Archive for February 2011

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Parking and the Limits of Downtown

February 25, 2011

Downtown Ann Arbor is the subtext for many of the intense debates about our city’s future.  In part this is because of its role in defining both the image and the life of the city.  In part it is because of its proximity to the main University of Michigan campus and the strong student presence that results.  And in part it is because there is money to made by exploiting the very concept of Downtown.

This has meant that much recent conflict has been over the attempt to expand the limits of downtown, both in concept and in real ways, like denser development outside downtown’s currently planned borders (which are essentially the Downtown Development Authority’s district border).  Thus the debate over Heritage Row (proposed for a residential neighborhood in a near-downtown area) has had many online commenters calling that area downtown.  A similar effect has been seen with the Near North development, where several houses in a near-downtown residential neighborhood are to be razed, with a substantial contribution from the DDA (though the location is outside their district).  Many people, especially those in their 20s and 30s, who would like to find decent, affordable (in the general sense) housing near the downtown and campus, have been resentful at what they see as an artificial distinction, while near-downtown residents feel embattled (see our early post on these two neighborhoods).

Downtown, the experience of life or leisure there, and its cachet are a limited resource that we are trying to sort out among ourselves.  It is partly a realm of the imagination and it is also a sum of gritty decisions and choices.  Some of the most difficult of these involve parking. Whether a visitor, a downtown worker, or a resident, we all want easy access to downtown and easy walkability to our destination.  That is one reason that near-downtown neighborhoods are so appealing; one can simply walk downtown.

The DDA has been managing parking in the downtown since the early 1990s, and doing a very fine job of it, too.  (See discussion of parking on the DDA website.)   Unfortunately, this has also led the DDA into a thorny thicket where many competing interests are vying for this precious resource.  It also has led to demands from the City Council for a big share of the parking revenue (as reported by the Ann Arbor Chronicle).

This week’s DDA committee meetings had several examples of the interaction of downtown’s future and the parking question.  Its Economic Development and Communication committee hosted Mary Kerr, President of the Ann Arbor Convention and Visitor’s Bureau and Jennifer Owens,  Vice President of Business Development, SPARK.  The committee is trying to establish the DDA’s place in the local ecosystem for marketing Ann Arbor and especially its downtown.  Their question to both could be paraphrased as: how do you see the importance of the downtown in your work, and what should happen to make the downtown even more attractive from an economic development standpoint?

Kerr’s answer was that tourists and conventioneers love Ann Arbor’s downtown, and it forms an important part of their impression of the community.  (She repeated this several times, with variations.)  But she mentioned that they would like to be able to walk from their hotel into the downtown (currently most hotels are at the outskirts).    She said that parking was not a complaint for most.  Yet clearly from her comments, the easy access to downtown was an important part of the experience.

Owens, on the other hand, said that parking was a major impediment to having businesses locate downtown.  Potential business owners are frustrated with the lack of easily accessible parking spots.  They expect to pay for them, of course, but those monthly permits (generally awarded on an annual basis; there is a waiting list for most structures) are hard to come by.

As I explained in a 2006 article published by the Ann Arbor Observer,  parking permits do not really pay their freight.  The charges for these permits are supported by hourly parkers, and by the growth in the system, which is nearly nil.  (As we explained in a recent post, the costly payments for the roughly $50 million underground parking structure near the library are now being picked up by the tax increment financing; an indication that the parking system is no longer paying for itself.)  The DDA has tried over the years to minimize the number of downtown workers actually demanding downtown parking. It has been a leader in promoting “alternative” [i.e., nonauto] transportation to and around the downtown and  is now the main supporter of getDowntown, which provides almost free bus passes and promotes bicycling and walking.

But Owens was very clear that the high-tech companies who SPARK is wooing  wanted parking, not mass transit.  “These are people who earn very high incomes.  They are not going to take the bus.”  Her message to DDA was simple.  If you want to bring more businesses downtown, it is parking, parking, parking.

