The Politics of Oops: Council Member Email “Explanation” of City Debt Includes Factual Errors & Omissions

AnnArbor.com’s political repeater Ryan Stanton struck again last week. This time, Stanton and AnnArbor.com simply “repeated” incomplete and incorrect information presented in a constituent email sent to the paper by Third Ward Council member Christopher Taylor. The first and most important question AnnArbor.com didn’t ask was about the timing of Taylor’s email. The lawyer, who specializes in intellectual property law, sought to “explain” to his constituents (and the newspaper’s 40,000 Washtenaw County readers) the nature, substance and meaning of the City of Ann Arbor’s current debt load at a time when there are increasingly pointed questions about the prudence of having incurred the debt.

The timing of the email is interesting for another reason: Ann Arbor’s City Administrator Roger Fraser recently took a position with the State Treasurer’s office. Fraser is quoted by the press describing the job thusly: “The local government operation there really has a lot to do with overseeing how cities are doing with their finances. The most particular thing they do on an annual basis is to look at debt load and whether or not you have appropriate budgets to pay for debt.” Roger Fraser came to Ann Arbor on April 8, 2002.  According to Table IX in the city’s audit, Ann Arbor had total debt of $107,556,000 on June 30, 2002 (the last day of Fiscal Year 2002).

Non-retirement related debt on June 30, 2010 (the last day of Fiscal year 2010) was $248,179,000. Not including retirement debt, the per capita debt grew from $943 per person to $2,199 per person during that time. Including the retirement debt, current per capita debt stands at $4,100 per person, a 4+-fold per capita jump that makes Roger Fraser look less like a fiscal whiz kid and, more like a man with an uncontrollable spending habit. Fraser is, in essence, leaving Ann Arbor saddled with a debt load and debt payments that are battering the General Fund, and have resulted in reductions in citizen services and sharp hikes in fees. In short, thanks to Roger Fraser, Ann Arbor does not have appropriate budgets to pay for the debt he encouraged elected officials to incur for capital projects that may or may not have been necessary.

Many Ann Arbor residents are questioning the wisdom of Fraser’s Council-supported borrowing binge. It would be inconvenient if the story of Fraser’s over-borrowing were picked up and investigated by the state-wide media. Such an embarrassing story could even threaten his new job as the state’s local government fiscal guru. Perhaps to get the city’s version of the debt “story” out, Fraser turned to a friendly City Council member.  Former Third Ward Council member Leigh Greden used to do the heavy lifting, but now it appears Ward Three’s Chris Taylor has stepped in to lend a helping hand.

He did it last February when he sent out a ridiculous email that claimed there were “buckets” of money, a claim repeated, but not investigated, by AnnArbor.com. The fact is that the City of Ann Arbor frequently moves money between funds (what Taylor referred to as “buckets”) when desired. The salary for the full-time Percent for the Arts Administrator, Katherine Talcott, for instance, was paid for out of the City’s Water & Sewer Fund.

On March 3, 2011, Taylor sent an email message to constituents “explaining” the city’s debt. Talyor even attached documents, one imagines were prepared by city staff. Then, the city’s PR machine also got help from AnnArbor.com and its government reporter, who simply repeated Taylor’s assertions. A story appeared in the print version of AnnArbor.com on March 3, 2011, the same day Taylor’s email was sent.  A story discussing Taylor’s email, and quoting liberally from it, appeared in the online version the next day.

Curious as to whether Taylor’s latest email missive to constituents and city residents was as error-riddled and flawed as his February 2010 “explanation,” that sought to sell the ridiculous notion of “buckets” of money, I asked a CPA who does no business with the City of Ann Arbor to evaluate Taylor’s facts and figures. The result? Christopher Taylor’s March 3, 2011 email “explanation” and accounting included several serious factual errors and omissions, as to the exact nature, amount and meaning of the city’s debt.

A2Politico asked the Certified Public Accountant to identify and explain the errors and omissions in the March 3, 2011 email. Council member Taylor’s original email is reproduced below with the CPA’s comments embedded, bolded, and italicized.

From: Christopher Taylor
To: votetaylora2@gmail.com
Sent: Thursday, March 03, 2011 6:11 PM
Subject: City Council Communication (Debt)Friends,

The City Administrator will in April present his budget for FY2012.  In the conversation that will follow you may hear some discussion about the City’s debt load.  To enable you to better participate, I thought it useful for you to have some background.

