The Tiff over TIF (Tax Increment Financing)

Stephen Kunselman and Sumi Kailasapathy are leading the charge for the Ann Arbor City Council Teapublican Caucus 1 to make revisions to Chapter 7 of the city code, which is a city ordinance that governs the Ann Arbor Downtown Development Authority (DDA).  They want to prohibit the mayor and other elected officials from sitting on the DDA board and recalculate how the TIF’s tax capture is calculated.

I believe that Downtown Develoment Authorities are a good thing and have helped revitalize downtowns in many cities throughout our state and the rest of the United States.  They came into existence because the suburban shopping malls caused many stores to move out of downtowns.  DDAs helped restore vitality and life into dying city centers.  I question the intent and motivation behind the charge to revise our city code relating to the DDA

I am not going to get into the nitty-gritty of comparing the current method of TIF calculation vs Kunselman’s proposed version in this post.  It is not really the direct point I want to make.  I am also, not going to get into the discussion about the benefits of having a DDA vs not having a DDA or what would happen if the DDA was dissolved.

I simply want you to consider and think about WHY this is being proposed, HOW this actually affects you as a resident of Ann Arbor, and WHAT it all really means.

Background

First some background.  The Downtown Development Authority (DDA) Act2 was passed by the State of Michigan in 1975.  This Act allowed local municipalities to use economic development tools to make improvements to their downtown, increase property values and to encourage investment.  Funds for this could be raised using a mechanism called Tax Increment Financing (TIF)which allows the DDA to collect the tax revenues resulting from the improvements to the taxable property in the district.  The Michigan Association of Planning explains it better than I can3:

Tax Increment Financing (TIF) is a popular method of financing the public costs associated with development and redevelopment projects. TIF occurs when a local government freezes the tax base within a specific development district and uses the revenues generated by reassessment or new development to finance selected improvements within the district. The term “tax increment” refers to the additional taxes that will result from private development. This “increment” is earmarked or “captured” for the TIF or to other taxing units that otherwise would receive revenues. Public improvements can be financed one of two ways in a TIF plan:

  • Improvements may be finances on a pay-as-you-go basis from annual tax increment revenues.
  • The municipality may issue tax increment bonds to finance public improvements and use the annual tax increment revenues to retire the bonds.

Our local Ann Arbor DDA captures TIF revenue from the City of Ann Arbor, Washtenaw County, Washtenaw Community College and the Ann Arbor District Library.  (The Ann Arbor public schools are not included).  The DDA only collects TIF tax revenue on the improvements to a building or a property in the DDA district.4   The original taxes on the original building or property still go to all the other tax entities (City-A2, Wash. County, WCCC, AADL) as they did before the new development.  All inflationary increases in tax revenue also go to the original taxing jurisdictions.  Only the taxes that are collected from the new development are diverted and captured for TIF.  The idea behind this is that everyone in the local area benefits from a strong, economically viable downtown, therefore all taxing jurisdictions should participate in the cost of the redevelopment (improvements).  There is no loss of revenue for any of the taxing jurisdictions because they continue to receive the taxes they were receiving before the new development was built.

In other words, if the DDA does a good job at increasing development, they will have a large TIF fund to use for re-vitalizing the downtown, while the taxing jurisdictions continue to receive the revenue they had been receiving AND receive future inflationary increases in tax revenue.

Since the Act 197 was created, many municipalities have created a DDA.  Here is a sampling of some of our local communities they have a DDA:  Ann Arbor, Ypsilanti, Chelsea, Dexter, Milan, Tecumseh, Plymouth, Northville and  Scio Twp,  Having a DDA is not a rare event and in fact is more common than not.  All those cute little downtowns you like to visit throughout the state are the result of hard working DDAs.  Without a DDA it is not likely that the local governing bodies would have dedicated that much revenue from their general funds in order to spruce up their downtowns.

