fiber to the premises in Ann Arbor citywide.

Politics of an Extension: School Tax Capture

Earlier in the meeting, Skip Simms had argued for a 15-year extension. He said if the LDFA did not get the extension, a significant sum of money would not be coming to benefit the city of Ann Arbor.

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

Sally Petersen picked up on Simms’ observation about the source of funds and the reimbursement from the state. One of the issues that the city council is concerned about, Petersen said, is whether the TIF capture from the Ann Arbor/Ypsilanti SmartZone is coming from the state school aid fund. “That’s still out there,” she said.

Stephen Rapundalo responded to Petersen by asking: “What’s it take – for them to understand unambiguously how that works? I mean we have told them. Why is the onus on the LDFA to have to show them that?” The LDFA has nothing to do with that aspect of funding, Rapundalo continued, saying that all the LDFA knows and understands is how the calculation is made, and therefore how much money is allocated to the LDFA board for the purposes stated in all of the various agreements. [See above for statutory interpretation indicating that the school aid fund is not reimbursed for the Ann Arbor/Ypsilanti LDFA SmartZone tax capture.]

Luke Bonner of Ann Arbor SPARK suggested that it is a lot to ask of current Ann Arbor city councilmembers, who were not around when the LDFA was created, to have a clear understanding. He suggested that the material needed to be broken down into a kind of LDFA 101 presentation.

Rapundalo expressed frustration – because such presentations have been given over the years, which he thought were really dumbed-down. Jerry Lax quipped that maybe they needed better diagrams. Rapundalo ventured that with respect to the school aid fund reimbursement, the council needed to hear from someone at the state level. He did not know who that person might be, but it could be somebody at the highest level of the MEDC, or the Dept. of Education – but it should not be from the LDFA.

Bonner suggested that it might be someone at the Dept. of Treasury – because the treasury department, more so than the MEDC, has to put their stamp of approval on the TIF plan. The state treasury is responsible for taking the money and reimbursing the school aid fund.

Rapundalo said he would ask Ann Arbor SPARK to identify the person who could explain that. “That needs to be cleared up, as much as we can, once and for all,” Rapundalo said. Lax added that many of the issues that city councilmembers might have concerns about are based on the actions of the state legislature in creating the statutory scheme in the first place. So if people have questions about it, they might very well be legitimate questions that need to be addressed – but the fundamental point is that for better or for worse, this is what the state legislature determined would be the mechanism.

If people have questions or doubts or criticism about how reimbursements are made, and where it comes from, and what bucket the money is taken out of, that’s not something that the city council determined or that the LDFA determined, Lax said. That’s something that the state legislature determined in adopting the state legislation in the first place.

Petersen said there are two things that concerned her about how the city council received this kind of information. The council might decide that they don’t like the mechanism at the state level, and to prove that point, the council might not want to support a 15-year extension of the LDFA. There are also remaining questions about whether the city of Ann Arbor public schools are actually getting reimbursed. She understood that representative Jeff Irwin had done some analysis of that, but she was not sure what it was, as she had just heard about it.

Lax ventured that maybe councilmembers feel that the schools ought to be getting more money – but the question of whether the schools are getting more money is a separate question from whether the way the schools are being reimbursed is fair. If the schools in general are getting a dollar-for-dollar equivalent for the captured taxes, then “so far so good,” Lax said.

Petersen stated that city CFO Tom Crawford has stood up and stated that the schools are getting reimbursed. Rapundalo observed that Crawford’s statement does not satisfy some councilmembers, and that’s why they need to hear from somebody who can walk them through the calculations and the whole process at the state level.

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

Action came at the council’s June 2, 2014 meeting after about 20 minutes of deliberation that concluded just before 11 p.m. Carrie Leahy, chair of the LDFA board, and Ann Arbor SPARK CEO Paul Krutko were on hand to answer councilmember questions. The voice vote by the council passed over dissent from Sumi Kailasapathy (Ward 1).

Ann Arbor’s local development finance authority is funded through a tax increment finance (TIF) district, as a “certified technology park” described under Act 281 of 1986. The Michigan Economic Development Corp. (MEDC) solicited proposals for that designation back in 2000. The Ann Arbor/Ypsilanti “technology park” is one of 11 across the state of Michigan, which are branded by the MEDC as “SmartZones.”

The geography of the LDFA’s TIF district – in which taxes are captured from another taxing jurisdiction – is the union of the TIF districts for the Ann Arbor and the Ypsilanti downtown development authorities (DDAs). It’s worth noting that the Ypsilanti portion of the LDFA’s TIF district does not generate any actual tax capture.

The LDFA captures Ann Arbor Public Schools (AAPS) operating millage, but those captured taxes don’t diminish the school’s budget. That’s because in Michigan, local schools levy a millage, but the proceeds are not used directly by local districts. Rather, proceeds are first forwarded to the state of Michigan’s School Aid Fund, for redistribution among school districts statewide. That redistribution is based on a per-pupil formula as determined on a specified “count day.” And the state reimburses the School Aid Fund for the taxes captured by SmartZones throughout the state.

In FY 2013, the total amount captured by the LDFA was $1,546,577, and the current fiscal year forecast is for $2,017,835. About the same amount is forecast for FY 2015.

The extension of the LDFA is made possible by Public Act 290 of 2012, which amended the Local Development Financing Act to allow a SmartZone to capture school taxes for an additional five years or an additional 15 years. The staff memo accompanying the council resolution describes the five-year extension as possible “upon approval of the MEDC President and the State Treasurer, if the Ann Arbor/Ypsilanti SmartZone LDFA agrees to additional reporting requirements and the LDFA requests, and the city councils of Ann Arbor and Ypsilanti approve, the amendment of the LDFA tax increment financing (TIF) plan to include regional collaboration.” The current MEDC president is Michael Finney, former CEO of Ann Arbor SPARK.

A 15-year extension is possible, according to the memo, “if, in addition to the above requirements, Ann Arbor and Ypsilanti, as the municipalities that created the SmartZone, enter into an agreement with another LDFA [a "Satellite SmartZone"] that did not contain a certified technology park to designate a distinct geographic area, as allowed under Section 12b of the Act…”

The council’s resolution states that if the MEDC approves the extension, the city of Ann Arbor will work with the LDFA and the city of Ypsilanti to identify another LDFA – called the “Satellite SmartZone LDFA.” The arrangement will allow the Satellite SmartZone LDFA to capture local taxes in its own distinct geographic area for the maximum 15 years allowed by statute.

Responding to an emailed query from The Chronicle, Sally Petersen (Ward 2) – who sponsored the resolution on the agenda and serves as the council appointee to the LDFA board – wrote that possibilities for an LDFA satellite for Ann Arbor’s SmartZone include Adrian (Adrian College) or Brighton and Livingston County (with Cleary University).

Details on the council’s deliberations are provided in The Chronicle’s live updates filed during the meeting.

This brief was filed from the city council’s chambers on the second floor of city hall, located at 301 E. Huron.

Items on the consent agenda are considered routine, and include contracts for less than $100,000.

The contact with the economic development agency Ann Arbor SPARK is one that has been renewed annually since the Washtenaw Development Council and Ann Arbor SPARK merged in 2006. Previously, Ann Arbor had contracted with the WDC for the business support services for which it now contracts with SPARK. On June 20, 2005, the city council authorized that one-year contract with WDC for $40,000. This year’s $75,000 contract with SPARK describes the organization’s focus as “building our innovation-focused community through continual proactive support of entrepreneurs, regional businesses, university tech transfer offices, and networking organizations.”

Ann Arbor SPARK is also the contractor hired by the city’s local development finance authority (LDFA), to operate a business accelerator for the city’s SmartZone, one of 11 such districts established in the early 2000s by the Michigan Economic Development Corp. (MEDC). The SmartZone is funded by a tax increment finance (TIF) mechanism, which in the current fiscal year captured around $1.4 million in taxes from a TIF district (which is the union of the Ann Arbor and Ypsilanti Downtown Development Authority districts, though revenue is generated only in Ann Arbor’s district.) The specific taxes on which the increment since 2002 is captured are the school operating and state education taxes, which would otherwise be sent to the state and then redistributed back to local school districts.

GCSI’s Kirk Profit, a former member of the state House of Representatives, typically makes an annual presentation to the council with an update on state-level legislative issues relevant to the city’s budget situation. Written updates to councilmembers on legislative activity are sent on a weekly or daily basis.