An example was cited by DDA’s executive director Susan Pollay.  She noted some complaints about parking from a recently relocated business. MyBuys, which was at 101 North Main Street, has now expanded and leased the former Kinko’s space (as reported by AnnArbor.com) on East Liberty. MyBuys (which is now employing DDA board member Newcombe Clark), was lured to Michigan by a $3.9 million tax credit from the Michigan Economic Development Corporation and some local assistance from the City of Ann Arbor and SPARK.  Apparently many of their employees are relatively low-income and can’t afford to pay a lot for parking.  But in their old location, they were near enough residential neighborhoods that they could park there and walk to work.  Now they are in what is probably the most heavily parking-impacted area in the city, State Street.  The Liberty Plaza parking structure is already wholly parking permits (mostly commanded by McKinley) and Maynard often fills up in high-demand times. They are boxed in by the UM campus and nearby residential streets are already highly impacted.  MyBuys is complaining about the lack of parking for employees, and as Pollay said, she gets the message that it should be free.  (They are doubtless casting an envious eye on the deal given to Google, which got city-subsidized parking from the General Fund; see this discussion.)

So in a sense, what defines downtown is: anywhere within walking distance, especially if you can leave your car there.  At the DDA’s Bricks and Money committee meeting, staff member Amber Miller presented her parking district study that would, in its broadest application, put anywhere in Ann Arbor that is within walking distance under the “parking management” of the DDA.  Miller, who is a recent graduate of the UM urban planning program, argued hard for her more expansive view (see the explanation and excellent graphics by the Ann Arbor Chronicle).  This would draw a 3,300 foot “buffer” around the downtown, reaching far into residential neighborhoods.  (I was startled to see that my house, 2 miles from State Street and thus just walkable, was just inside the boundary.)  In her concept, all of this area was possible parking for downtown and thus a reasonable area for the DDA to manage.

From the committee packet; click for larger image

Miller also called out streets (not visible in this reproduction but called out in the Chronicle’s account, and colored purple in the projection shown at the meeting) that qualified under more restrictive criteria, including a nonresidential use for some parcels and not eligible for the Residential Parking Permit program.  Committee members were reluctant to endorse the more expansive boundary, or even all the more distant and more obviously residential streets that qualified under the more restrictive guidelines.  Roger Hewitt warned of a political firestorm. He said that putting streets like Sunset Road, for example, under the DDA management, would cause political problems that wouldn’t be warranted.  The consensus of the committee seemed to be to offer to manage the “purple streets”, but maybe not even all of them. Miller, chagrined, pointed out that “land uses might change” (striking fear in this neighborhood advocate’s heart), but wiser heads apparently prevailed.  Pollay also hastened to point out that the DDA would not necessarily plan to put parking meters on all streets under its management.

Regardless of the outcome of this immediate plan, it is clear that not just the neighborhoods immediately adjacent to downtown but also all those within any reasonable walking distance are not being regarded as excluded by all those plan boundaries (Downtown Plan, Calthorpe Plan, etc.) but are gradually being withdrawn into the economic entity that is Ann Arbor’s Downtown.  There will be many more debates to come.

Postscript:  Owens told an amusing story about bringing representatives from a Santa Barbara company to Ann Arbor in July.  They were charmed.  Wonder how much parking opportunity will be necessary to retain that charm during Ann Arbor’s winter?

Categories: Business, Neighborhoods

Comments: 7 Comments

Ann Arbor Conference Center: An Authoritative Study

February 19, 2011

Throughout our long discourse on the possibility of a conference center on the Ann Arbor Library Lot,  we have been pointing out the need for an authoritative description of the likely success and economic effect of such a facility.  (And we attempted to gather as much information as possible in a series on economics of an Ann Arbor conference center.)  When a report was released from the consultant (The Roxbury Group) hired by the City of Ann Arbor with money allocated by the Downtown Development Authority, we pointed out the deficiencies in that report.  In recommending the proposal by Valiant Partners LLC, they performed the amazing gymnastic feat of declaring that the scheme must be financially viable because the development team proposing it said that it was.  Thus the thing proves itself.  But if the “Balance Sheet” for this project is to be believable, an analysis and current report on the market and likely outcomes is needed.