Credit Card Debt vs. Mortgage Debt

When most of us think about government debt, we think about the National Debt.  Generally speaking, this debt has accrued due to deficit spending; the federal government has borrowed to cover current operating costs.  This is analogous to credit card debt.  If you can’t pay for groceries today, you put them on the credit card and hope to pay for them tomorrow. Ann Arbor does not have any debt of this kind.  Zero.  We balance the budget every year.  In fact, we typically end each year with a surplus.

Ann Arbor’s debt accrues due to the sale of bonds; Ann Arbor has borrowed to cover long term capital improvements.  This is analogous to mortgage debt.  If you can’t buy your house for cash (as if!), you take a mortgage and pay the loan off over time.

As you will see from the attached documents, Ann Arbor’s long term debt – its mortgage debt, if you will – has increased from in $119M in 1999 to $246M in 2010.  This is a substantial change and you should understand the reasons behind it.  The short answer is “Infrastructure”.

CPA Comments: Taylor explained that the federal debt is like credit card debt.

TAYLOR’S OMISSION: What Taylor left out was that bonds were not the sole source of funding capital improvements.  The city made substantial down payments from its reserves (savings account) to help pay for these big ticket items.  Using his credit card analogy, to get those reserves, the city cut expenses for groceries so that it could put money into savings for the down payment on the new addition.  For example, the police courts building is a $47 million dollar project but the city borrowed $27.66 million.  The remaining $19.34 million came from savings generated by reducing services or raising fees.

TAYLOR’S MOST SERIOUS OMISSION: Incredibly, Taylor left out the city’s retirement debt. The city’s Blue Ribbon Committee issued a report in May 2005 making recommendations on reforming the plans.  According to the retirement plan actuarial reports, on June 30, 2005 the city had an unfunded retiree healthcare liability of $121,568,000 million. It’s pension plan was overfunded by $14.322  million (plan’s actuary said the assets were $14.322 million more than needed to make future pension payments).  As of June 30, 2010, Ann Arbor had a retiree healthcare debt of  $169,637,000 million and a pension debt of $45,496,000 million.

Ann Arbor’s total debt load, then, is not only the $246 million Taylor claims in his email, a claim repeated by AnnArbor.com, but rather $461,133,000.

The primary projects that led to this increased debt are all projects that were required to address areas of long-term infrastructure need:

1) The approx. $70M bond issuance between 2004-2008 to replace the 1930s era Wastewater Treatment Plant.  I need not stress the importance of a safe and functioning facility of this nature.  These bonds are being repaid directly from sewage fees.  See www.a2gov.org/government/publicservices/waste_water_treatment/Pages/FacilitiesRenovations.aspx

CPA Comments: Taylor goes on to talk about 3 of the infrastructure items:  $70 million for the wastewater treatment plant, $49 million for the underground parking structure and $27 million for the Police Courts building.

TAYLOR’S FACTUAL ERROR: The city did not issue $70 million of sewer bonds between 2004 and 2008.  It issued about $52 million in sewer bonds and about $40 million in water bonds.  Surely the city would not have violated the “bucket rule,” Taylor explained in a previous constituent email, that he generously sent to AnnArbor.com to be repeated verbatim. Download a spreadsheet that correctly lists debt issued, here.

2) The $49M bond issuance in 2009 for the underground parking structure on 5th Ave.  Ann Arbor has a thriving downtown, with a parking system that has shown increased demand even during the Great Recession.  This increased demand has occurred at the same time as we have lost scores of parking spaces due to road reconfiguration projects and the like. Adequate parking for workers, visitors and customers is vital to the continued health of our downtown. These bonds are being repaid from parking system revenues and the DDA’s portion of downtown property taxes capture. See www.a2dda.org/current_projects/s_fifth_ave_parking_structure_project/

CPA Comments: Taylor explains that the undergound parking structure bonds are being paid from DDA parking revenues and the DDA’s portion of downtown property tax capture.

TAYLOR’S OMMISSION: What he fails to tell his constituents is that the parking fees were raised to pay for these bonds, that the structure was built to subsidize a downtown hotel and conference center, and that city taxpayers are on the hook for the bonds if the DDA can’t come up with the money.