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]

Susan Lackey, executive director of the Legacy Land Conservancy, confers with Bob Tetens, director of Washtenaw County Parks & Recreation, before the start of Thursday's working session of the county board of commissioners. (Photo by the writer.)

The proposal comes as the board prepares to place a renewal of the 10-year NAPP millage on the November ballot. The current millage, which raises about $3 million annually to preserve natural areas in the county, expires at the end of 2010.

Also at Thursday’s meeting, commissioners heard a report on internal controls used within the county government, both in finance and other areas. This has been topic that commissioner Wes Prater has pushed the board to address for several months.

Highlights from a draft report were presented by staff of the county’s new energy and economic development department. The report includes data on job losses, education, housing, transit and other factors, and presents four strategies for improving the county’s economy. Tony VanDerworp, who leads the department, explained that the report is required by the U.S. Dept. of Commerce’s Economic Development Administration so that the county can apply for grants from the EDA.

Finally, Verna McDaniel, incoming county administrator, said she plans to hold a meet-and-greet for candidates of the deputy administrator job on May 5 before that evening’s board meeting, to get commissioners’ feedback on a potential hire.

Natural Areas Preservation Program

Susan Lackey, executive director of the nonprofit Legacy Land Conservancy, and Bob Tetens, director of Washtenaw County Parks & Recreation, briefed commissioners on a proposed change to the ordinance governing the county’s Natural Areas Preservation Program (NAPP). The change reflects two broader strategic goals: incorporating farmland into NAPP’s land preservation efforts, and clarifying the county’s use of the purchase of development rights (PDR) to preserve land, in addition to outright acquisition [.pdf of NAPP ordinance revised draft].

NAPP is funded by a 10-year millage that expires at the end of 2010. The 0.25-mill tax brings in about $3 million annually – since the program began in 2000, the county has acquired over 1,800 acres of land, establishing 17 new nature preserves.

Several months ago, Lackey said, she and others involved in local land preservation began talking with county parks officials about how farmland fits into the county’s current land preservation strategy. Discussions included the possibility of using the purchase of development rights as an alternative to buying the property through the NAPP program. [The county has a separate ordinance, passed in 2007, for a PDR program aimed at securing grants from the Michigan Agricultural Preservation Fund. The Legacy Land Conservancy helps oversee that program.]

Using PDR to preserve farmland has several advantages, Lackey said: 1) it allows the land to continue to be actively used as farmland, by the owner or others; 2) it keeps the property on the tax rolls; and 3) it enables the county to tap federal grants through the federal Farm and Ranch Lands Preservation Program (FRPP). The county is the most successful in the state at bringing in FRPP dollars for land preservation, through the Ann Arbor greenbelt and other programs.

County parks officials, the Legacy Land Conservancy, the Ecology Center and conservation consultant Barry Lonik have worked to draft changes to the ordinance, to incorporate farmland more clearly as a type of natural area. The draft adds “agricultural purposes” as a definition of natural areas, and adds the category of “agricultural land” in the section that defines criteria for NAPP purchases:

B. Agricultural Lands

• Characteristics of the farmland: prime and unique soils, size, percentage of property in agricultural use, scenic historic or architectural features, scenic view.
• Potential for development pressure: adjacent land uses, adjacent land use designation, amount of road frontage proximity to public sanitary sewer/water.
• Leverage: Percentage of funding from other sources, including willingness of landowner to accept a percentage of the appraised value of the development rights on the property.
• Open space value: Proximity to existing private and/or public protected land, regardless of use.

The draft language specifies the county’s Agricultural Lands Preservation Advisory Committee as the group that would advise the county about farmland PDR deals. The idea is to take some of the pressure off of the Natural Areas Technical Advisory Committee, which currently advises the NAPP program, Lackey said. The proposed ordinance changes would eliminate references to a “planning advisory board.”

Also, language has been added stating that 75% of purchases would be natural areas and 25% agricultural development rights. This reflects the reality of the county’s current land acquisitions, Lackey said – they’ve bought active farmland in the past, because the parcels also included natural areas that they felt were important to protect. The problem is that the land then comes off the tax rolls, she said, and it’s a headache to manage. The county has to find a farmer to farm the land, or convert it to another use.

Lackey reminded commissioners of the 1998 county millage that was defeated – it would have raised funds for PDR deals on agricultural land and open space. Since then, she said, things have changed. The Ann Arbor greenbelt millage was passed in 2003 – land in the greenbelt is protected through PDRs, and people have a better understanding of what that means. Farmers are also more comfortable with the PDR concept, she said.

Natural Areas: Commissioner Comments, Questions

Several commissioners expressed support for the ordinance changes, the millage renewal and the NAPP program in general. The tone was markedly different from a meeting earlier this year, when some commissioners had raised questions about the renewal. [See Chronicle coverage: "County Natural Areas Tax Up for Renewal"]

Mark Ouimet said it was critical that voters understand what the changes are – to know what the county is transitioning to. He noted that when the countywide schools millage was on the ballot last fall, many people were confused because the millage would have been administered by the Washtenaw Intermediate School District. People didn’t understand that legally, WISD was the only entity that could collect the millage, then redistribute it to local school districts, he said. That confusion contributed to the millage’s defeat, he said.

Wes Prater questioned the 75/25 split between natural areas and farmland preservation. He said he could see that PDRs of farmland would benefit the county, since landowners would continue to pay taxes. He thought a larger percentage for farmland would be fine.

Later in the meeting, Irwin also raised the issue of the 75/25 allocation, asking if they had flexibility to alter those percentages. What if a particularly attractive parcel of farmland was available? Tetens and Lackey said the flexibility is there – the percentages are looking at overall preservation, not just in one given year.

Echoing Ouimet’s comments, Barbara Bergman said she didn’t want to vote on adding it to the November ballot until the community had a descriptive ordinance, so that residents would know exactly what they were voting for. Lackey said they knew it was important to be transparent.

Ken Schwartz asked what the timeline was for bringing these changes to the board for a vote. Tetens said they hoped to put the ordinance changes on the May 5 agenda of the Ways & Means Committee, on which all commissioners serve. Typically, resolutions are voted on first at Ways & Means, then a final vote is taken at the regular board meeting two weeks later.

Tetens said they hoped to discuss putting the NAPP millage on the November ballot at the board’s June 3 or July 8 working session. The board would need to vote at one of its regular meetings to approve putting the item before voters.

Schwartz said he strongly supported the county’s land preservation efforts – all six of the townships he represents in the northeast part of the county have had land purchased by NAPP. He was also supportive of incorporating more farmland through the purchase of development rights. What’s happening in Washtenaw County is unique, he said, citing NAPP, and Ann Arbor’s greenbelt and natural area preservation programs. They need to advance the successes they’ve already had in land preservation, he said.

Leah Gunn reminded Tetens and Lackey that they’d need to do more than just an informational campaign. “We’ve got to run a political campaign,” Gunn said.

In response to a question from Jessica Ping, Tetens clarified that the millage was 0.25 mills – it would be a renewal, not a new millage. He said it initially generated about $2.6 million annually and got as high as $3.6 million – due to increased property values – but had since dropped back down.

Internal Financial Controls

Wes Prater has brought up the issue of the county’s internal financial controls at several meetings over the last few months. At the board’s Feb. 17, 2010 meeting, he proposed forming a new committee that would review the county’s internal financial control policies. From The Chronicle report of that meeting:

Prater said he believes the county has a systemic problem regarding internal controls. He pointed to the arrest earlier this month of a county employee working in community mental health – part of the Washtenaw County Health Organization – who was charged with embezzling more than $100,000 over the past 16 years. In light of those allegations, he said, they needed to act urgently to protect the dollars of their constituents. He noted that the auditors don’t conduct an audit of internal financial controls, and that the board needs to act to prevent something similar from happening in the future.

His motion to form a new committee was tabled until the board’s March 3 meeting, with other commissioners asking for more information from the administration about what controls are currently in place. Prater later agreed to push back discussion of a committee until after the board could hold a working session on the issue – that happened on Thursday.

Pete Collinson, interim finance director, began by giving a general definition and overview of internal controls. He noted that it’s not just a concern of the finance department, but it encompasses every function and employee in the organization. While the governing body is ultimately responsible, the controls are primarily management’s purview, including design, implementation, monitoring and reporting.

Collinson outlined five components of internal controls, and gave examples of how these apply within Washtenaw County government.

