Digging Ourselves Into a Hole

This very long and detailed post describes the cloud of factors and actions that link our city’s future finances with the decision to bond for the South Fifth Avenue Underground Parking Structure, and also ties in the possible conference center planned for its surface.  I’ve attempted to aggregate useful documents and links in addition to putting forth a point of view.

Things are looking grim for government in the City of Ann Arbor.  In his presentation to the Council on August 6, 2009, Tom Crawford, the city’s Chief Financial Officer, explained that the city is expected to suffer a severe loss in revenue over the next couple of years.  While the adopted budget for Fiscal Year 2009 (which began in July 2008) calls for $89 million in both revenue and expenditures, Crawford forecasts that by FY 2011 (begins in less than a year from now), the city’s revenue will be only $83 million.  Even with proposed cuts proposed to various programs, the city’s expenditures will be greater than its revenues.  As Crawford said, this means “significant” cuts in services.  The city administration has a suggestion: institute a city income tax.  In an interview  at a working session on August 13 (broadcast over WEMU), City Administrator Roger Fraser said that the city “owes it to the community to decide if they want a continued reduction in services or a new tax”.  But Council is apparently stepping back from the brink for the moment, as they did not appear favorable to putting an income tax measure on next Monday’s agenda; according to the Ann Arbor Chronicle, that means the tax will not be on the November ballot.

Unfortunately, the community also did not get to decide whether to drain the city’s fund balance to build a new city hall.  That was last year’s debate, however, and one we’ll revisit some other day.  But there is another of what Crawford referred to as investments in capital and special projects “for the city’s future” on the table: the underground parking garage at South Fifth Avenue, under what we have always liked to call the Library Lot.  The bonds have been sold and are due to be finalized on Wednesday (August 19). Beginning in 2013, the city must pay out $3 million per year to service these bonds, going up to $3.5 million by 2035 (its last year). That’s about 4% of the total current city budget. Will there be a last-minute save or will we continue with this $55 million project in the face of our collapsing city finances?

Recent decisions affecting the fate of the Library Lot

It began with the Ann Arbor District Library. Beginning in 2006, the AADL board had engaged in a long planning process, including a lot of public participation, to renovate and expand its aging downtown library.  But in November 2008, the board voted to suspend those plans.  The board had hoped to put a millage on the ballot to pay for the expansion, and then withdrew that idea in acknowledgment of the worsening economy.  In April 2009, the board moved further to reduce the millage rate being charged – which also meant that no more money went into its capital improvement account.  It appears that the construction plans will stay on that shelf for the foreseeable future.

Unfortunately, the city has not proved to be that nimble. It has continued on its trajectory for the parking garage that was originally initiated in conjunction with the Library’s plans.  In September 2007, the Downtown Development Authority Board voted to support the Ann Arbor District Library in its expansion plans. After the Council requested assistance in planning for an underground structure in November 2007, the DDA hired some of the same players as those on the design team for the AADL, and in September 2008 approved a plan to build and fund an underground parking garage.

Happy supporters: DDA members Leah Gunn and Roger Hewitt with CM Margie Teall and Leigh Greden (photo Ann Arbor Chronicle)

Happy supporters: DDA members Leah Gunn and Roger Hewitt with CM Margie Teall and Leigh Greden (photo Ann Arbor Chronicle)

You’d have thought that the library’s change in plans would have given the Council pause, since much of the design of the underground structure was integrated with the library and derived from the library’s plans.  And indeed, we now know from the infamous council emails that there was some discussion of postponing the vote. But in February 2009, Council voted to approve the issuance of  bonds for the South Fifth Avenue Underground Parking Structure. As reported by the Ann Arbor Chronicle, councilmembers spoke to their reasons for supporting the structure, even as several members of the public (including Steve Bean, the chair of the Environmental Commission) spoke against it.  But in the end, only CM Mike Anglin cast a lonely vote against it.  (CM Carsten Hohnke successfully offered an amendment that deleted the portion of the garage extending beneath 5th Avenue from the proposal.)

Free for You and Me?