Now, by one of those extraordinary events that it was impossible to predict, one of the most authoritative national voices in the area of hotel and conference center economics has provided City Council with a masterful report on the feasibility of such a facility in his home town.  Charles “Chuck” Skelton, who has been mentioned in earlier posts, dropped off a report to Council (dated November 10, 2010 but distributed on January 25, 2011) with a nice cover letter.

We are providing a  scanned copy of the report, which does not do justice to the color illustrations. It is an in-depth study, using data from many sources, specifically aimed at a facility on the Ann Arbor Library Lot.  It does not discuss specific proposals at any length, though there are several mentions, directly or indirectly, of the Valiant proposal, like this one:

“We understand that one of the current proposals is for a conference center of approximately 25,000 to 32,000 square feet in conjunction with a hotel and restaurant.”  (This is a description of the Valiant proposal.)

Here are the areas considered, as listed in the introduction:

  • An analysis of economic and demographic data representative of the area such as population, employment, retail sales, household income and traffic, to determine the health of the market area pertaining to such a facility.
  • An investigation of the meeting industry on a local and regional scale to determine conference and meeting trends in terms of market sources, size, utilization characteristics, duration, purpose, format, frequency, and services required. This also included an evaluation of the preferences of the market with regard to extent, size and nature of meeting facilities, lodging accommodations and amenity packages. Demand for such additional services such as availability of audio/visual equipment and operators, graphics and ancillary presentation aids, and conference planning has also been considered.
  • An evaluation of comparable regional properties in terms of rate structure, size, and scope of facilities and services, utilization characteristics and degree of success in the market, types and styles of events and groups attracted and trends in general.
  • An analysis of utilization trends in the region to include utilization, market impact and revenue potential and what that might mean for a facility in downtown Ann Arbor.

The conclusion of the report is that the plan is not feasible.  “…we calculated the estimated profit or loss after debt service, which shows there will be a substantial annual shortfall both before and after debt service. Our estimated shortfall is approximately ($1,105,000). Our research concludes that a conference center, whether it is 25,000 square feet or 32,000 square feet, will fall far short of meeting debt service.”  It also criticizes the modest size of the conference center, saying that it “would not attract or create significant new business unless it was more than twice the size of the proposed conference center.”  Later, after surveying all the conference facilities already available in the area, the report states, “In order to open new markets, a significantly larger facility of at least 60,000 square feet would be necessary, and given downtown development costs and market trends, this undertaking would be a high-risk real estate venture”.

The study includes a long parade of  “comparable” facilities in other cities, especially those near Ann Arbor.  The news has been unremittingly bad and none of them appear to have broken even in recent years.   The beautiful facility in Madison, Wisconsin caught my eye:  (quoting)

Monona Terrace was inspired by Frank Lloyd Wright and faces out on Lake Monona. The subject is also located in a state capital with a downtown location and captures most of the state-oriented business although it is down significantly. However, in 2008, Monona Terrace experienced a $4.5 million loss before debt service. In 2009, it lost $4.57 million before debt service.

Note that is before debt service, i.e. bond or mortgage payments.

The Seagate Center in Toledo, Ohio is (as proposed for Ann Arbor) a 501(c)3 facility, “part of the entertainment district in downtown Toledo…in 2008 (it) lost 2.3 million dollars before debt service. In 2009, it lost 1.67 million dollars before debt service.”

In addition to reviewing comparable conference facilities, the report uses these in estimating both costs and revenues for the proposed Valiant facility, and it also even estimates construction/development costs.  It “pencils out” every possible consideration.  It also lists all the hotel – conference opportunities in Ann Arbor and discusses the national as well as local hotel and conference market over the last several years.  It enumerates the trends in loss of conference traffic in general over the last several years.   It points out the many conference facilities available at the University of Michigan itself, some marketed to the public.  It mentions the possibility that the former Pfizer facility is being readied for conference business.