1. The organization’s “control environment”: He characterized this as the “tone at the top,” with the governing body, management and HR policies all setting the stage for integrity and ethical behavior throughout the organization. Examples include HR policies on employee conduct and honesty, regular discussions at the board’s bi-weekly meetings and working sessions, and communication between the chair of the board and the auditor.
2. Risk assessment and monitoring: The county operates 35 different “businesses,” Collinson said, some with greater risk than others – the jail staff, for example, or public health employees. The county’s risk management staff is doing an extensive analysis of all department’s exposure, he said, and will identify strategies to deal with that, such as insurance or contract provisions. Areas that will be analyzed first include parks & rec, facilities, the sheriff’s department, courts and administration.
3. Control activities: There are 260 policies and procedures outlining county business practices that in some way involve internal controls, Collinson said. Examples include building security and access, ID tags placed on equipment, restricted access to computer systems, requiring two signatures on invoices prior to payment, and supervisor approval of timesheets, among others.
4. Information and communication: It’s important for communication to flow up, down and across the organization, Collinson said. This goes back to the “tone at the top,” he noted – top administrators must communicate that internal controls are taken seriously.
5. Monitoring: There are several ways to check whether internal controls are being followed, Collinson said, including annual audits, periodic reviews of petty cash balances, and regular reviews of offices that take cash over the counter, among others.

Collinson concluded by saying “I know that internal control is not the most exciting in the world” – but he noted that it’s vital to making sure the county government operates in an orderly, ethical way.

Internal Controls: Commissioner Comments, Questions

Several commissioners thanked Collinson for giving a broad overview of internal controls, not just focusing on the financial piece. Leah Gunn said she thought their workforce took the topic seriously.

Wes Prater asked Collinson for suggestions on how the administration can better communicate to the board about its internal control practices. He said they receive very little information, other than annual audits. Though he said he doesn’t want to micromanage, there needs to be a process in place, since the board has an oversight role. Specfically, Prater cited concerns with credit card use and filling out time sheets on computer.

Verna McDaniel, who’ll be stepping into the county administrator’s job next month, said credit card purchases are closely monitored. Any unusual purchases are brought directly to her attention, she said, and she talks to the purchaser personally. She also suggested that the board be provided with “exception” reports – a listing of transactions or items that fall outside of normal business practices. This might alert them to areas where they might need to “raise the bar” on internal controls, she said.

Collinson clarified that although time sheets are submitted electronically, they still require supervisor approval before being forwarded to payroll.

Prater said a lot of this information was new to him, and useful.

Mark Kettner of the accounting firm Rehmann Robson, which handles the county audits, was on hand as well for the presentation. He emphasized the role of the board as setting the tone for the organization, and letting management know their expectations.

Gunn said in all her years of service she’s never encountered any commissioner or top manager who wasn’t ethical – unlike some other governments she could think of, she said. She was proud of that.

Mark Ouimet recalled that he did a stint in the auditing department as he worked his way up the food chain during his career in banking. The key to internal controls is discipline, he said, and problems usually arise when someone gets lax. He asked Collinson whether there was a regular schedule of monitoring, and whether management was comfortable with that protocol.

Collinson said they should strengthen their communication with top administrators about the schedule of internal audits, to ensure that everyone is comfortable with the level of monitoring. Ouimet observed that when there aren’t any problems, it’s easy to think you can cut back on internal controls. But cutting back then opens up opportunities for abuse, leading back to a refocus on internal controls – which is where they are today, he said.

Later in the meeting, Prater requested another working session related to finance – focusing on the county’s debt, liabilities and unfunded liabilities.

Comprehensive Economic Development Strategy (CEDS)

Tony VanDerworp, the county’s director of the department of energy and economic development, gave a presentation on a draft version of the county’s Comprehensive Economic Development Strategy, known as CEDS. This specific report is required by the U.S. Dept. of Commerce’s Economic Development Administration in order for the county to apply for funding from the EDA [.pdf file of CEDS report].

The rationale for requiring this report, VanDerworp said, is to fit requests for specific grants into a broader economic development strategy. EDA grants are available for incubator facilities, research park infrastructure, revolving loan programs and a range of other projects.

VanDerworp highlighted several facts in the report:

• The county’s median age in 2008 was 33.1 years – that’s younger than the state or national levels. [It was then noted that it was commissioner Mark Ouimet's birthday, which prompted some age-related ribbing.]
• For the first time in recent history, Washtenaw County’s population dropped in 2008, falling by 0.2%. The county’s population is estimated at 347,376 people.
• The county has seen a loss of over 15,000 jobs since 2003, including a loss of 4,200 jobs in 2008. Major losses have come from the closing of Pfizer’s research operation in Ann Arbor. Ypsilanti and Ypsilanti Township have been hit by the closing of GM’s Willow Run plant and Automotive Components Holdings (formerly Visteon). VanDerworp said the most recent forecast by UM economists George Fulton and Don Grimes calls for a slight job gain this year, with a more normal growth rate – a couple thousand jobs annually – in 2011-12.
• The county is highly educated, with 93.4% of adults having at least a high school diploma – higher than the state (87.6%) or national (84.5%) levels. But there are still educational attainment issues, VanDerworp noted. Graduation rates in some districts are poor: 51.8% in Willow Run and 66.8% in Ypsilanti for 2007. That’s important to address, he said, because jobs in the future will require a higher level of education, and at least a high school degree.
• The report lists four general strategies that the county needs to pursue: 1) grow companies by converting innovative ideas into action and attracting investment to the region, 2) develop the talent needed for growing economic sectors, 3) develop quality-of-living assets needed to retain and attract talent, and 4) revitalize the eastern portion of the county. There are six pages of specific projects designed to meet those goals.

VanDerworp said they hoped to get feedback from commissioners. Next steps include forming a steering committee to finalize these strategies before sending the report to the EDA for approval. The document will be updated annually, he said.

Mike Finney – CEO of Ann Arbor SPARK, the county’s main economic development agency – spoke briefly following VanDerworp’s presentation. He said they’re looking at EDA funding to help move the community’s economic fortunes forward, and it looks promising. In March they’d been visited by John Fernandez, the Obama administration’s assistant secretary of commerce for economic development, and that was followed up by a visit from an official who oversees this area for the department, working out of the Chicago office. Finney said he thinks they’re in a position to start tapping these federal resources.

CEDS Report: Commissioner Comments

There was little discussion or comment on the CEDS report. Leah Gunn said she was astounded by seeing how many employees work for the University of Michigan – about 46,000 people, including workers at UM’s health system. She noted that the university was truly an economic driver for the state.

Gunn also wondered why the Ann Arbor Transportation Authority wasn’t listed as a partner. She suggested that someone talk with the AATA’s CEO, Michael Ford.

Jessica Ping praised the report, saying it made the county look good. It also highlighted the importance of small businesses in the economy, she said, and their role in the local economic recovery.

Stephen Rapundalo (Ward 2) sets up his presentation on the Local Development Finance Authority (LDFA) before the start of the April 12 council budget meeting. Rapundalo sits on the LDFA board as the Ann Arbor city council’s representative, and currently chairs the board.

At the April 12 budget meeting, the council heard presentations on two related entities: the Local Development Finance Authority (LDFA) and Ann Arbor SPARK. The LDFA contracts with Ann Arbor SPARK for various business development services.

The two key themes that emerged from the LDFA presentation were consistent with the overall topic of the city’s budget: (i) Where does the LDFA get its money? and (ii) What does the LDFA spend its money on?

Part of the LDFA’s revenue goes towards economic development activities – a business accelerator – for which it contracts with Ann Arbor SPARK. The presentation to the council from SPARK’s CEO, Michael Finney, was followed by testimonials of companies who said they had benefited from SPARK’s efforts.

Development activities are just one kind of investment that the LDFA could make under its TIF (tax-increment financing) plan. It could also make investments in physical infrastructure. During question time, Sandi Smith (Ward 1) drew out from Stephen Rapundalo (Ward 2) the possibility that the LDFA could contemplate an investment in a fiber-optic network. Rapundalo, who serves on the LDFA board, indicated that such an LDFA investment might be possible, even if Google does not select Ann Arbor as a test community for its current fiber-optic initiative.

The council also heard from the economic development community about how the name “Ann Arbor” is perceived in the rest of the world.

