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- DDA districts
Monday night the city hosts a guest speaker and will be talking about the downtown development district.
The DDA and downtown Traverse City have been a phenomenal success in the past 15 years. There are many reasons for this. They include the hard work and investment of downtown merchants and entrepreneurs, the downtown’s unique location and character, a renewed cultural appreciation for downtowns, and an outstanding DDA staff. But the downtown’s success is also due to the infusion of DDA capital the downtown has received – injections of public money far beyond what any other part of Traverse City has received.
Here’s hoping we can have a discussion about how to continue the DDA’s success, but spread some of the wealth to other parts of the city as well.
The Traverse City DDA was first created in 1978. The purpose of creating a DDA is to halt the deterioration of property values in the downtown district and to promote economic growth downtown. The DDA does this by capturing all of the tax revenues that are in addition to those that existed when the DDA district was created. So for example if properties in the DDA district were worth $2 million when it was created, and are now worth $5 million, the DDA captures the tax revenue on the $3 million difference.
This is known as tax increment financing, or TIF, because it is the incremental additional dollars that are captured. The DDA captures not only the city taxes on the increment but also the taxes of other local units of government that collect taxes on those properties and who agreed to participate. These include the county, library, rec authority, BATA, and others. When all those dollars are added up, the DDA collects an additional 50 cents for every 50 cents of city taxes it captures out of the general fund. It’s not exactly 50/50 but it’s close. All property owners in the district also pay a 2 mill property tax to fund the DDA staff and operations.
The DDA uses the TIF dollars to fund capital projects within the DDA districts. The projects must be consistent with DDA TIF plans. There are two plans – one is TIF 97, and includes most of the traditional downtown area as well as the warehouse district. The other is TIF 2, and includes the Hagerty properties, Old Town, and Midtown. The map at the top of this post shows the boundaries of the two districts. TIF 97 is set to expire in 2027, and TIF 2 is set to expire in a few years. The original TIF 97 and TIF 2 plans can be found here: http://www.downtowntc.com/dda/tifhistoryandplans.html
Significant projects that have been constructed downtown using the TIF plans include the Hardy and Old Town parking decks. They also include more modest but nonetheless lovely public improvements like the streetscapes, pedestrian crossings, and the Jay Smith walkway. The DDA is on the brink of potentially very significant expenditures of TIF dollars for projects that include the bayfront, the 200 block alley, the tunnel from the Hotel Indigo to the open space, the River West parking deck, the Pine St pedestrian bridge, and the warehouse district streetscapes. More info on the context for these decisions was discussed about a year ago here: http://planfortc.com/2010/06/27/the-most-influential-board-you-probably-dont-pay-any-attention-to-dda-june-28/
(More recently, the DDA received a proposal from the Cherry Republic to use DDA TIF dollars directly on construction costs for a private building downtown. The reason for the request is that the state brownfield policy now requires local dollars to match state brownfield dollars for brownfield projects, even if the local dollars are captured by a TIF district. I strongly opposed setting a precedent in which DDA TIF dollars would be used for private construction costs instead of public projects. If we do this once, we will see these requests again and again in the future.)
Anyway, the general plan behind the DDA has been a phenomenal success in Traverse City. From the time JC Penney left the Horizon Books building until now, downtown has re-emerged as a premier location, Front Street has been named one of America’s 10 great streets, countless new businesses have opened, and property values have not only stopped deteriorating – they have appreciated at a scale that would have been hard to imagine at the time the Grand Traverse mall was first built and downtown TC looked like it was on the ropes.
All of which begs a question: How much is enough? When do you stop capturing the enhanced revenues you have created in one location, and allow those revenues to spread around the city? When do you declare downtown a success that no longer needs all this extra help?
Some residents argue that the DDA has simply become a case of the rich getting richer, by having their tax dollars captured from reaching the general fund and only used on projects that enhance downtown property values, further raising the revenues that are then captured to further enhance the downtown values in a positive loop. While this is good for downtown property values, it never allows these benefits to flow out beyond downtown to the rest of the city. In other areas, we are doing more infrastructure work than we used to – mainly streets and sidewalks – but it is not nearly enough to do the whole job and there are more needs than resources available. The DDA – which was created to halt deterioration in downtown property values – has long since accomplished that and the money is needed elsewhere.