In short, this is a devastatingly thorough demonstration that the Ann Arbor Library Lot Conference Center idea (and both by reference and by implication, the Valiant proposal) is a money-loser.

I recommend that you read it for yourself.

Note: Hospitality Advisors Consulting Group, Mr. Skelton’s firm, has a very impressive client list.  Here are the qualifications given in the report.

Categories: Business, civic finance

Comments: 4 Comments

Library Lot Forecast: Cloudy

February 18, 2011

As we recently reviewed, the RFP Advisory Committee met without fanfare on November 23, 2010 to hear a presentation from the consultant, David Di Rita of the Roxbury Group.  (The Roxbury report is available on the city RFP web page.)  After a fair amount of scrambling, notes from that meeting were finally posted on the web page as well.

The notes indicated that only three committee members were present: Chair Stephen Rapundalo, Councilmember Margie Teall, and DDA member John Splitt.  City administrator Roger Fraser was also present.  The notes indicate that Susan Pollay, executive director of the Ann Arbor DDA, was present, but apparently she was actually out of town.

Here is what transpired, according to the notes:

Mr. Di Rita proposed that the next steps include finalizing the Report and developing a draft Memo of Under-standing with Valiant that could serve as the basis for further discussions and negotiations between the City and Valiant over issues like site planning and financials.

J. Splitt moved that the Committee accept the Consultant’s Report and direct staff to work with Valiant on a letter of intent that could be presented to Council, along with the recommendation of the advisory committee. Motion was seconded by M. Teall. Splitt, Teall and Rapundalo voted in the affirmative. Motion passed unanimously.

Actions Taken: 1. Acceptance of Consultant’s Report 2. Directed staff and Consultant to draft a Letter of Intent or Memo of Understanding between the City of Ann Arbor and Valiant for review by the Advisory Committee and City Council.

Recently, a member of a DDA committee asked Susan Pollay what the progress with the Library Lot project was.  She replied that a letter of intent was being developed and would be on the City Council agenda in a few weeks.  After an inquiry from me to CM Rapundalo, a meeting of the RFP Advisory Committee appeared on the web page.  (The meeting is 9:00 a.m., March 3, 2011, 4th Floor, City Hall.)

But what about that letter of intent, or memorandum of understanding?

Considering the difficulty we had in obtaining information about the earlier meeting, I sent a Freedom of Information Act request to the City on January 27.  It requested, in part:

  • Administrative emails and memos tasking staff to prepare documents based on votes taken at that meeting. Specifically, emails and memos directing staff to prepare or participate in a letter of intent or memorandum of understanding with Valiant Partners, LLC. “Administrative” should include any city staff delegated to manage this task, as well as City Administrator Fraser. Emails and memos from the Chair of that committee, Councilman Stephen Rapundalo in re preparation of documents based on votes taken at that meeting are also requested.
  • Correspondence dating after November 23, 2010 with the consultant, The Roxbury Group (cf. RFP #758) regarding a letter of intent (with respect to RFP 743) or memorandum of understanding, and the preparation by or participation by the consultant in negotiations with Valiant Partners LLC.
  • Documents prepared by The Roxbury Group and transmitted to the City after November 23, 2010. The report, “LIBRARY LOT PROPOSALS – RFP #743 REPORT AND RECOMMENDATIONS TO THE CITY OF ANN ARBOR” and its appendices (attachments) are specifically *excluded* from this request.
  • Any letter of intent or memorandum of understanding between the City and Valiant Partners LLC. If a final, approved version of such a letter or memorandum is not available, please supply the most recent draft version. This request specifically *excludes* the draft form Letter of Intent supplied by The Roxbury Group as Attachment C of their report dated November 23, 2010.

The City opted to add a 10-day extension to the 5 days in which they are ordinarily supposed to respond to a FOIA “because of the time needed to process your request”.

The much-anticipated response finally arrived on February 17, 2011.  It was simply this:

Your request for records related to the November 23, 2010 Advisory Committee meeting held regarding RFP 743 is denied, as the City does not possess any records that respond to your request.