The Issue

Listening to our Teapublican caucus 1 though, you would think that a DDA was rare, bad and one of those “Ann Arbor only “issues.  They believe that our DDA is irresponsible with the TIF money, should not save for infrastructure projects, has too much debt, and should not acquire debt for future infrastructure needs.   Knowing that complete dissolution is unpopular, they are trying to cap and remove future funding from the DDA.  They are insisting that all current and future “surplus” be returned to all contributing governmental bodies. This may cripple the DDA so that they cannot fund future projects and may even cause them to be financially unstable to the point where the DDA might not be able to make their bond payments for the bonds that have been issued for past improvement projects.  Who is on the hook if the DDA can’t make their bond payments?  The city of Ann Arbor and the residents are.

Lets make clear, the DDA has been a good steward of our money; there has been NO improper spending, theft, corruption or fraud.  They have been fiscally responsible on all counts.  They have been extremely cooperative in giving grants for many items affiliated with the downtown.  Take for example the justice center project.  The DDA has pledged $500k/yr for bond payments for the building as a grant.  If council caps DDA TIF revenue, the DDA might not be able to make those payments, thus sticking the city with the bill.

So now you might be saying, what’s the difference?  If we cap the TIF revenue for the DDA, all the extra TIF money now goes to the City of Ann Arbor general fund, right?  WRONG! The city does get some additional tax revenue, but WCC, AADL and Washtenaw county will get their portion of TIF revenue to spend any way they please, which most likely could be outside the city limits.  We lose their contribution.  Remember the initial premise of a DDA is that all neighboring governmental units benefit from a strong, economically viable downtown and should contribute to the effort in sustaining it.  Now they get all the benefits and we the resident s of Ann Arbor pay their way.

Others might be thinking,  so what?  DDA money IS City of Ann Arbor money anyway, what’s the difference which bucket it is in?  Here is an example that shows why the DDA bucket is preferable from purely a financial standpoint. Downtown Ann Arbor needs to replace the streetlights on Mainstreet.  Lets say it might cost $500k.  It is a downtown infrastructure project that is justifiably funded using TIF funds.  But now, the DDA TIF money is capped and they can’t afford to do this project because they are obligated first to pay their bond payments and they no longer have extra funds.  The streetlights need to be fixed, it can’t be ignored, so now the city of Ann Arbor will have to cover the costs using general fund money. 5  The cost to replace the streetlights spent from our general fund will NOT be equivalent to the amount of TIF cap money returned to the city; it will not be revenue neutral.  It will be at a higher cost because the contributions that the other tax entities once contributed are now gone.  We the residents of ann arbor will now pay more to make up for the money that our councilmembers VOLUNTARILY gave back to other governmental units.

The heart of the matter is the definition of surplus.  Chapter 7 of the city code6 simply states that any surplus should be given back to other governmental units.  The DDA says there really is no surplus, all the money is accounted for.  Kunselman and Kailasapathy are hell bent on showing that the DDA has a surplus.  They are even challenging the calculation that is used to show if there is a surplus.  They want to implement a new calculation that shows a surplus, while the current one does not.

Now, surplus is a gray area, how do you define it?  The DDA is allowed to legally encumber funds to pay for future bond payments and for anticipated projects. Are those dollars used for any encumbrances considered surplus?  I think not.  To use a straight accounting 1 year term to decide if there is a surplus (revenue-expenses) does not work efficiently.  You cannot show long term encumbered expenses as easily.  Is the reserve fund a surplus?  No.  If all the TIF money is accounted for by expenditures, encumbrances, bond payments, and other projected plans then what’s the problem?  The Teapublicans are trying to create a problem where there is none.

I am not going to bore you with comparing the current method of TIF calculation vs Kunselmans proposed version.  It is not really the direct point I am trying to make.  I am also, not going to get into the discussion about the benefits of having a DDA vs not having a DDA, except to say that I do think that our vibrant downtown is the direct result of all the hardwork our DDA has done over the years.  Many people, including me, purposely chose to move her because of the vibrant downtown, not in spite of it.

The Question

What I want you to think about it is this?