TAYLOR’S FACTUAL ERROR: Taylor also claims that the city has lost parking spaces due to road reconfiguration projects even though part of the Library lot structure project is to reconfigure Fifth and Division to add parking spaces.

3) The $27M bond issuance in 2008 for the Police Courts building on Huron and 5th Ave.  This structure was required to house the 15th District Court, formerly located in the County Building, and to provide an adequate Police Station, formerly located on the first floor and basement of the Larcom Building.  The condition of the Police Station was particularly troublesome – cramped quarters, leaks, security insufficiencies, radon, asbestos.  The arrangement was considered ‘only temporary’ in the 1960s.  These bonds are being repaid by the City in part by contributions from the DDA; in part by fees from cell-phone tower leases; and in part by the City out of monies that it would otherwise have paid in rent to house the District Court and various City departments, which were previously renting portions of the Dahlmann City Center Building. See www.a2gov.org/government/publicservices/project_management/upcomingprojects/Documents/AACourt-PoliceFAQs.pdf

CPA Comments:

TAYLOR’S OMMISSION: What Taylor leaves out is that the antenna lease revenue and the DDA payment could be and had been used for other expenses, like downtown police officers.  He also forgot to mention that the new building would have substantial operating costs, that were never part of the financing plan.  In response to a question at a council meeting, Roger Fraser estimated them at about $500,000. The security costs alone are $187,000 per year. Ann Arbor’s CFO Tom Crawford told AnnArbor.com in February 2010 that “utilities alone for the new building are estimated to cost about $130,000 next year, a figure that jumps to $275,000 the first full year of operation.”

Now just because a person does not have any credit card debt and ends every year with more money in the bank than she expected, doesn’t mean that she can afford her mortgage.  It is appropriate, therefore, to ask whether Ann Arbor can afford the debt it has incurred to meet these long term infrastructure needs.

Credit Rating Upgrades

Based upon the dedicated and allocated revenue and payment streams directly associated with these recently issued bonds, I believe that we can meet our obligations without difficulty.  I am not alone in this belief.  With each debt issuance, independent debt rating agencies evaluate the City’s fiscal health.  In the past five years when a majority of the increase in debt issuance has occurred, rating agencies have actually increased the City’s credit rating (e.g., Standard & Poors rates Ann Arbor as AA+ (Exceptional)), reflecting their view of the security and outlook for the City.  Ann Arbor’s credit rating is one of the highest in the State.

CPA Comments: These folks are part of the same Wall Street crowd that gave high ratings to all the toxic asset debt issued by banks.

It is worth noting as well that even with the increased debt carried by the City, Ann Arbor is currently utilizing only 26% of its statutory debt limit.  In 1999 it was utilizing 21% of its statutory debt limit.  In other words, although the absolute amount of debt has doubled to meet infrastructure needs, Ann Arbor’s statutory limit has nearly kept pace.

We live in difficult times and our operating budget remains under severe stress due to revenue declines associated with the University’s purchase of the Pfizer site, decreasing property tax receipts, drastic reductions in state revenue sharing, and near-zero investment income.  These operating budget challenges require us to continue to make substantial changes to how we provide services to residents.  At the same time, Ann Arbor’s long term needs cannot be ignored.  I believe that we have over the past few years taken real and important steps to meeting those long term infrastructure needs in a manner that is fiscally prudent.  After your review of the foregoing, I’d be interested to hear from you.

CPA Comments: Yes, Ann Arbor lost about $3.5 million in tax revenue from Pfizer, but the loss has been offset by tax increases on other property.  Property tax revenue has not gone down. Yes, there have been declines in state revenue sharing, but most of the revenue sharing the city receives is protected by the state Constitution. Ann Arbor could have offset the lost revenue sharing if it had pursued a cheaper alternative to the police/courts building. To focus on the statutory debt load is misleading. A credit rating cannot predict whether Ann Arbor’s General Fund will be able to handle the significantly increased debt payments resulting from, in essence, doubling the city’s non-retirement debt load.

TAYLOR’S OMMISSION: Taylor neglects to mention that the operating budget has become increasingly stressed due to debt payments which have risen exponentially.

Best,
Christopher

P.S. As ever, if you no longer wish to receive these communications, please just let me know and accept my apologies for the intrusion.

Christopher Taylor
ctaylor@a2gov.org
Ann Arbor City Council Member (Third Ward)
734-604-8770 (m)
734-213-3605 (w)