NONE?  Are we to assume that the consultant walked away with a verbal commitment from the committee and nothing else?  No directives, no discussion?  Or maybe he simply hasn’t gotten started with the work?

RFP advisory committee meetings are not bound entirely by the Open Meetings Act, but the product should be available to see what the Council will be asked to respond to.  I hope that it is not intended that this will be landed on their agenda for March 7, without any chance for the public to see what entanglements with Valiant are being proposed.

Categories: Business, civic finance

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Ann Arbor’s Budget: The Case for a City Income Tax III

February 17, 2011

Soundbite conclusions, misleading comparisons, and poorly explained statistics.

Cities in Michigan face limitations for revenue (taxation).  As we’ve discussed in previous posts, the City of Ann Arbor relies mostly on the property tax. We are advocating that the voters should be allowed to consider substituting an income tax (collected from a broader base, namely all income earned in the city) for part of the property tax. This would mean that the general operating millage, which in 2010 was 6.1682 mills, would be eliminated.  Ann Arbor residents would still pay all other current property taxes.  This would mean a higher rate of revenue for the city and avoid some really nasty budget decisions.  (See the current discouraging article from the Ann Arbor Chronicle.)

AnnArbor.com has been publishing stories on this issue.  The most recent discussed the possibility of a local sales tax.  But as we have explained, that is contrary to current state law.  Anyone care to place a bet on the Michigan Legislature making that particular change this year or anytime soon?  So despite local legislators promising to put it on the table, Mayor Hieftje’s expressed preference for it is wishful thinking.  Council (or anyone else) should not allow themselves to be distracted by this fanciful possibility.  (As an aside, it is not clear how a local sales tax would interact with the Headlee restriction on total tax capture;  it might actually require a constitutional amendment.)

Misleading comparisons lead to overstated conclusions.

Earlier, AnnArbor.com had two companion stories based on a  “Memorandum” from the Citizens’ Research Council on local-option city income taxes in Michigan.   Much of that CRC report is a summary rather than an analysis.  It is an overview of cities in Michigan that have local income taxes.  (Ann Arbor itself is not mentioned in the report.) But AnnArbor.com’s main story appears to draw the conclusion from the study that income tax wouldn’t work for a city like Ann Arbor.  Again, Mayor Hieftje is quoted as saying that it “reaffirms his thinking that a city income tax may not be the right move for Ann Arbor”.  Yet that conclusion is not justified by the report or the facts.

Aside: Mayor Hieftje has now stated that he is hoping to “make it through the recession without a tax increase”.  What is his plan, exactly?

The main argument against an income tax is made in a story with a misleading headline, “City income tax revenues can be volatile, unreliable during recession, Grand Rapids shows“.

Comparison of Grand Rapids and Ann Arbor taxes. Reprinted with permission of AnnArbor.com

But the information in the graph that relates to Ann Arbor is misleading. Let us refer to the authoritative source of information about Ann Arbor City’s finances, the Comprehensive Annual Financial Report (CAFR).  The numbers used for Ann Arbor are difficult to reconcile with the figures in these reports, but it appears that in the last few years the numbers are Total Revenues, not property tax collections.  As the attached spreadsheet shows,  property tax collections for FY 2008, FY2009, and FY 2010 were flat, at about $70 million each year.  The higher number (about $80 million) includes Michigan state shared revenue.

Notes to the spreadsheet:

  • Figures do not include other sources of revenue, like fees, interest on bank deposits, sale of property, etc.
  • Figures are from Basic Financial Services section under “General Revenues” and include property tax for debt retirement purposes but do not include “Business-type Activities”, which are enterprise funds.  Instead, they are “Governmental Activities”.

The conclusions drawn also fail to consider implications of the time context.

The AnnArbor.com graph refers to “2010” as its last data point.  But assuming that the Grand Rapids figures are correct and that they and the Ann Arbor data are both referring to Fiscal Year 2010 (though the Grand Rapids CAFR for that year shows a slightly higher figure), we should remember that FY 2010 ended June 30, 2010.  The income tax figures thus would reflect tax collected on income made in 2009.  But Ann Arbor’s FY 2010 property tax collection is based on taxable value from 2008 assessments.