Downtown proponents argue that having a strong downtown enhances property value throughout the city, because living close to downtown becomes itself an amenity and a selling point for residential property. They also argue that some of these downtown investments – the Old Town parking deck being the best example – lead to job growth, which positively impacts city residential property values and the city’s economy in general. They also argue that ending the DDA early would mean we as a city are leaving money on the table – specifically, the 50 cents that other local units of government contribute to the TIF funds.
Both sides make good points. The nub of the matter is this:
On the one hand, making the deal to capture revenue and keep it within the district essentially doubles our money. On the other hand, downtown properties – especially now – are the highest revenue properties in the city. Making the DDA deal means that the revenues from these highest revenue properties can only be used in the vicinity of these properties. Even if the city has greater need of these funds in other areas of the city.
This, in a nutshell, is the DDA conundrum: We double our money, but it must be used where it’s generated - even if that’s not where it’s most needed.
Operationally, the DDA is doing well. While the DDA board can include non-city residents as long as they are downtown property owners, the present board is mostly city residents now and is more reflective of the composition of the city than reflective of downtown business interests. The DDA has been prioritizing projects – something that did not happen in the past and something that makes capital investments more reflective of board direction. The DDA has pledged $450,000 to the bayfront, an investment that has led to another $900,000 of contributions from outside sources – all of it to be spent on public space that anyone can use. The DDA decision on the Hotel Indigo tunnel came down to one vote, much closer than the 6 to 1 margin that passed it at the city commission.
Still the conundrum remains. How to benefit from the contribution of local dollars without falling into the problem that they cannot be spent where most needed?
One solution may be to maintain the DDA but start shrinking its boundaries. By removing parcels from the DDA on a plan over a period of time, the contribution of local dollars would remain for areas of the DDA that the board has determined are still highest priority – chiefly the warehouse district, West Front Street area, and bayfront. The city portion of the revenues from the removed parcels could flow to the general fund, where they could be earmarked for neighborhood improvement projects. The other portion would go back to the other local units, who are unlikely to complain about that.
Properties removed from the district would see an immediate, 2 mill reduction in their taxes as a result of no longer paying the operating millage. Just as an example, imagine if the Park Place were removed from the DDA district and its city revenues directed toward the neighborhoods.
Some may view this proposal as anti-downtown. I view it as pro-neighborhood. I’m not a DDA opponent - I’m a downtown property owner and a member of the DDA board. But someone at some point needs to recognize that there is a growing dissatisfaction with what appears to be an abundance of city dollars in the downtown district and not enough for the neighborhoods and corridors. A slow transition that shrinks the boundaries of the district and lets the released revenues flow to the neighborhoods, while preserving the power of TIF dollars in areas the DDA board believes are still a priority, could be part of a solution to the DDA conundrum.
Post-script – I’ll indicate my intentions for the fall election at the beginning of Monday’s city commission meeting. Take care.
The CC passed the proposal outlined two posts below last night by a 6 to 1 vote. Thanks to fellow commissioners for a thorough and civil debate.
The TCLP budget outlined below came close to passing. It will be up again in two weeks. This is a crucial vote for energy efficiency and for a resident dividend. Hope to see you there.
Best wishes.
Three weeks ago, TCLP chair Mike Coco presented the idea of a resident dividend to the CC. TCLP’s budget is up for approval Monday night. A resident dividend would function like a stock dividend, except the “distribution” would take the form of a periodic rebate rather than a periodic check. Here is one way this could be handled -
Premise
The premise for instituting a resident dividend is that TCLP is a business and city residents are the shareholders of the business. The board acts to drive shareholder value.
The basis for this premise is the city charter. Section 118 says that TCLP shall be operated for the benefit of the City of Traverse City. Section 179h says that rates shall be uniform for each customer class, but rates within the City limits may be less than for the same class of customers outside the City limits.