The part of the council’s meeting dedicated to deliberations on its own budget was comparatively brief. Councilmembers were keen to portray in a positive light a couple of different issues, among them a potential increase in the city’s debt load resulting from a failure to complete a $3 million sale of property at First & Washington, as well as proposed increases in water rates.

Local Development Finance Authority (LDFA)

The presentation to councilmembers on the LDFA was made by their colleague, Stephen Rapundalo (Ward 2), who sits on the LDFA board in the slot designated for a city councilmember, and currently chairs the body.

A point of emphasis for Rapundalo – to counter what he characterized as “misinformation” – was to make clear that there are some taxes not captured by the LDFA.

The two kinds of taxes identified by Rapundalo and displayed on the slide in his presentation as not captured by the LDFA are Ann Arbor Public Schools debt service and the enhancement millage. Ann Arbor’s public schools “remain whole,” Rapundalo said, due to the way property taxes are redistributed by the state.

LDFA: Where the Money Comes From – Capture

By way of more detailed background, it’s worth considering what’s meant by “capturing taxes.”

The LDFA is funded through tax-increment financing (TIF) in a manner similar to the way the Ann Arbor Downtown Development Authority is supported. A TIF district allows authorities like the LDFA and the DDA to “capture” some of the property taxes that are levied by other municipal entities in the district.

There’s a contrast, then, between property taxes that are “levied” by a municipal entity that has the right to collect (i.e., levy) them, and taxes that are “captured” by an authority like the LDFA or the DDA.

The notion of “capture” conveys at least two ideas. First, a TIF authority does not itself levy taxes – the legal right for the collection of taxes stems from some other municipal entity, like the city of Ann Arbor, or Washtenaw County or the Ann Arbor Public Schools (AAPS). This is sometimes one of their selling points: Creation of a TIF district does not contemplate creation of new taxes or raising taxes.

Second, if a particular TIF authority did not exist, the taxes it captures would be collected anyway, and those monies would have some other “destiny.” In most cases, that destiny would be direct use by the municipal entity that levied the tax. By way of a concrete example, one of the kinds of taxes captured by the DDA is the city of Ann Arbor’s general operating millage. If the DDA did not exist, then the portion of city of Ann Arbor taxes currently captured by the DDA would go to the city’s general fund.

In the case of the LDFA, the story of an alternative destiny for some of its captured taxes has an extra wrinkle. That’s a wrinkle involving capture on the increment for the AAPS general operating millage. If the LDFA did not exist, then the taxes collected on behalf of the AAPS for its general operating millage would not be used directly by AAPS, but rather would go to the state’s School Aid Fund, for redistribution among school districts statewide based on a per-pupil formula as determined on a specified “count day.” This is what underlies Rapundalo’s explanation that local schools would “remain whole.” [Previous Chronicle coverage with a primer on how public schools are funding in Michigan: "Does It Take a Millage?"]

The TIF plan for the LDFA discusses the potential impact to local school funding as follows:

Based on current state law, this Plan shall have no direct impact upon the local school districts, as it has no direct impact upon the per pupil reimbursement from the State to the public schools. The impact to the State School Aid Fund will be approximately $24,000,000 over the 15 years of the LDFA plan. This translates to approximately $1,600,000 annually, or $0.79/student statewide.

The state of Michigan’s School Aid Fund is administered in a way such that some districts get back more from the state than their millages contribute to the fund, while others get back less. Those that get back less – like AAPS – are known as “donor districts.”

The Ann Arbor school district’s status as a donor to the School Aid Fund is sometimes heard in defense of any possible negative impact on statewide school funding potentially caused by the LDFA’s tax capture. That is, the LDFA can be seen as a mechanism by which the Ann Arbor area recoups millage dollars that are lost to other areas of the state due to its “donor” status in the School Aid Fund. This recouping, of course, does not recover millage dollars for the direct benefit of the public schools.

The specific taxes that are captured by a TIF authority are spelled out as part of the set of formative documents for such an authority. For the Ann Arbor DDA, the relevant taxes that are captured are spelled out as follows [emphasis added]:

Per Public Act 197 (1975), as amended, the Ann Arbor Downtown Development Authority collects the tax revenues levied by the City of Ann Arbor, Washtenaw County, the Ann Arbor Transportation Authority (AATA), Washtenaw Community College, and the Ann Arbor District Library on the initial taxable value of all new real and personal property within the DDA District.

Prior to 1994, the DDA also captured Ann Arbor Public Schools taxes and the Washtenaw Intermediate School District taxes.

For the LDFA, the taxes to be captured are spelled out as follows [emphasis added]:

Under this Plan, tax increment revenues subject to capture by the LDFA shall include, to the maximum extent permitted by Act 281 of 1986, as amended, the following: Ann Arbor portion of the district – 50% of operating millage of local school districts and 50% of the State Education Tax levied upon the Captured Property. Ypsilanti: no revenue shall be captured at the present time. The LDFA shall not capture tax revenues attributable to the levies of any other taxing jurisdiction.

The specific geography of the LDFA district mentioned here – the union of the geographic areas specified in the respective DDAs of Ann Arbor and Ypsilanti – is one of two ways that the amount of taxes to be captured by a TIF authority is limited: geography and increment.

LDFA: How Much Gets Captured – Putting the “I” in TIF

If a TIF authority captured all of the property taxes levied by a municipal entity everywhere those taxes are collected, then there would be no tax revenue to the municipal entity. That is not how TIF authorities are set up. The first limitation is geographical – the specific area in which the Ann Arbor DDA can capture taxes, for example, corresponds to an area generally described as downtown Ann Arbor.

The area in which the DDA can capture any portion of property taxes levied by a municipal authority is defined to be property inside the red line. (Image links to a .kmz file in the city of Ann Arbor’s Data Catalog, which can be opened in Google Earth.)

The second limitation is how much of the tax levy is captured in a defined TIF district. The “increment” in “tax increment financing” is the difference between some baseline of taxable value for properties in the district, compared to increases in the taxable value.

In the case of the DDA, the increment is defined to be the difference between the value of new construction and the previous value of the property. Any subsequent increases in the taxable value of the property as a result of market forces is not included in the increment on which the DDA captures taxes. This is sometimes called a “one-time increment.”

For the LDFA, the increment is defined as follows:

Beginning in 2003, the LDFA will capture ad valorem and specific tax levies on all new and incremental growth from the initial assessed value of Captured Property determined on the basis of assessments as of December 31, 2001. The initial taxable value of the LDFA District is $261,776,313. The LDFA will capture tax dollars for fifteen (15) years, commencing with levies imposed in 2003 through the levies imposed in 2018.

As reflected in the section of the LDFA TIF plan previously cited, it is not the entire amount of the increment that is used to define tax capture for the LDFA, but only 50% of it.

LDFA: How Much Is That in Dollars?

In his presentation, Rapundalo presented the actual dollars captured to date by the Ann Arbor LDFA:

2004  $   68,578
2005     199,699
2006     333,524
2007     526,624
2008     727,999
2009   1,101,408
2010   1,234,626

-

Based on projections presented by Rapundalo, the captured taxes will steadily increase to around $1.8 million in 2018, when the life of the LDFA currently ends. Summing over the entire 15-year life of the district from Rapundalo’s slide, current projections suggest that the district would capture about $16 million total. That is less than what was originally forecast – before the economic downturn of 2008 – in the formative documents for the district, which estimated that $24 million would be captured over the course of 15 years.

The total amount of taxes captured over the life of the district plays a role if the amount proves to be higher than what was originally estimated. From the LDFA TIF plan [emphasis added]:

Tax Increment Revenues in excess of the estimates set forth in this Plan, or in excess of the actual costs of this Amended Plan to be paid from Tax Increment Revenues will be considered surplus under Act 281. Unless retained to further implementation of the Development Plan set forth in Section III pursuant to a resolution of the Authority, surplus tax increment revenues must revert proportionately to the respective taxing jurisdictions from which collected.

LDFA: How the Money Is Spent: Activities, Infrastructure

The kinds of activities supported under the LDFA’s contract with Ann Arbor SPARK, Rapundalo explained, are centered around the business acceleration, incubator services, entrepreneurial education, and networking among businesses and entrepreneurs.

A business accelerator provides resources to help nascent start-up companies clear the hurdles to becoming a mature company with a saleable product, which in turn could lead to the creation of jobs and increased employment in the area.