This time-frame shift is important in making this comparison.  First, the Grand Rapids numbers date from the most severe year of the recession, and before the voter-approved increase from 1.3% to 1.5% (which took place July 1, 2010).  But Ann Arbor’s property tax figures do not reflect either the worst of the bursting of the housing bubble or loss of the Pfizer property tax with the sale of that property to the UM.

Thus, the comparison is highly misleading and overstates the stability of Ann Arbor’s property tax vs. the Grand Rapids example.

Ann Arbor’s Property Tax History (CAFR)

The graph above shows the taxable property valuations and the property tax collected over most of the last decade, based on figures from the CAFR.  Note that while property tax is collected in a given Fiscal Year, it is based on valuation from a calendar year two years earlier.  (The dip in property tax collection early in the decade was because Council reduced the millage rate below what was allowed.)  This shows that the trend in valuation had dropped and tax collection had flattened even before loss of the Pfizer property (December 2010) is accounted for .

Improper comparisons with other Michigan cities

The headline for the other story was, “New report says city income taxes work best in smaller cities, are less reliable than property taxes.”  But this is not an accurate summary of the report.  What the report did was to lump a number of Michigan cities into categories and compare the performance of income taxes for cities within each category against statewide figures for property tax and state income tax.  Notably, the period considered was from 1996 to 2009. (AnnArbor.com reproduced both a graph and a table comparing cities from the report.)

  • Over this period, city property tax collection over the entire state increased steadily.  But is this a surprise?  We knew that the housing bubble and the real estate bubble in general lifted all boats through most of the last decade.  (Note, as we have explained, there is a two-year delay in translation of property values to tax collected, hence the 2009 figures in the report likely reflect a 2007 property valuation, before the big crash.)
  • Over the same period,  the total income tax collected for all Michigan cities that impose them sank steadily.  Again, no surprise.  Michigan has been losing jobs for most of the last decade.  But this result was partly because it largely reflected Detroit’s tax collection. As the report says, “Detroit income tax revenues have constituted about 60 percent of all city income tax revenues over the past decade”.  And Detroit has, of course, been bleeding residents as well as manufacturing jobs.  So the statewide city income tax collection looks very poor because it is actually a statement about Detroit’s economy, not about smaller cities.
  • There were three categories of cities shown separately: “Larger Core” cities such as Grand Rapids, Battle Creek, and Lansing; “Smaller Core” cities like Albion, Hudson, and Port Huron; and “Suburban” cities like Hamtramck, Highland Park and Pontiac, which were actually near large manufacturing core cities, especially Detroit.   Both Larger Core and Smaller Core cities actually did pretty well with their income taxes over the decade; the tax collected remained essentially level for that period, and well above the 1996 baseline.  Only the Suburban cities declined. But Ann Arbor does not match any of those cities in important ways, and is not at all like the Suburban cities.

How does Ann Arbor differ from the cities studied and how does that matter?

  • Ann Arbor is comparable in population to some of the cities (like Lansing) described in the “Large Core” group, though it is  larger than some (like Jackson).  But it is much smaller (at about 110,000) than Grand Rapids (187,695 according to a 2008 estimate). Yet it is also the core city for a larger metropolitan area.
  • Most of those cities (which include Flint, Saginaw, and Battle Creek) were dependent on the auto industry and other heavy manufacturing, much of which has been lost.  Ann Arbor is not.
  • It is clearly not at all like the “Suburban” cities, which are dependent on large manufacturing centers in nearby cities. Again, Ann Arbor is insulated from the loss of heavy manufacturing.
  • It has a high quality of life and attractiveness that encourage election both as a place of residence (retired people and others for whom this is an option) and upscale business ventures.
  • It has the University of Michigan, with a physical plant that looks pretty well rooted in place.  The UM also raises the income level of the region.  While the median household income is shown for most cities in the CRC report as between roughly $27,000 and $40,000, the Ann Arbor area has held steady in the $60,000 range for many years.  (Current HUD figures used for housing estimates are $67,400 for a household of 2.)
  • It is “landlocked” (mostly finished with annexation), and the UM has steadily acquired property within the city borders. Thus the property base for taxation is decreasing permanently.

