The state grant program, which has historically varied in amount from year to year, was enacted to address the fire protection costs incurred by local municipalities that are home to state-owned institutions – like the University of Michigan. State law sets forth a formula to set funding levels for all Michigan municipalities where state-owned facilities are located. But the law also allows the legislature to fund only a percentage of the amount that results from the formula-based calculation.

The council’s March 3 resolution encourages Gov. Rick Snyder, state senator Rebekah Warren (D-District 18), and state representatives Jeff Irwin (D-District 53) and Adam Zemke (D-District 55) to explore creative ways to fund the state’s fire protection grant program for municipalities like Ann Arbor, which host state-owned facilities.

By way of additional background, state-owned institutions like the University of Michigan, located in Ann Arbor, do not generate property tax revenue, which is used to pay for fire protection, among other basic services.

UM does not operate its own fire protection service, but Ann Arbor’s fire station #5 is located on university property, for which the university does not charge rent, utilities, or maintenance costs. UM estimates the annual value of that arrangement to the city at about $230,000.

In general, however, the Michigan legislature recognizes that municipalities hosting state-owned facilities face a burden of providing fire protection for such facilities – without receiving property tax revenues to pay for that fire protection.

So the legislature enacted a law to award fire protection grants from the state of Michigan – which are dependent on an allocation from the state legislature each year. The allocation is governed by Act 289 of 1977. [.pdf of Act 289 of 1977] The statute sets forth a formula for a state fire protection grant to all municipalities that are home to state-owned facilities – a formula that attempts to fairly determine the funding allocated for fire protection grants in any given year. The fire protection grant formula is defined for any municipality in terms of the relative value of the state-owned property in the municipality.

More precisely, the percentage in the grant formula is the estimated state equalized value (SEV) of state-owned facilities, divided by the sum of that estimated value and the actual SEV of the other property in the community. For example, in Ann Arbor, the total SEV of property on which property tax is paid is roughly $5 billion. The estimated value of state-owned facilities (primarily the University of Michigan) is around $1 billion. So the percentage used in the state fire protection formula for Ann Arbor is about 16% [1/(1 + 5)].

The percentage in the formula is different for each municipality. That percentage is then multiplied by the actual expenditures made by a municipality for fire protection in the prior fiscal year.

The formula can be described as equitable among municipalities – because the grant amount depends in part on the relative value of state-owned facilities in a given municipality. All other things being equal, a city with a greater number of state-owned facilities receives more fire protection grant money than one with a small number of state-owned facilities. The formula can also be described as equitable to the state of Michigan, because the formula calibrates the state’s investment in a municipality’s fire protection to the level of funding that a local municipality itself is willing to provide.

The roughly $14.8 million in a provisional budget request from the Ann Arbor fire department for FY 2015 would translate to a state grant of roughly $2.3 million.

But the state statute explicitly provides for the possibility that the legislature can choose not to allocate funds sufficient to cover the amount in the formula [emphasis added]:

141.956 Prorating amount appropriated to each municipality.
Sec. 6. If the amount appropriated in a fiscal year is not sufficient to make the payments required by this act, the director shall prorate the amount appropriated to each municipality.

Since 1996, the legislature has funded the grants at amounts as low as 23% of the formula to as high as 68%. For the five-year period from 2007 through 2011, the legislature funded the same dollar amount of about $10.9 million statewide, but that translated into diminishing percentages over the five-year span. In the last three years, the program has been only 40-55% funded.

State of Michigan Fire Protection Grants: Actual Dollars. (Data from state of Michigan, chart by The Chronicle.)

State of Michigan Fire Protection Grants: Percentage of Formula Funded. (Data from state of Michigan, chart by The Chronicle.)

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]

According to city of Ann Arbor CFO Tom Crawford, the city’s response to the letter would not require any city council action. The city staff would be explaining to the state how the city’s internal financial procedures mitigate against what Crawford characterized as a “minor issue.”

A note in the city’s own audit report called attention to the fact that:

An excess of expenditures over appropriation were reported in the local street nonmajor special revenue fund (final budget of $1,582,562 and actual of $1,623,495); this excess of $40,933 was absorbed by available fund balance. No other expenditures in excess of appropriations were reported.

The city’s local street fund receives Act 51 money from the state and is used primarily for street repair and maintenance.

If expenditures exceed the appropriations for any fund, it violates state statute, and thus triggers a letter from the Department of Treasury. The letter notes the violation and requires the city to file a corrective action plan (CAP) within 30 days. The CAP, according to Crawford, would not require any city council action, and would include an explanation of the city’s internal procedures. Crawford observed in an emailed answer to a Chronicle question that “They note expenses over by $40K but did not note transfers out that were under budget by $60K.”

Terry Stanton, with the state’s treasury department, responded to a Chronicle inquiry with an email that explained how common such letters are:

Letters, such as the one sent to the City of Ann Arbor, are not rare, with approximately 400 sent to local units in 2012 (there are about 1,800 cities, villages, townships and counties in Michigan).

Essentially, the letter acknowledges certain conditions which have been noted in a local unit’s audit report and informs a city (or village, township, county) that it needs to submit a corrective action plan. They are expected to indicate to the department how they plan to fix any deficiencies noted in the audit report.

To help ensure the local unit submits a corrective action plan in a timely fashion, there can be consequences if a plan isn’t submitted. Those consequences are outlined in the letter.

The audit of Ann Arbor’s FY 2013 financial statements was recently reviewed by the city council’s audit committee.

[.pdf of Nov. 22 state of Michigan Dept. of Treasury letter to city of Ann Arbor] [.pdf of final audit report released on Nov. 15, 2013]