The business acceleration services are conceived in terms of phases: Phase I, Phase II, Phase III.  In Phase I, initial contact is made with people who have a business/technology proposition and the idea is screened for programmatic fit, reviewed by advisers and consultants, and vetted for advancement to Phase II. That’s a step that entails an in-depth evaluation of a prospective client to determine capability of business for consulting help in Phase III.

That final phase reflects substantial involvement on the part of SPARK to get a company past start-up phase to a point where the company can attract venture capital investment. In Phase III, strategic issues are addressed, including the development of a business plan, schedule and budget.

Among the questions posed by councilmembers was one from Margie Teall (Ward 4), which focused on the notion of “virtual tenants” for SPARK’s incubator facility. Rapundalo deferred the question to Skip Simms, who is SPARK’s managing director for entrepreneurial business development. Simms explained that virtual tenants had access to internet service, a physical address where they could take a mail drop, and use of conference rooms.

Teall asked if a company needed an Ann Arbor address to become a virtual tenant of the incubator. Simms clarified that a company’s status as virtual tenant was a mechanism by which a company could claim an Ann Arbor address – that of the incubator on East Liberty Street. The question of a company’s address is important, because an Ann Arbor address is required for eligibility for LDFA services.

LDFA: Measurement of Success – Activities vs. Outcomes

In Rapundalo’s presentation, he noted the challenge inherent in evaluating success of the LDFA’s activities. During question time, Sandi Smith (Ward 1) asked Rapundalo about effectiveness. He noted that one kind of comparative metric they looked to was other LDFAs created under Michigan’s SmartZone legislation – what are best practices among other similar such districts? One of the priorities that came out of the board’s 2009 retreat, said Rapundalo, was a focus on an analysis of effectiveness. [Chronicle coverage of that retreat: "Expanded LDFA Board Reflects on Purpose"]

One of the statistics that’s tracked is activity related to the various business acceleration services, measured by the number of companies that used various services: Phase I services (218);  Phase II services (91); Phase III services (61); entrepreneurial boot camp (28); and incubator (34). Those activities were, in aggregate, associated with 106 new jobs, according to Rapundalo’s slide. Balanced against that were five companies that left the LDFA service area, resulting in 11 jobs lost.

One of the difficulties, Rapundalo acknowledged, was that they were dealing with very young companies and that there was a certain volatility associated with that.

Sabra Briere (Ward 1), looking at the 106 new jobs, noted that some would say it’s not enough, but some would say it’s really good. “What is the measure of success?” Briere wanted to know. Rapundalo allowed that this was exactly the crux of the matter.

The LDFA TIF plan does make an estimate of the number of jobs that could be created through the LDFA investment over the 15-year life of the district: 700. From the TIF plan:

The estimation of jobs in the high technology sector and under the program outlined by this Plan is a speculative venture contingent upon many factors outside the control of the LDFA. However, the writers of this plan estimate that 700 jobs may be created as a direct and indirect result of these activities. This estimate is based upon the following assumptions: A survey conducted in 1998 by the Washtenaw Development Council and the Ann Arbor Software Council determined that the average technology company in the area employed 57 individuals after approximately 10 years of operation. Based on the establishment and/or location of two new businesses each year within either the Ann Arbor or Ypsilanti portions of the SmartZone, this would result in the creation of just over 700 jobs during the 15-year life of the LDFA.

Following Rapundalo’s remarks, the city’s CEO, Tom Crawford – who sits on the LDFA board as an ex officio member – added that “we’re creating the environment that nurtures the growth.” The idea, said Crawford, is that one of these companies will “take off.” Pressed by Briere for any examples of a company that has “taken off,” the example of Xoran Technologies was offered.

Rapundalo echoed Crawford’s sentiments, saying that the business acceleration was about “hand holding” and helping companies learn how to walk. There’s high risk of failure, he allowed, but this was balanced against the potential for high return.

The LDFA, said Rapundalo, as an oversight body, needed to make sure that tax dollars were translated into “something meaningful.”

LDFA: Infrastructure Investments – Fiber Optics

In the course of his remarks, Rapundalo mentioned that the LDFA had offered $250,000 in support of Ann Arbor’s response to the Google Fiber initiative: The firm’s request for information (RFI) from communities interested in having Google install a fiber-to-the-home network. Sandi Smith (Ward 1) asked Rapundalo if the LDFA would consider making an investment in a fiber-optic network, even if Google did not choose Ann Arbor as a test community. Rapundalo did not rule out such a possibility, saying that the LDFA had talked a bit about the topic in a broader sense.

Smith was in some sense echoing sentiments the city council had heard before on the need for a fiber-optic network, even if Google did not fund one for Ann Arbor. During the public hearing on the city’s Google Fiber initiative, held on March 15, 2010, Wes Vivian urged the city council to think about how they would achieve a fiber-optic network, if Google did not choose Ann Arbor. [From Chronicle coverage: "Mixed Bag: Phones, Fiber, Fire"]:

Wes Vivian introduced himself as a decades-long telecommunications consultant, and told the council that for the last 15-20 years it’s been clear that either the telephone companies will migrate to fiber-optic networks or face domination by cable television companies. That process has begun, he said – AT&T has installed fiber in many communities.

If Google “coughs up the money” that’s great, Vivian said, but we need to find a way to implement this anyway – even if Google decides not select Ann Arbor as a test site. Fiber, he said, was part of the necessary infrastructure of a city – like a street. It wasn’t necessary to provide a system, he said, but just a hole in the ground or a hole in the air.

The idea of using LDFA funds as infrastructure investments – specifically the kind of high-speed telecommunications infrastructure represented by fiber-optic networks – is made explicit in the LDFA’s formative documents. From the TIF plan [emphasis added]:

The LDFA District is fully developed with roads, sidewalks, lighting and subsurface utilities. The infrastructure is publicly financed and maintained. The Development Plan does not anticipate large-scale improvements to or expansions of this infrastructure. In the event sufficient revenues become available through this plan, investment may be made to facilitate the expansion of high-speed telecommunications infrastructure throughout the District. Alternatively, the LDFA may become a grant recipient for financing designed to encourage this investment.

At the March 2010 meeting of the Ann Arbor Downtown Development Authority board – on which Smith also sits, in addition to serving on the city council – Smith had drawn out the fact that when underground work on streets is undertaken by the DDA, conduit is installed to accept potential installation of various telecommunications.

Ann Arbor SPARK

Ann Arbor SPARK CEO Michael Finney gave a presentation that addressed some of the same issues that Stephen Rapundalo had touched on.

SPARK: Metrics for Success, Job Retention, ProQuest

Among the issues covered by Finney was the challenge in evaluating success – not only in choosing appropriate metrics, but in taking the measurements in a reasonable way. He noted that in calculating the number of “jobs retained,” the idea was to count only those jobs that were actually at risk of leaving. In the city of Ann Arbor for 2009, for example, Finney indicated that 450 jobs had been retained through the activities of SPARK.

SPARK’s activities related to job retention include talent recruitment for companies that are looking to expand. Finney gave ForeSee Results as an example of a company that recently indicated they were looking to hire 10 additional staff. If a company that is looking to grow cannot recruit the staff in the Ann Arbor area that it needs for that growth, there’s a risk that the company could try to achieve that growth in a different region of the county.

Finney had invited representatives of a few companies to speak on behalf of the positive effect of SPARK’s efforts. Among them was Elliott Forsyth, senior vice president of human resources and business services for ProQuest. He explained that in 2006 ProQuest had been financially stressed and that Cambridge Information Group had acquired the company, expressing some interest in moving operations elsewhere.

Forsyth credited SPARK’s efforts at coordinating support from the Michigan Economic Development Corp. and the city of Ann Arbor to encourage ProQuest to stay. The support from the city of Ann Arbor to which Forsyth alluded came in the form of a tax abatement approved at the city council’s March 3, 2008 meeting:

Resolution to Approve Industrial Facilities Exemption Certificate Between the City of Ann Arbor and Proquest LLC. A motion was made by Councilmember Rapundalo, seconded by Councilmember Greden, that the Resolution be approved. On a voice vote, the Mayor declared the motion carried unanimously. Enactment No: R-08-094

In a Dec. 18, 2007 Ann Arbor News article on the $10 million Michigan Economic Growth Authority tax credits awarded to ProQuest, the value of the tax abatement granted by the city of Ann Arbor was put at around $1.2 million.