This hardly leaves other customers out in the cold. TCLP still has an obligation to them as customers – to meet their their needs for safe, reliable, cost-effective service. However, the obligations of a business to its customers and to its owners are different obligations.
Current rates
TCLP did a rate study in 2006. The utility’s rates to each class of customers (residential, commercial, industrial) roughly correspond to the cost of providing service to that class. TCLP’s rates are below market for each customer class. Here is a comparison of rates from last year with the Michigan market, including power supply, general operating, and sales tax. The source of market data is the US Department of Energy’s Energy Information Administration, http://www.eia.doe.gov/electricity/epm/table5_6_a.html, Figures are in ¢/kWh:
customer class EIA average TCLP
residential 12.67 9.32
commercial 10.66 9.09
industrial 7.41 6.81
All customer classes are significantly below the state average. However, because they are based on the cost of service, residential rates are higher on a per kilowatt-hour basis than commercial or industrial.
TCLP’s financial performance
Based on the 2006 rate study, TCLP’s financial performance has been strong – despite lower sales due to Energy Optimization programs and a weak economy, despite upward pressure on power supply costs, and despite the utility’s decision to hold generating rates rates steady the past few years.
The rate track proposed in the rate study from 2006 sought to achieve an average operating income through 2011 of $2,251,535, and an average net income through 2011 of $3,283,073. TCLP actually achieved operating income from FY 06-07 through FY 09-10 of $2,775,003 and net income for the same period of $3,835,911.
TCLP did not make some anticipated capital expenditures during that time, which increased net income by decreasing expenses, but TCLP also did not implement some of the rate increases recommended in the study.
The rate study recommended TCLP achieve a cash balance in 2011 of $29,048,814, while the 2010 audit report indicated a projected balance in the range of $31 million.
Resident Dividend
The residential class is 20% of revenues; the city resident portion is 16% of revenues. One way to issue a dividend would be to determine each year how well the utility performed against projections. Then divide the residential customer class into a city resident class and a nonresident class.
If TCLP’s actual revenue exceeds budgeted revenue, spread the difference back to the city residential customers as a refund – either once a year or spread it over 12 months as a reduction in the bills.
So for example, in FY 09/10 projected revenues were $2,961,000 and actual revenues were $3,132,000 on total operating revenue of $26,575,000. If the $171,000 difference were spread back to the city residents as a refund, it would reduce city resident electric bills by 4% for the next year. That is not a radical transformation of the rate structure but it would absolutely feel like a dividend.
An advantage of doing this as a refund based on actual revenue performance is that it won’t put pressure on other rate classes to make up the difference. It would be something spread back to the our public utility’s shareholders, not something transferred from one rate class to another.
It also would not hamstring TCLP from making other necessary investments in generation or demand side management (energy efficiency). It would not significantly impact the excess cash balance built up beyond the projection in the rate study, saving that capital for other objectives like undergrounding, baseload planning, or DSM.
And it might even engage city residents in the business performance of their utility. As TCLP discusses planning and policy decisions, the residents would be engaged in the future of TCLP much like the shareholders of a corporation would be – only with the advantages that the board of directors are their neighbors, and the goals of the utility are broader than just the bottom line.
Other news
In other TCLP news, the utility proposes to increase its energy efficiency spending beyond state requirements, and to invest further in community relationships while suspending the community investment fund grant program. The energy efficiency goals are summarized by Mike at http://ourtclp.com/. A tight vote is expected on the TCLP budget Monday night, and they could really use some support.
The DTE Energy Foundation has informed the City of Traverse City that it plans to support the Traverse City Bayfront Plan in the amount of $150,000.
Steven Rawlings, Regional Manager for DTE Energy, will ask the City Commission on Monday, June 6, 2011 at 7:00 p.m. in the Commission Chambers, to adopt a Resolution accepting the gift. The Resolution would stipulate that the funds be used for the $150,000 natural artesian water feature that flows and meanders through the Clinch Park site. The natural water feature is in important part of the Clinch Park Phase I project of the Bayfront Plan, and will be integrated into the planned Natural Playscape feature.