One of the justifications for going ahead with the construction at this time is often repeated by the Mayor – that parking fees are supposed to pay for it. As the background to the resolution states,

“The cost of construction is being funded 15% by Downtown Development Authority reserves and 85% by bond proceeds. Debt service on the Bonds is expected to be paid from revenues of the City’s public parking system and tax increment revenues collected by the Downtown Development Authority. “

CFO Crawford reinforced this view in an email that was posted on a listserv:

“Although the City’s General Fund guarantees the parking deck debt which was issued, there are no contributions from the General Fund expected for this project.  Since the DDA is a separate legal entity and has the primary responsibility for managing the downtown parking system, it is committing its resources to repay the debt.  The DDA operates with a rolling ten year financial plan which incorporates meeting this commitment.  While the new deck itself may lose money for a number of years (emphasis added) the existing decks can contribute to covering the debt expense. The DDA can rely on the parking system as a whole for payment, reduce the size of the waiting list for monthly parking permits, market to the University (which the DDA hasn’t traditionally done), and tap other DDA financial resources.  All of these avenues are available so the City’s guarantee is not requested.”

But there are two problems with this nifty plan. 

First, the City really is on the hook. The bond description has some very explicit language (see p. 5):

“The City has pledged its limited tax full faith and credit as additional security for payment of principal of and interest on the bonds as a first budget obligation from its general funds, including the collection of any ad valorem taxes which the City is authorized to levy, but any such levy shall be subject to applicable constitutional, charter and statutory tax rate limitations.”

Translation: to pay the bondholders, the City must put these payments as a top priority (ahead of other budget priorities), even if it means levying more taxes, as long as it can legally levy those taxes.

Second: There are some very broad assumptions made in asserting that the DDA will actually be able to make these payments through 2035, especially based on parking revenue alone.

1. The parking system has enough profitability to assume this additional expense. 

According to the DDA’s 2010-2011 budget (recall that FY 2010 began in July 2009),the parking system generated $11 million of income after expenses – but once capital costs are subtracted, the balance is only about $2.3 million.  Take out the $2 million contingency amount, and the budgeted parking fund balance for the year (correcting for rounding errors) is only $194,757.  I assume that the bond payment for the 5th Avenue structure is already factored in, but for 2010 that is only $1.25 million and it will rise to $3.5 million in a few years.

2. The City will not continue to draw on the DDA for supplements to the General Fund.

The City has been drawing down the parking fund at the rate of $2 million a year for the last 5 years and negotiations appear somewhat stalled over whether these payments will continue.  But that amount became a regular and expected supplement to the General Fund budget that is now shown as a question mark on the August 6 budget presentation.  The DDA was also tapped to help pay for the new city hall.  I assume that amount is included in the $2,293,605 budgeted for fund transfers.  With these transfers, the DDA all-funds budget for the coming year is at a $3 million deficit and worse, shows a declining balance, beginning the year with $12 million and ending with about $8.5 million.

3. Parking rates can go up indefinitely as needed.

If the current system is not profitable enough, perhaps parking rate increases could shoulder the additional burden. The DDA passed a schedule of parking rate increases in their November 2008 meeting:

ParkingRates

They have also been moving toward a demand-based parking meter system, in which more desirable areas could presumably cost a premium for parkers.  But parking behavior is thought to be elastic; the DDA makes that assumption in setting different rates in order to influence parking demand.  How many rate increases will the system bear? And even with these already-passed rate increases, how long before downtown merchants are affected by loss of customers because of the cost of parking?  As I explained in an article some years ago, there is a strong link between ease of parking and retail traffic flow.

4. As mentioned by CFO Crawford in the quote above, the DDA could also draw on its TIF (tax-increment) funds.  These are property taxes captured from new construction and improvements within the DDA district; not only city taxes, but the county, library, community college and so on – and even special millages like Solid Waste and the Greenbelt.  Traditionally the DDA has kept TIF funds separate from the parking fund and used them for projects to improve the downtown, and for certain grants.

The DDA’s projected increases in TIF revenues have been hit by two factors: the drop in property values due to the economic crisis and the delay or cancellation of many anticipated projects that would have produced new tax revenue.  (Projects do not pay TIF until they have received a certificate of occupancy.)  The most recent budget showed a deficit of $761,124 for the year when expenses were subtracted from TIF income.