In summary, Ann Arbor has a higher-income population, plus higher-income jobs that draw workers from adjacent communities; it is unlikely to lose its major industry, the University of Michigan; it is also likely to remain attractive to residents and businesses because of its quality of life and cachet, despite any change in method of tax collection; and its ability to continue increasing property tax collections (or to remain at the same level) is doubtful.

As the report states, much of the problem with income tax collection in some of the larger cities has been directly related to the problems with the (Michigan manufacturing-based) economy. “…the city income tax revenues also reflect the out migration and loss of income in the state’s largest core cities.”

Of course,  part of this discussion depends on your view of the future.  The belief in “business cycles” has become almost religious in some circles, but does it really apply to cities like Ann Arbor? Are the factors affecting future revenue collection from property tax vs. income tax really cyclical (and therefore stability is the key factor) or have circumstances changed for real?  I believe that it is a dynamically changing scenario and parts can be predicted.  More on that later.

The stories in AnnArbor.com are certainly timely and it is good to have the discussion happening.  But I hope that there is not a lot of prejudgment going on in advance of placing the question on the ballot. In spite of the negative tone and misleading comparison of Ann Arbor with Grand Rapids in the companion story,  a slim majority of those polled at the end of the story still supported putting the income tax on the ballot.

 

Categories: civic finance, politics

Comments: 11 Comments

Ann Arbor’s Budget: The Case for a City Income Tax II

February 10, 2011

The debate about an Ann Arbor city income swung into full cry January 30 with a story on AnnArbor.com.  The companion story purports to show that a city income tax is a less dependable source of revenue than property tax.

We’ll get to the arguments about those two stories shortly.  But meanwhile, let’s define the issue.  First of all, the city is facing a budget crisis.  Thanks to the Neighborhood Alliance for reproducing the handout from the January 8 Council budget retreat that helps to show the deficits.  Although our city has done relatively well through the recent economic downturn compared to other cities, especially in Michigan, to use CM Rapundalo’s frequent metaphor, it doesn’t make it okay to lose your toes and one arm up to the elbow just because someone else lost both their legs.  As we’ve reported before, some unpleasant choices loom if we don’t do something soon.

As stated in the first post of this series, I believe that a city income tax is the best solution for the budget problems confronting the city, and I’m advocating that City Council should put the issue on the ballot for the voters to decide.  Here is one of the reasons:

There are structural (i.e., problems unrelated to current trends, but inherent in the way our tax system is set up) reasons for this current crisis.  Here is a brief review.  (In order to keep this discussion moving along, details of Michigan tax policy are kept to a minimum here. See the excellent summary by the Citizens’ Research Council for details.)

1. No local sales or use taxes:  Michigan law imposes major limitations on the taxing power of municipalities (that includes cities, townships, counties and villages).  Michigan cities are not able to tax any activity.  Whenever the subject of Ann Arbor’s problems come up, someone is sure to suggest a fee on UM football tickets, for example.  But we can’t do that,  or any local sales tax.  There is a surcharge on hotel rents, but that goes to the Convention and Visitors’ Bureau and the county, under a special provision.  So although Ann Arbor’s economy is increasingly as a tourist destination, we can’t take advantage of that to offset our expenses.

2. No help from the State of Michigan either. The lack of such local taxes were supposed to be offset by state “revenue sharing”. But as explained in a recent story on Michigan Radio, the loss of revenue sharing dollars over the last decade has put stress on cities.  The state legislature has found these dollars a good source to plug budget holes at the state level.  So cities are stuck – with neither the power to tax on their own behalf nor a share of those revenues.

3. Property tax is left standing alone. What this means is that the City of Ann Arbor must derive all its revenue from property tax or fees for service.  We’ll look at the question of fees at a future time, but for the moment we’ll assume that they are only applied to users of certain very specific services and cannot be used to support most governmental functions.