“In recognition and celebration of our tenth continuous year supporting the National Cherry Festival, DTE Energy is proud to make even more of an investment in Traverse City by supporting this bayfront initiative,” Rawlings said. The DTE Energy Foundation has a long history of supporting environmental initiatives in the region. The planned natural water feature will include a shallow interactive stream that is intended to be fun, child-friendly and celebrate the importance of the State’s natural and water resources of the Traverse region.
The following comes from Commissioner Mike Gillman and myself, and will be discussed and voted on Monday night -
Budget proposals from Mike and Chris
For the June 6 City Commission meeting
Overview
The current budget as we understand it proposes the following:
- Combined general fund and Act 345 revenue of $15,085,450, an increase in revenue of $183,350.
- Combined general fund and Act 345 spending of $15,529,300, or $443,850 more than combined revenue.
- A proposed spend-down of the general fund balance by $443,850 to cover the gap between revenues and expenditures.
- An increase in total employee costs despite a reduction of four positions.
- Maintenance of the $1 million of street and sidewalk spending from general fund. Including inflation, this is a small decrease from 2 years ago.
- No payment on the $208,000 debt that the Act 345 police and fire pension fund owes to the economic development fund as a result of a budget error in 2009. The budget memo contemplates that the economic development fund could eat this cost in FY 12-13.
- With a 0.2 mill Act 345 increase, a 0.1 mill County senior center millage increase, and a 0.1 mill reduction, a net tax rate increase of 0.2 mills. This increase is additional to a property inflation rate multiplier of 1.7%, which the State sets based on the Consumer Price Index.
In round numbers, this proposal would fund an increase in operational costs of $444,000 by spending the same amount of savings balance. It would maintain but not increase infrastructure spending. It would not address the $200,000 of Act 345 debt. And it would result in a small net tax rate increase to taxpayers, in addition to the inflation increase they will already receive.
We do not believe this proposal should be approved as presented. Our recommendations follow.
Recommendations
Overview
Our recommendation is to reduce operational spending by at least $600,000 in round numbers. We recommend using the savings as follows:
- $350,000 for a 0.5 mill reduction in the tax rate.
- $140,000 to offset the 0.2 mill increase to the taxpayers.
- $110,000 to pay down half of the Act 345 debt.
We also present an alternate option that could save another $300,000 to $600,000, for a total savings that could exceed $1 million. The city commission would determine how to allocate additional savings if it chose that option.
Recommendation #1: Garage Fund
The budget proposes an increase in garage fund net income of $315,000. This increase comes from rental increases to departments that use vehicles. The reason for the increase was that the life-to-date capital cost of garage fund vehicles (including depreciation) exceeds their rental income by $660,000.
However, the garage fund also has a cash balance around $2 million. That is about 85% of its annual expenditures, compared to 25% of annual expenditures used for the general fund balance. Even without the increase in net income, the garage fund will take in around $2.4 million with expenses of $2.35 million. In some years vehicle capital expenses are higher than others, but they average in the $800,000s and the highest number in the past ten years was $1.8 million. The savings balance in the garage fund plus this year’s depreciation revenue (which is put away for new vehicles) equal around $2.8 million.
Recommendation: Cap the garage fund revenue increase at last year’s actual revenue plus the Consumer Price Index adder of 1.7%. Review an increase next year if there is an impact on the garage fund’s cash savings balance.
Projected savings: $275,000, more or less
Recommendation #2: Fire Department
The fire department is the second most expensive department in the general fund. The budget proposes an increase in general fund fire department spending from last year’s actual spending of $168,000. Added to an approximate increase in Act 345 pension spending of $70,000 (one half of the 0.2 mill increase), the total requested increase in fire department spending is $238,000.
Recommendation: Reduce the increase in total fire department spending to a total increase of $138,000. This would leave total fire spending around $3.2 million in round numbers, which is still an increase.