Why is the Teappublican Caucus1 going after this issue at all?  Why are they arguing over the definition of surplus, trying to change how we calculate the TIF, and insisting on returning TIF funds to the other Government entities when there clearly will be a revenue loss for our general fund?  Our downtown wins award after award. Why are they insisting that council revamp the TIF system so that the residents of Ann Arbor will end up paying more out of our pockets while the other governmental tax units get a revenue positive result?  It makes no sense.  Why our elected officials are not representing the residents of Ann Arbor?

The Analysis

They are doing this for two reasons.

First, their hatred of Mayor Hieftje.7  Look at this Ann Arbor News article from April 5, 2013 that questions this groups intent. They are anti-everything he is for, what I am for and what you are probably for.  They are also trying to change the Chapter 7 rules of the city code so that the Mayor cannot sit on the DDA board.  It is standard practice in most cities to have the mayor sit on the DDA board.  What is the point of this? Doing this makes our city look like amateur hour. If you watch council meetings you will see that this hatred shows through loud and clear.  Quite frankly, it reminds me of the birther8 mentality towards President Obama; unrelenting bullying, unreasonable accusations, and accusatory statements.  That is how it appears to me as I watch the meetings.

Second, they are pushing their personal ideology of no taxes and no debt which are major themes of the Republican/Tea Party Platform.  Kailasapathy believes that the DDA has a spending problem and spends too much on debt.7 She repeatedly brings up the topic of debt during all the council discussions.  I guess she has forgotten that the DDA is allowed to use bonds to finance projects.  From the Michigan Planning Association definition of TIF3

The municipality may issue tax increment bonds to finance public improvements and use the annual tax increment revenues to retire the bonds

In my mind, bonds are not really “debt” but financing of much needed infrastructure that most likely would not happen if the bonds were not available.   Sort of like your mortgage.  Do you consider your mortgage as debt?  I don’t.  Most people don’t.  It is a necessary financing method used when there really is no other choice.  Most of us can’t buy a house with cash.

However, Kailasapathy’s solution to spending too much on “debt” is to re-calculate the TIF capture so that the DDA gets less tax revenue and could possibly not be able to make their bond payments, which could result in the city’s general fund having to make the payments.  They have too much debt, therefore we shall take the money they use for payments away from them????  I can’t figure the logic out on that one.

When listening to her I tend to get the sense that she does not understand the difference between business accounting and government accounting. 9, 10  She is an accountant, so maybe it is just me not understanding her correctly, but she appears to to not understand how the city accounting works based on her questions and misunderstandings of staff’s answers..

Kunselman’s mantra is that he wants fiscal discipline for the DDA and he wants to control their spending.  He wants to rein in the DDA’s budget and redistribute some of their wealth.11    Really?  Exactly what inappropriate spending has occurred?  Are they in debt because of inappropriate spending?  No.  They have simply issued bonds to pay for needed infrastructure projects.  Stating fiscal discipline implies that they have done something wrong that needs to be rectified, which isn’t the case.  What he means is that he does not like all the TIF money being spent downtown and he wants to funnel it over to his neighborhood.

There is a logic problem with this.  Currently TIF revenue supports downtown infrastructure and projects and the general fund supports the infrastructure everywhere else throughout the city.  If you have less TIF money supporting downtown, the general fund will have to cover the expenses for any infrastructure issues downtown that the DDA cannot cover.  It is not like the issues will just disappear and the business owners will now cover them.  The city general fund will have to cover the entire costs, when previously we only had to cover part of the cost due to the tax capture from other districts.  He wants you to think he is stealing from the rich to help the poor.  In reality he is giving someone a tax break and forcing YOU to pay more.  Sounds very familiar, doesn’t it?

Kunselman and Kailasapathy’s antics over the so-called DDA debt are very similar to the antics of the Congressional Republicans who are refusing to raise the debt ceiling while ignoring all the dire consequences that will occur.  Our Ann Arbor Teapublican caucus1 is essentially lowering the debt ceiling on the DDA with disregard to the fact that they may be lowering it beneath the level of what we currently owe.