But Michigan state law has also restricted the way property tax is levied.

a. The Headlee amendment to the Michigan Constitution (passed in 1978) has several provisions intended to restrain the growth of taxation.    Two are especially important to cities:

  • Headlee requires that any new taxes (like special millages) instituted after 1978 are approved by a vote of the people.
  • It also requires taxation based on current valuation to increase no more than inflation.  So (excluding new construction) if the assessed valuation increases more than inflation, the rate at which property is taxed (millage rate) must be reduced.  This is the well-known and much despised “Headleeization” that brings previously approved millages down, down, down.  That is why the General Operating Millage of the City of Ann Arbor, originally approved at 7.5 mills, is now 6.1682 mills.

b. Proposal A, passed by popular vote in 1994,  limits the increase in taxable value for an individual property to 5% or inflation (the consumer price index), whichever is less.  Since the CPI has been very low (note that this measure specifically excludes housing) over the last decade, taxable values have been very stable for long-term owners.

  • Cities were depending on transfers of property during the housing boom to keep their taxable values up.  When a property is sold, it reverts to an assessment based on the current market value – the so-called “pop-up tax”.
  • During the housing boom, the prices of houses and other property were going up yearly.  This also increased taxable value.
  • BUT – in the last half decade, fewer houses were sold, and the market price sank.

Here is a summary from the city’s Comprehensive Annual Financial Report (CAFR) for Fiscal Year 2010 (remember, that ended June 30, 2010).  It shows the effect of Headlee and Proposal A on property tax revenues.

Each July 1st the City property tax is levied and becomes a lien on the related property, the value of which is equalized by the State of Michigan and limited by Act 415 of 1994. The City’s operating tax rate levied July 1, 2009, as controlled by the Headlee Amendment, Act 415 and City Charter, is 6.1682 mills. Other tax rates are as follows: Employee Benefits (2.0560), Refuse Collection (2.4670), Ann Arbor Transportation Authority (2.0560), Street Repair (1.9944),Parks Maintenance & Repair (1.0969), Open Space and Parkland Preservation Millage (0.4779), and Debt Service (0.4806). Real and personal property located in the City as of December 31, 2008 were assessed and equalized at $5,787,470,424, representing 50% of estimated current value. Act 415 of 1994 limits annual increases in taxable value to 5% or the Consumer Price Index, whichever is less. The 2009 taxable value on March 18, 2010, was $4,730,622,646. Property taxes are due July 31st of each year and any delin- quent real property taxes are turned over to Washtenaw County for collection the following March 1st.

Note:

  1. The “estimated value” was about $5.787 billion.  This was based on current assessments, which are then “equalized” by the state (this process is to keep overly favorable assessments from being delivered in some localities) to give a State Equalized Value (SEV).  As it states, this is 50% of current market value.
  2. After Proposal A limits were taken into effect, the Taxable Value (TV), on which taxes are actually levied, was only about $4.73 billion, a reduction of nearly 20%.
  3. The millage numbers are all strange fractions.  For example, the Open Space and Parkland Millage (aka the Greenbelt Millage) was approved by voters at 0.5 mills in 2003, but is now down to 0.4779 mills.  This is the “Headleeization” effect.
  4. The taxes that Ann Arbor property owners paid in July 2010 were the result of an assessment conducted in 2008.  That is because taxes are paid after the year in which they are incurred.  So the tax collection for 2010 really reflects the value of property in 2008.

We said at the beginning that the City is facing a “structural” problem with regard to the taxes it collects.  Part of that problem is the almost complete reliance on property tax to fund the city.  The other part is the heavy presence of the University of Michigan as the main property owner in Ann Arbor – but which is exempt from paying taxes.

In future posts we will look at the impact of the UM and the reason that this makes a city income tax the solution to the budget problem that is most reasonable, feasible, and most stable over the long term.  We’ll also analyze the recently published arguments that seem contrary to that conclusion.

Categories: Business, civic finance

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