A search of online Ann Arbor News archives [registration required but free, available through the Ann Arbor District Library] shows that through the early to mid-2000s, a possible tax abatement for ProQuest had been discussed, but rejected until the 2008 approval.

One issue raised by Tony Derezinski (Ward 2) was the question of whether arrangements made to retain companies could be enforced. Finney indicated that agreements are typically contingent on jobs.

In the case of ProQuest’s tax abatement, the deal comes with the following conditions:

6. By December, 31  2009, ProQuest will add not less than Fifty (50) jobs at the facility named on the Application as compared to its number of employees as of the effective date of the Certificate. If ProQuest adds less than Fifty (50) additional Jobs by December 31, 2009, ProQuest shall have materially breached the terms of this Agreement and the City shall have the right to recommend revocation of the Certificate subject to provision 11 of this agreement to the State Tax Commission or taking other appropriate legal action in connection with the default.

7. ProQuest shall comply with all of the requirements of the City’s Living Wage Ordinance.

8. This abatement is being granted by the City in part to allow ProQuest to qualify for application of incentive tax credits by the State of Michigan. This agreement is contingent upon ProQuest receiving approval of State tax incentives within 120 days from the date the Michigan State Tax Commission issues the herein referenced abatement certificates. Failure to obtain approval of State tax incentives during this time will automatically revoke this agreement and the City shall have no further obligations to ProQuest under this Agreement.

9. ProQuest shall maintain operations within the City of Ann Arbor during the period of time for which the State tax incentives are in effect. If ProQuest relocates, whether within or outside of the State of Michigan, ProQuest shall pay to the affected taxing units an amount equal to those taxes it would have paid during the abatement term had the abatement not been in effect.

SPARK: What’s Your Elevator Speech for Ann Arbor?

Michael Finney indicated during his presentation that the name “Michigan” or “Detroit” did not generate a positive response from people he met from other regions of the country. The name “Ann Arbor,” however, had a positive association.

Sandi Smith (Ward 1) asked Finney what his “elevator speech” was for Ann Arbor. [An elevator speech is the short, condensed pitch given to someone in the time it would take to ride an elevator with that person before going separate ways.] Smith said that she’d spoken to Ken Nisbet, director the University of Michigan’s technology transfer office, and that Nisbet had given Ann Arbor’s “quality of life” as his response to the elevator speech question.

Finney’s response focused on the idea of Ann Arbor’s robust entrepreneurial ecosystem. He noted that SPARK itself is a start-up organization. Having the right ecosystem, Finney said, is the key to success. Referring to the possibility of a Google fiber network, Finney said, “we’re drooling about something like that happening.”

However, Tony Derezinski (Ward 2) focused on the idea that it’s not the city boundaries, but rather its regions that are important for the Midwest. He cited a book by Richard Longworth, “Caught in the Middle: America’s Heartland in the Age of Globalism,” as articulating that idea. Finney concurred with Derezinski that southeast Michigan is a relevant region in that sense, and that Ann Arbor could be the focus of that region, expanding outward from Washtenaw County.

City Budget

City administrator Roger Fraser kicked of the short discussion of the budget by noting that the budget would be presented formally at the council’s April 19 meeting, although the budget book has been available for a couple of weeks.

Councilmembers had a few clarificational questions on various aspects of the budget.

City Budget: Debt

Sandi Smith (Ward 1) was puzzled by a line in the budget summary that reads “Loan payment for First and Washington – $150,000,” noting that she did not think the city owed any money on the property.

Fraser allowed that Smith was correct – the city does not owe money on the property. However, the city is expecting $3 million from the sale of the property in connection with Village Green’s City Apartments project, which has site plan approval from the city, but has not moved forward yet due to lack of financing.

Fraser described the $150,000 as a contingency of sorts, borrowing some money to “tide us over” if the $3 million from the sale of that First & Washington property does not come through sometime soon. The site approval option to purchase agreement has been extended once by city council through December 2009, with a provision that the city administrator can authorize two 3-month extensions, which he has done. When the second extension runs out at the end of June 2010, the council will need to act if there is to be an additional extension.

At the council’s Monday budget meeting, the city’s CFO, Tom Crawford, indicated that he’d had recent conversations with Village Green and that they were feeling positive.

Mayor John Hieftje asked Crawford to confirm that the city was within its legal limit for debt load – the city cannot have debt in excess of 10% of the total state equalized value of property. Crawford indicated that the city was at 2.6%, and he thus felt comfortable with the city’s debt level. Crawford also cited other cities’ debt load – Grand Rapids, Lansing and Kalamazoo – as comparable. Ann Arbor’s bond rating, said Crawford, was in the top 20 in the state.

City Budget: Rates and Fees

Sabra Briere (Ward 1) requested that for the various fee changes that were included, a two-year frame of reference be provided – she was concerned that fee increases proposed this year might be coming on top of fee increases already made last year.

Mayor John Hieftje asked Sue McCormick, the city’s public services area administrator, to confirm that the city’s water rates are low compared to other communities in the state. She provided that confirmation, saying that the city’s water and sewer rates were second-lowest in the state. She allowed that the city had a separate stormwater system, whereas some municipalities had their stormwater system integrated with their sanitary sewer, which would cause Ann Arbor’s rates to appear artificially lower.

However, after factoring in stormwater charges, McCormick said, Ann Arbor’s rates were still fifth-lowest in the state – roughly $1.40 for every 1,000 gallons of water. Tecumseh, she said, was an example of a muncipality that had lower rates – $1.25.

Other topics addressed to the councilmembers who attended caucus included the status of the East Stadium bridge repair, the proposed installation of parking meters in residential areas near the downtown area, and foliage obscuring sight lines along Glazier Way.  The allocation of $75,000 to SPARK, which is on the agenda for Monday, received some discussion in response to a query from The Chronicle.

The three councilmembers remaining at the caucus at its conclusion (Sabra Briere, Mike Anglin and John Hieftje) had little to discuss as far as formulation of questions among themselves. Briere briefly mentioned to Hieftje that she’d had some conversations with councilmembers who were interested in exploring some revisions to council rules – to address emailing policies, among other things.

SPARK Funding

Discussion on the $75,000 of Ann Arbor SPARK funding came at the end of caucus after Marcia Higgins (Ward 4) and Stephen Rapundalo (Ward 2) had departed. As they are the two councilmembers who are likely the best able to speak to the issue, we will incorporate the somewhat unproductive caucus discussion into our report on any deliberations that might take place during the council meeting on the resolution that authorizes the funding.

Not present at caucus was Carsten Hohnke (Ward 5), who was recently appointed to the executive committee of SPARK, a nonprofit agency focused on economic development. His perspective as a SPARK executive committee member will presumably be part of the deliberations at the council table as well.

Argo Dam

Council is scheduled to have a formal public hearing on the question of keeping versus removing Argo Dam at its July 6, 2009 meeting. A work session devoted to the topic is scheduled for Monday, June 15, 2009 at 6 p.m.

At Sunday’s caucus, a couple dozen residents gave various arguments in favor of keeping the dam. We present in summary form some of the major points raised. But before launching into that summary, we point out that Joe O’Neal, whose construction company reconstructed the Argo Dam in 1972 (not 1920), prefaced his speaking turn at caucus with the joking announcement that it was an historic occasion – one on which he and Ray Detter agreed on something. Both are in favor of keeping the dam. Also worth noting is that former Ward 1 councilmember Bob Johnson appeared at caucus, in order to advocate for keeping the dam.

Engineering Status of the Dam

Several speakers cited an Other Voices piece written by executive director of the Huron River Watershed Council, Laura Rubin, for The Ann Arbor News on May 7, 2009 as problematic, saying that it misrepresented the condition of the dam. In that essay she wrote, “Argo Dam is failing. That’s one reason the City of Ann Arbor is considering removing it. The Michigan DEQ found that part of the dam has deteriorated to the point where it could collapse and has ordered the city to fix or remove it.”

One speaker noted that the assessment of the DEQ report by Matt Naud – who’s the environmental coordinator for the city – is not that the dam is failing or is in poor condition, but rather that a plan needs to be put in place to maintain the toe drains. [Naud has stated at multiple public meetings that the dam is not failing.] Donald Gray and Joe O’Neal, who’ve examined the DEQ report, agree that there’s not an evaluation by the DEQ in the report that the dam is in poor condition. O’Neal’s assessment that the dam is in good condition is based also by his own physical inspection of the dam.