Projected savings: $100,000, more or less
Recommendation #3: Police Department
The police department is the most expensive department in the general fund. The budget proposes an increase in general fund police department spending from last year’s actual spending of $24,000. Added to an approximate increase in Act 345 pension spending of $70,000 (one half of the 0.2 mill increase), the total requested increase in police department spending is $94,000.
Recently the city contracted with Alexander Weiss to study police operations under the supervision of the police ad hoc committee. The study concluded that by shifting to workload-based staffing we could reduce the force by 3 officers without a loss in service. The current budget proposes a reduction of 2 officers through retirements. The proposed $94,000 increase in total police department spending would occur despite the reduction of 2 officers based on retirements.
Recommendation: Implement the study’s recommendation to reduce the force by 3 officers. Total police spending would still be over $4 million, roughly even with last year, and up from a couple years ago.
Projected savings: $100,000, more or less
Recommendation #4: City Engineering
Alternative (a)
As recently as FY 09/10, city engineering and GIS were one department with total spending of about $675,000. Now they are two departments with total spending of around $800,000. It is true that the city does more street and sidewalk construction now than it did a couple years ago, but we were spending over $1 million in FY 09/10 and almost that much in FY 08/09.
Recommendation: Reduce the combined spending on the engineering and GIS departments to the FY 09/10 level.
Projected savings: $125,000
Alternative (b)
Greater savings could be achieved by bidding out the functions of these departments to an outside firm. There are several local firms to choose from.
A qualified outside firm could provide design engineering and supervision on city projects based on a percentage of construction cost. Informal interviews indicate that those costs are typically 10-15% of total project costs. This is a variable cost depending on how much construction the city does in a year.
For example, in a year the city did $1 million of its own construction the owner’s engineering cost would likely range from $100,000 to $150,000. In a year with $3 million of construction the cost would be $300,000 to $450,000, etc. Bidding this work out would allow spending to ramp up and down as necessary. It would also allow the costs to be included in the projects’ capital budgets as is common in the private sector – instead of having a separate, fixed cost regardless of volume.
The other principal function now provided by city engineering is reviewing plans and permits for private sector projects. The outside firm could conduct these reviews on a flat fee schedule included in its bid, with the costs passed through to the owners of the private projects.
Many cities use engineering services in a similar way. Petoskey, Manistee, and Gaylord are examples.
Recommendation: Outsource the engineering and GIS functions.
Projected savings: $300,000 to $600,000, depending on the amount of total city-owned construction projects in a given year.
General Fund Balance
Like the manager’s proposed budget, these recommendations include a $440,000 spend-down of the fund balance – which currently exceeds the target of 25%. With our proposed spend-down, the city would still be $348,000 above the 25% target. The difference is, we propose that the spend-down be given back to the taxpayers as a portion of the millage reduction we are recommending.
This is the first in a series over the next two weeks about the city budget. We’ll explain how things work now, and propose some changes intended to flow more city revenues toward the needs of city residents.
For the past five years I’ve been involved in city government, budget discussions are the first ones people tune out. Yet spending public money is probably 80% of what we do, with another 10% devoted to prescribing conduct (for example by ordinances) and another 10% is mainly educational or symbolic.
So how we spend public money does more than anything else to set our priorities as a city and shape our quality of life.
The city budget is actually a whole series of budgets. These include general operations, Light & Power, DDA, water and sewer, marina, police and fire pensions, and others. The general fund is about $14 million, police and fire pensions add another $1.4 million, TCLP is around $30 million, the DDA is planning over a million dollars in capital projects, and the city has over a million dollars of mostly grant money lined up for the bayfront.
Relatively speaking, Traverse City is a wealthy community. You can see that in some parts of our city - most notably downtown and also the marina. You can also see it in some of our operations – for example police and fire services that outpace comparable cities in quality and cost, and a state of the art wastewater treatment operation that protects the bay but also at a high cost.
Other areas of our community and other aspects of our operations contrast with these examples. Some of our corridors look run down. Large sections of our streets look like those of a poorer community. Many stretches of sidewalk are crumbling or missing entirely.