Kunselman and Kailasapathy repeatedly speak about curbing the DDA spending by giving some of the TIF revenue to the other governmental tax units.  However, if you remember the background information in the beginning of this long, long post, you will see that captured TIF revenue is a result of a strong, functional downtown….a strong functional downtown in which the DDA played a huge part.  Their hard work caused the increase in taxes that were captured by TIF.  The TIF funds are the driving force to reinvest in the downtown which is the goal and the mission of the DDA.  TIF funds are, in a way, an incentive.  If they perform well, they will get more TIF funding to do more.  It is sort of like a commission one gets at a sales job.  The top performer gets more commission and has more incentive to do sell more and work harder.  If you impose a commission cap, then one only works hard enough to reach the cap. The cap on TIF revenue for the DDA, is a commission cap forced upon them and will take away their incentive to do more for our downtown.  Why do all the work for others to steal your benefits.

Commission caps are so ridiculous that the TV sitcom The Office actually did an episode about it.12  Watch Jim in this clip find out about the new policy:

To sum up, I ask again for you to think about why….why is Kunselman and Kailasapathy leading the Teapublican Caucus in the charge against the DDA at all? None of their ideas are in the best interest of the city residents or our pocketbooks.  They are trying to distract you with all the discussion about the TIF calculation, returning tax money and debate about who needs the money more.  What they are really trying to do is to fool you into thinking that this is being done in your best interest, when it could not be further from the truth.

Listen to their words, think about their motives, and look for the logic.  Nothing they are proposing will make our city better and could potentially have dire consequences for our downtown.

Abite nummi, ego vos mergam, ne mergar a vobis

Cui bono

-MOTL

_____________________________________________________

1  The Ann Arbor City Council Teapublican Caucus is made up the following councilmemebrs: Mike Anglin, Stephen Kunselman, Sumi Kailasapathy, Jane Lumm, and Sally Peterson.  (Based on his campaign platform and rhetoric, I assume Jack Eaton will be welcomed into this group once he takes office in November.)

DOWNTOWN DEVELOPMENT AUTHORITY Act 197 of 1975

3   Michigan Association of Planning/ Tax Increment Financing

4  The DDA’s TIF is derived from some of the new taxes generated by new building construction in the DDA District, which is then directed into downtown purposes with the goal of encouraging economic growth, greater tax values, and private reinvestment. The A2 DDA TIF does not include tax increases created by property value escalation or by inflation.   http://www.a2dda.org/about-the-dda/history/

5 The light pole scenario has already happened in a way. When the TIF issue was first brought up at council, there was an outpouring of support form the affordable housing community in support of the DDA who regularly grants them money.  In response to this, the council, led by Kunselman, compromised and decided to have the DDA grant $400k to the DDA affordable housing fund eventhough there was no project dedicated for these funds.  Now, the DDA did not have enough funds in the budget to pay for the new light poles that needed replacing on Main Street.  The result was that council ended up funding $214K and the DDA funded $300k for the light poles.  This was politics at its worst IMO.  Kunselman’s antics caused us to use general fund money when the DDA already had the replacement of light poles in their budget.

Ryan Stanton, ann-arbor-dda-puts-more-money-toward-housing-and-replacing-main-street-light-poles, June 5, 2013.

6 Chapter 7 of the Ann Arbor City code

7 Ryan Stanton,  All about politics? Ann Arbor council member’s motivations called into question.   Ann Arbor News, April 5, 2013

A believer in one or more conspiracy theories holding that President Barack Obama is not a “natural born” citizen of the United States, and therefore ineligible for the presidency.  http://en.wiktionary.org/wiki/birther

9  Government Accounting Vs. Profit Business Accounting

10 Fund Accounting

11  Ryan Stanton, Tax-dollar tug of war: Proposed city ordinance changes would place new limits on Ann Arbor DDA.  March 18, 2013

12  The Office Season 7, Episode 9

cropped-Downtown-A2_B1.jpg

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