During the caucus discussion, the issue was raised of Mayor John Hieftje’s possible conflicting interests in deciding the question due to his prior status as a board member of the Huron River Watershed Council, and current status as an alternate board member.

In the course of the discussion, Hieftje indicated that his view on the dam had been misrepresented recently in The Ann Arbor News, saying that he had not yet made up his mind on the question of whether to remove it. The confusion had resulted, he said, from the fact that he’d indicated to The News’ reporter that he felt there were viable venues for rowers other than Argo Pond – a body of water that would disappear if the dam were removed.

Alternate Rowing Venues?

Barton Pond has been mentioned frequently as a possible alternative to Argo Pond as a rowing venue for the University of Michigan men’s team and the Huron and Pioneer high school rowing programs, as well as the other rowers who aren’t affiliated with a team. At caucus, a rowing coach made the point that the north-south orientation of Argo Pond protected it from the prevailing winds in a way that the predominantly east-west orientation of Barton Pond did not.

Access by rowers to Barton Pond along Country Club Drive, it was pointed out, would require a “departure from current use” as specified in the agreement between residents of Barton Hills and the city of Ann Arbor. Sabra Briere (Ward 1) elicited from one speaker the fact that a different possible access point – just above the Barton Dam – was not ideal in terms of safety because of the close proximity to the dam.  Further, it was clarified, the water at that location – the end of the pond – was choppier due to the relatively long “fetch,” the expanse of open water over which wind can blow without interruption by land.

Bellville Lake, the venue used by the UM women’s rowing team, was briefly mentioned as a possible alternate venue, but there were unknowns associated with the location of a boathouse.

Sedimentation: Cost of Dredging?

In the Huron River and Impoundment Management Plan (HRIMP) report, there’s a cost associated with the dredging of Argo Pond specified at $1.8 million – a figure criticized by more than one speaker. It wasn’t clear, they said, that dredging would be required at all on a “dam-in” scenario, because the rate of sedimentation was not known. Topographical maps comparing the river channel historically to its current shape, one speaker contended, showed very little change. That suggested, he said, that dredging might not be required.

Land Aquisition: Monetary Benefit?

The HRIMP report also specifies a major economic benefit for a “dam-out” scenario, which is attributed to the land that would be acquired due to the elimination of Argo Pond: $2.8 million. That economic benefit is the hypothetical cost of purchasing an equivalent amount of park land – which speakers at caucus criticized as not an actual monetary benefit. The benefit would only be realized if the land were sold, which is not being contemplated, they said.

Hieftje allowed that the city was not currently contemplating the acquisition of that amount of park land, nor was it thinking of selling the land, so the dollar amount was somewhat arbitrary. He said that he and other councilmembers viewed all the numbers presented in the HRIMP report with some skepticism and that they would be asking for recalculations in some instances.

Hydropower at the Dam

Payback scenarios for installation of hydropower at Argo Dam were calculated in an initial study and put the period of payback at close to 40 years. Speakers at caucus discussed the possibility that the payback period could be reduced to as little as 20 years if carbon offsets and a retail pricing model for the electricity generated were included.

One speaker explained that under the kind of cap-and-trade system that seems likely to be introduced in the U.S., the  market price for the carbon that is not generated would be be worth 1 to 5 cents per kilowatt hour. Hydropower at Argo could generate an additional $40,000 per year in a carbon market, he concluded.

The electric rate used in the city’s payback model is based on selling the electricity to DTE at a rate of a little over 8 cents per kWh, with a 5% increase each year. The same speaker at caucus who discussed carbon credits pointed to the possibility of selling the electricity on a retail scenario, which is currently around 12 cents per kWh. On such a scenario, power would be supplied directly to homes or businesses close to the dam, or by setting up recharging stations for electric vehicles. More on the specific issue of hydropower can be found in The Chronicle’s report on the city energy commission’s deliberations.

Damping of Peak Flows

One presenter at caucus showed a poster from U.S. Geological Survey data illustrating how the introduction of dams on the Huron River mitigated against peak flows. It is peak flows, he said, that posed the greatest problems as far as downstream erosion.

It’s about the Pond: Backup Water Supply and Built Environment

Besides providing a rowing venue, caucus attendees pointed to other benefits to Argo Pond. One benefit was as a backup water supply for the city of Ann Arbor. (The city now gets 80% of its water from the upstream Barton Pond.)

Another positive aspect of the dam was the historical existence of some kind of dam and a pond dating from 1830, when Anson Brown had built a dam at the location of the current Argo Dam – the built natural environment of a dam with a pond is a major part of the city’s identity.

Voter Referendum on Dam?

In response to a question from the caucus audience, Hieftje indicated that most of the email he’d been receiving on the subject was in favor of keeping the dam.

The Chronicle posed the following question to councilmembers at caucus:

Chronicle: The HRIMP report found that the “dam-in” versus “dam-out” decision “comes down to one of community preference. Both options will require significant investment of capital and operation and maintenance dollars in addition to staff time.” One way to gauge community preference is through a voter referendum on the question. Have you given any thought to putting the question to voters? How would you weigh the merits of putting the question to voters versus deciding the question as a council?

Allowing that she had not previously considered the idea of a voter referendum on the subject, Sabra Briere (Ward 1) said, thinking on the fly, that it would be important to specify with great detail exactly what the scenarios were that voters would be voting on. She also said that the outcome of a voter referendum would offer future councils less flexibility to change their mind in light of changing conditions.

For example, if council decided that it would pursue a five-year course of study for dam removal, that a council could at any point elect not to continue down that path. If there were a definitive voter referendum on the matter, then it would not be possible to change course without returning the question to the voters.

E. Stadium Bridge Repair

One resident asked for a status report on several aspects of the E. Stadium bridge repair. When will the drawings for the design be done and ready for citizen input? Will any of the funding come from the $23 million available from the street millage? What about general obligation bonds? Who is going to lead the project?

By “leading the project,” the resident meant to be asking who on council would be adopting the project as their own “baby” to shepherd it through to completion. Hieftje said he felt that it was something that all councilmembers thought was important. Marcia Higgins (Ward 4) said that she and her Ward 4 colleague, Margie Teall, considered it to be something they were especially committed to overseeing, given the bridge’s location in Ward 4.

As far as a timeline, Hieftje said that drawings and design were currently being developed. Funding, he said, would be requested at the top of the list for the next federal transportation bill – an effort supported by U.S. Rep. Mark Schauer, congressman for Michigan’s 7th District, as well as U.S. Rep. John Dingell, congressman for the 15th District. Hieftje said that such projects were typically not funded by local sources. In response to the resident’s followup question, he allowed that some kind of match by local funds was typically a component – the Broadway bridges were funded with 1/3 local funds and 2/3 state funds.

Parking Meters

Ray Detter, president of the Downtown Citizen’s Advisory Council, spoke at caucus against the introduction of parking meters in residential areas near downtown. Their introduction was approved as a part of the FY 2010 budget adopted recently by the city council.

There are two resolutions related to such meters on Monday’s agenda, which Sandi Smith (Ward 1) has been working on, together with Sabra Briere (Ward 1), Carsten Hohnke (Ward 5) and Mike Anglin (Ward 5). Smith alerted the monthly meeting of the Ann Arbor Democratic Party, held Saturday, June 13, 2009, that she’d be introducing the resolutions at Monday’s meeting.

One gives the green light to installation of parking meters in areas considered to be more commercial. From the resolution, those areas are:

• East Madison (18 spaces)
• Depot Street west of Broadway (16 spaces)
• Depot Street in front of Gandy Dancer (5 spaces)
• Depot Street Lot (20 spaces)
• Wall Street (115 spaces)
• Broadway (4 spaces)

The resolution also requires city staff to receive direction from the council before proceeding with installation of parking meters at any additional locations.

The second resolution on the agenda relating to parking meter installation has to do with the adjustment of rates at the 415 W. Washington parking lot, which were set somewhat lower ($2/hour) when the lot was first opened, because it was thought that the parcel would be quickly  redeveloped – so the pricing strategy focused on making the lot as attractive as possible to drivers.

How are parking rates at 415 W. Washington related to installation of parking meters elsewhere?

If parking meters are not to be installed in all the areas planned by city staff as a part of the FY 2010 budget plan, then the revenue shortfall needs to be addressed. And part of the strategy for addressing that shortfall is – in cooperation with the Downtown Development Authority – to raise the parking rates to $3/hour at 415 W. Washington,  and to revise the revenue-sharing agreement between the city and the DDA so that the city of Ann Arbor would receive the additional revenue.