While it is true that schedules projecting the ability of the DDA to make the bond payments have been drawn up and incorporated into reports that supported this project, they appear to have used the best-case, if-only-everything-goes-as-expected scenario that has tripped up many institutions in our country in the last two years.  If we have learned anything from the national, state, county and city budget problems, it should be the value of expecting the unexpected, of planning for complexity, not predictability.

Conclusion: it is reasonable, or even necessary, to expect that the DDA will not be able to make the bond payments indefinitely; unless economic conditions change rapidly, they may fall short in the near future or be unable to meet their other commitments.

Further, if the parking system does generate additional revenue, the city may need it to keep the General Fund solvent.  This is not a time to assign a reliable stream of revenue so that it cannot be redirected.

Parking , development, and the conference center connection

While the immediate impetus for planning the 5th Avenue underground parking structure may have been the AADL expansion plans, other motivations soon surfaced.  There were many supporters at the February meeting, including people who wanted more parking for downtown customers (Leigh Greden is quoted by the Chronicle as saying “If you vote against this garage, you’re voting against our locally, independently-owned businesses”).  Some people liked the idea of underground parking and hoped it might lead to fewer above-ground structures.  Former CM Joan Lowenstein said downtown residents needed more parking.  Others, like Newcombe Clark (now on the DDA board but also representing several business associations) spoke of the need for employee parking so that businesses will locate downtown.  But perhaps the most potent motivation was voiced earlier by DDA Director Susan Pollay in a 2008 memo to Council: the parking is needed to support development in the midtown area.

As reported here earlier, parking has been used as a form of business subsidy.  Even just the ability to reserve spaces, as McKinley has done in Liberty Square via a long-term agreement with the city, is a potent business asset.  According to calculations I did some years ago, monthly permits do not pay the full cost of providing spaces in new structures, and underground spaces are even more expensive.  Pollay’s report specifically calls out the McKinley Liberty Street development as deserving of support: “Additional nearby parking would support this private development investment by making it possible to attract top quality tenants.” The report also mentions the value of the old Y site for potential development and concludes by recommending support columns adequate to support a 25 story building.

The temperature surely rose when the concept of the conference center atop the site entered into open discussion.  Then in July CM Smith successfully proposed that Council should ask the administrator to prepare an RFP for a structure on the site. At the time, we suggested that the plan for a conference center underlaid the effort.  That RFP has now been released. (BIG FILE) It is remarkable for its brevity.  Most of the document is devoted either to an overview of the City of Ann Arbor (reading much as though the city is making an application, not calling for them) and technical details about the site. (The site plan still reflects the AADL planned changes.) There is little to indicate why the City would engage in a potentially costly and difficult negotiation at this time. Here are the specifications for the project in their entirety:

Site Development Objectives

A successful proposal must address all of the following site development objectives:

1. Beneficial use of the site. Any proposal for this site must demonstrate a clear benefit to the community and be consistent with the recommendations of the Downtown Plan, and A2D2 initiative. Preference will be given to proposals that incorporate a use (or uses) that provides a publicly available service to the community, for instance, building or open space that may be used for public meetings, recreation, or civic/ cultural events.

2. Environmental benefits. The development proposal should incorporate to the greatest extent possible environmentally sensitive design and energy efficiency features that follow Leadership in Energy and Environmental Design (LEED) standards. In addition,the project should propose innovative and environmentally friendly runoff water management and seek to improve water quality.

3. Financial return. The proposal must provide a positive financial return to the City. In the absence of other considerations, the City has a fiduciary responsibility to obtain fair market value upon the sale of City assets. Long-term lease or other property arrangements will be considered, but must meet this financial return criterion.

Because the Council lengthened the timeline somewhat in July, proposal deadlines call for the proposals to be submitted by November 13, with a final decision by Council in January, time for work to be coordinated with the scheduled parking structure construction.

Conclusion:The potential public benefits for this very substantial investment to the city (the parking structure) seem vague, while its importance as support for downtown development, possibly with already understood actors, seems concrete.