We are making some progress on some of these areas. Street spending is up over $1 million, with another $100,000 for sidewalks. The 8th St corridor project holds promise, we have a fund of $1.4 million in the bank for traffic calming that awaits neighborhoods willing to ante up their 25%.
We have a high tax burden. Our millage rate for combined general fund and Act 345 is proposed at 13.66 mills. (The Act 345, which covers police and fire pensions, used to be booked with the general fund but a couple years ago was separated out, making comparisons over those years confusing unless they are added together.)
The tax burden is less a matter of these millage rates and more a matter of high property values – a good thing – and the many additional special millages we have voted for as a community – including school bonds, library, BATA, recreation authority, and others.
Despite being a relatively wealthy community with a high tax burden, we often are unable to provide for good projects due to lack of funding. As I said, we have made progress but in many ways not enough. Some of the unmet needs include neighborhood improvement projects, other capital projects, corridor upgrades, full funding for legacy costs, and full funding for needed street and sidewalk infrastructure. Many residents also call for a lightening of the millage burden.
The city will be voting on all of these budgets next Monday night. Between now and then, we are going to look at changes that could help reduce the financial burden and changes that could increase the dollars flowing toward the priorities of residents as opposed to other priorities. Here is a tentative schedule:
Tomorrow we’ll outline a proposal for a resident dividend that TCLP chairman Mike Coco recently discussed with the city commission.
Later this week we’ll take a look at a process that could lead to a public vote this fall on whether to contract fire protection and emergency services to the Grand Traverse Metro Fire Department.
Over the weekend we’ll have some proposals to reform this year’s general operations budget to pay down some legacy costs and provide some tax relief this budget year.
And next week we’ll have a compromise proposal for reforming the DDA to maintain some of the benefits of DDA TIF but also to begin a transition that will enable some of those dollars to flow to the neighborhoods.
Stay tuned. It’s going to be a busy couple weeks.
This post started as a comment but grew -
Gary, Brian, Andy, Katie – thanks for these thoughtful comments. A few observations, not an argument.
One is because the city doesn’t have a ward system, NAs provide that representation of distinct areas of the city that commissioners serving wards provide in other cities. If we didn’t look to NAs to provide that role, what would take its place?
Another observation is that our challenges in TC include working to make the city serve the priorities of city residents foremost over those of other interest groups. We have made gains but still have a ways to go on that. The NAs are the only interest groups representing exclusively the priorities of city residents. If they don’t set the agenda they at least provide a counterweight to the other interest group voices at city hall.
Another of our challenges is changing for the better the extent to which projects are initiated and driven by the desires of the residents vs initiated and driven by staff. Again – the NAs provide a vehicle for initiating and potentially driving projects from the grassroots resident level. It doesn’t happen as much as it could but it does happen -the Boardman Lake bridge being one shining example. Again, I don’t know what other authentic means we could use to do this.
One of the points made by a neighborhood president Monday night was that the NA meetings provide comfortable and accessible direct participation opportunities to people who may not feel comfortable participating directly in city commission meetings.
Finally, I would argue that the neighborhood associations – more often than not – are just right about things. By right, I mean accurate in their representation of the pulse of the residents. Maybe not always, but usually.
Almost a year and a half ago, I solicited from the neighborhood presidents a letter outlining the top priorities of their associations collectively. http://planfortc.com/2010/01/22/neighborhood-presidents-top-priorities-ian-glatting-hired-for-divison-st-ipr-update-jan-23-24/
The priorities included calming traffic, improving access to the beaches and nearshore waters, better parks, addressing the inequity in the millage rates of the city vs. surrounding townships, promoting transportation choices, improving neighborhood identities, and others.
These priorities became a jumping off point for many of the things we have been able to accomplish and many of the most worthwhile projects we are still working on.
Like anything else in the city, the NAs are not perfect but in my opinion they fill a crucial niche and have even more potential. I appreciate the dialogue and hope it will continue.
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