Here’s a related comic about parking meters.

Foliage

One resident called councilmembers attention to the fact that along Glazier Way, there was foliage growing so that it obscured sight lines for motorists, creating unsafe conditions for pedestrians. Enforcement of Chapters 40 and 47 in the city code would address those issues, she said. She indicated that she intended to create a website showing who the owner of record was for the offending properties, with links to the Google Streetview locations, reasoning that this might prompt the owners to comply.

HealthMedia got a boost in its nascent stages from a handshake understanding.

If you’ve just described your company as “the coolest damn company in the world,” how do you announce to your 150 employees – 95% of whom are shareholders – that the company has been acquired by Johnson & Johnson? If you’re Ted Dacko, president of HealthMedia, you take advantage of the venue you’ve selected for the mid-afternoon announcement. You’re at a nightclub with an excellent AV system (Live at PJ’s), so you cue up the company movie.

As the fast-paced sequences of still images, synced to the tempo of Angels and Airwaves’ “Heaven,” flickered past the assembled employees’ attentive stares, it seemed pretty clear they’d seen most of it before – except for the final frame: “HealthMedia is now a Johnson & Johnson company.” And that frame drew the applause it was designed for.

For some employees, it was a confirmation of the rumors they’d heard. Dacko tackled head-on the possible uncertainty he thought that some employees might be feeling, emphasizing that this was not a “financial acquisition” for Johnson & Johnson, but rather a “growth acquisition” – meaning that HealthMedia was the first investment Johnson & Johnson was making in a division called the Office of Strategy and Growth. The plan is to grow HealthMedia from a $23 million company to a half billion dollar company.

Dacko said that the plan was to retain all employees and that this was not like two auto companies merging, and then immediately trying to squeeze out various parts, leaving a completely different looking entity going forward. It’s hard to know if the company movie soundtrack was chosen specifically for the final lyric, “Please stay/Don’t go/I’ve got you now/Are you curious?/Please stay,” but it seemed apt given Dacko’s assurance of sticking to the place and people that had brought them this far.

Ted Dacko holding a poster of a cockroach, which recalled some earlier, harder times for HealthMedia, a company like a cockroach - it might be bad off, but you just couldn't kill it.

This was not a guarantee of lifetime employment, Dacko told the assembled group, but they should not go home tonight thinking “Oh crap, I’m going to get laid off.” In describing HealthMedia as now a wholly owned independent subsidiary of Johnson & Johnson, Dacko focused on the “independent” part. He stressed that HealthMedia would keep the same sign on the front of its First Street building, would continue in its same line of business, would retain its company culture, but would go global faster.

In fact, HealthMedia has already entered the global market, with clients in Germany, France, Italy, Ireland, Japan, Australia, and Singapore. But in a sense, HealthMedia’s most important client, which came on board in 2003, was an American company: Johnson & Johnson. They liked the HealthMedia product so much, said Dacko, they decided to buy the company.

What exactly is HealthMedia’s product? Let’s say you’re an employer who’s concerned that your workers are suffering from stress, coronary heart disease, asthma, depression, diabetes or any number of other health conditions that could be partly ameliorated through behavioral modification. What HealthMedia does is offer web-based educational and coaching modules that assist people in a self-directed way to adjust their behaviors for a maximum benefit to their own quality of life.

Say, for example, someone has a health condition that could be addressed in part by walking every day. HealthMedia offers coaching products that work by monitoring walking mileage – with that mileage upload-able from a pedometer directly into the coaching program. Don Turner, director of solution planning for HealthMedia, said of their approach to eating, “it’s not a diet,” and compared it to coaching people as opposed to forbidding them to eat certain foods. So, Turner assured us, “You can still have a cupcake!” Which was good news for anyone within earshot and arm’s reach of the several dozen cupcakes loaded onto tables for the occasion of the announcement. (Based on appearance, the cupcakes looked like they’d come from Cupcake Station.)

Health Media CFO John Ternes, and director of solution planning, Don Turner.

What the employer can expect as a result of workers’ participation in HealthMedia programs are workers who are at work more often and more productive when they are present. Turner explained to The Chronicle that the outcomes measurements for each of the products are made at the beginning of a program (baseline), and then again at 30, 90, and 180 days. Insurance claims data analysis also showed the financial benefit of HealthMedia’s programs, said Turner. Turner said the financial benefit to a company using HealthMedia programs could range from $600 per person per year to thousands of dollars per person per year. HealthMedia CFO John Ternes pointed out that this savings was especially significant given the cost of the products at a few dollars per head.

Asked if HealthMedia itself used its own programs as an employer, Turner said, “Absolutely. We eat in our own kitchen.”

If HealthMedia is a kitchen, then it’s fair to ask, Who’s the chef in that kitchen? Otherwise put, who knew enough about health and behavior modification to cook up the basic concept? That would be Victor Strecher, Professor of Health Behavior and Education at the University of Michigan School of Public Health, who founded HealthMedia some 10 years ago. The company is a University of Michigan spinoff, with the UM retaining some equity as a part of the licensing of the technology – equity which will bring the UM around $1.7 million as a part of HealthMedia’s sale. That licensing was accomplished with the help of Ken Nisbet, executive director of the UM technology transfer office. In acknowledgment of that key role, Nisbet was called to the front of the group by James Epolito, head of the Michigan Economic Development Corp., who was on hand to mark the occasion along with Michael Finney, CEO of SPARK; Cynthia Wilbanks, UM vice president of government relations; Rick Snyder, CEO of the Ann Arbor venture capital firm Ardesta; Roger Fraser, city administrator of Ann Arbor; and John Hieftje, mayor of the city of Ann Arbor.

Victor Strecher and Rick Snyder shake hands, celebrating the acquisition of HealthMedia by Johnson & Johnson.

Snyder was instrumental in providing some early venture capital investment to HealthMedia through Avalon Investments, and continues to serve as chair of SPARK’s executive committee after helping to found the economic development agency. SPARK supported HealthMedia with talent recruitment, marketing outreach and business development.

It wasn’t a smooth ride for Strecher and HealthMedia to acquisition by Johnson & Johnson. In fact, just after the internet bubble burst in 2001, HealthMedia looked nearly dead, missing payroll a few times, borrowing money from its employees. When Strecher took the mic, some hint came of why the company didn’t die. That hint came from the founding story Strecher told, which showed how personally invested he is in this enterprise. It’s rooted in the wait for a heart transplant for his daughter and not knowing what the options were. Sifting through the information, evaluating various studies, Strecher said his father (who was on hand to share in the occasion today) asked him, “Don’t you do this for a living?” The elder Strecher joked that he was not “to blame” for the creation of HealthMedia.

Dacko also gave a lot of credit to Snyder, who said that he’d had a one-hour meeting that grew into a three-hour meeting, at the end of which Snyder and Dacko had a handshake understanding moving forward. There were plenty of other handshakes at today’s event: Eagle-eyed Chronicle readers will have already noticed that the hands shown mid-shake at the top of this story are from a larger photo of Snyder and Strecher just above.

Victor Strecher and Ken Nisbet.

HealthMedia employees await the announcement of their company's acquisition by Johnson & Johnson.

Michael Finney, CEO of SPARK, joked that he tried hard to hit the required dress code, but didn't figure on the T-shirts that the HeathMedia employees were wearing.

HealthMedia offices along First Street between Liberty and Huron. A T-shirted HealthMedia employee heads towards Live at PJ's where the acquisition of HealthMedia by Johnson & Johnson was announced.

Cupcakes served at the announcement of HealthMedia's acquisition by Johnson & Johnson.

A couple of weeks ago, I took another shot at the name change while tottering with Elizabeth Parkinson, who is Managing Director of Marketing and Public Relations for SPARK. Long story short, that’s a name change that’s not going to happen. But we did talk a lot about names on the totter – nicknames, company names, event names. We covered everything from Kentucky Fried Chicken (Elizabeth Parkinson used to work on their account) to SPARK’s Entrepreneur Boot Camp.

Elizabeth seemed open to the possibility of re-naming the Boot Camp to something else. That’s where readers of Teeter Talk and The Chronicle can help. Come up with an alternative name for Boot Camp. Here, I’ll get things started: Entrepreneur Boot Qamp.