That pesky lawsuit: Decision time

In May, the Ann Arbor Chronicle reported that the city had received a letter from Noah Hall, Executive Director of the Great Lakes Environmental Law Center, indicating that the city was at some risk of a lawsuit over the environmental impacts of the proposed parking structure. (Hall is married to Jennifer Santi Hall, a past planning commissioner and current DDA board member.)  Little seemed to happen as a consequence of the letter, though Dave Askins, the editor of the Ann Arbor Chronicle speculated that a July decision by Council to designate the current First and William city parking lot as a target for preservation as open space might be related to the lawsuit.  The hastily drafted resolution is more of a statement of intent than a binding decision, since it leaves any actual change in the status of the lot (one of the city-owned “greenway” sites) in a misty future.  But it could be said to reduce the parking spaces available in the city, thus undercutting the principal basis for the suit (increase in vehicles and the concommitant air pollution).

But along with the letter was the news that Hall had requested copies, through the Freedom of Information Act, of council emails during the period when the structure was being considered.  This has caused considerable reverberations.  As explained in a recent Chronicle article, it has also been the basis for additional complaints in the late-arriving lawsuit.  The Great Lakes Environmental Law Center lawsuit, filed on August 11, specifically cites Open Meetings Act and FOIA violations by the city in addition to the environmental violations and nuisance charges by two additional plaintiffs.  It causes a complication because the bond counsel (Dykema) must certify the following:   “The City has no litigation pending or threatened which would have any material effect on the City’s finances or its ability to pay principal of and interest on the Bonds.”

That may be difficult to certify.  The complaint (to this non-lawyer’s eyes) seems very solid with regard to the “nuisance” and “trespass” claims from Herb David Guitar Studio and Jerusalem Garden.  They argue convincingly that their businesses and property would suffer harm from the construction period.  With regard to the environmental complaints, the complaint points to the city’s lack of adherence to its own stated policies on parking, based on the Nelson-Nygaard study commissioned by the Council, and its ignoring the pleas of the chair of the Environmental Commission (Steve Bean) for a consideration of the environmental impact before approving the project.  The OMA and FOIA complaints are also damning.

So what happens now?  Will the city still attempt to take possession of the money from sale of the bonds with the litigation pending?  If the court awards the plaintiffs an injunction that halts the project and the bond money has to be paid back, the city could suffer a penalty.  That certainly wouldn’t help our finances. Council could still act at its meeting on August 17 to halt the closing on August 19.  But is there leadership and nerve enough on council to make a last-minute decision of this nature? And will the judge (Judge Archie Brown) issue an injunction before the bond proceeds are collected on August 19? Or will the worst happen, with the city pushing ahead and then suffering the consequences – resulting in an even more dire financial situation?

I’m thinking of the plaintiffs as the guys with the white hats, riding in to save us from ourselves at the last minute.  I hope it works.

UPDATE:  The lawsuit didn’t stop the bond transaction from being finalized and plans for excavation are continuing. Meanwhile, local developers have expressed a lack of interest in responding to the RFP.  The comments on the AnnArbor.com story are interesting; they discuss the whole recent history of downtown development.

SECOND UPDATE: The lawsuit has now been settled (as of March 2010) – see the AnnArbor.com story. Construction is well underway.

THIRD UPDATE: The Ann Arbor Chronicle now has an exhaustive report on the settlement.  Was anything really accomplished?  It doesn’t look like much from here.

FOURTH UPDATE: Noah Hall of the Great Lakes Environmental Law Center has a discussion on his blog of the settlement and what they believe they have accomplished.

FIFTH UPDATE: For updated information on this subject, check the Library Lot Conference Center page, where all related articles are linked.

Explore posts in the same categories: civic finance

2 Comments on “Digging Ourselves Into a Hole”

  1. Noah Hall Says:

    For a detailed account of the Great Lakes Environmental Law Center’s work on this issue, including links to many of the original documents referenced in our complaint, see my August 16 blog post at http://www.greatlakeslaw.org/blog/.

  2. Karen Sidney Says:

    One has to wonder what is driving the decision to build a money losing parking structure that the city’s CFO says will be marketed to U of M students and staff. City management staff and most council members complain that the U of M does not pay city taxes and now this same group is asking Ann Arbor residents to subsidize a parking structure for the U while our roads, bridges and sewers are crumbling.


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