Treasury Officials Confirm Local Economic Development Entities Divert Public School Funding

By The Ann Arbor Independent Editorial Team On Jul 2, 2014 0

by P.D. Lesko

While AAPS Superintendent Dr. Jeanice Kerr Swift publicly challenges Gov. Snyder and legislators over cuts to K-12 funding, local economic development groups siphon away millions of public school dollars through tax increment financing (TIF). Rep. Jeff Irwin says, “…nobody in Lansing is trying to unroll the cumulative impacts of TIF districts…”

ACCORDING TO HER contract, AAPS superintendent Dr. Jeanice Kerr Swift earns around $240,000, including a golden handshake payment and other perks. Ann Arbor SPARK CEO Paul Krutko earns slightly more. Both executives rely entirely on public money to fund their operations.

Paul Krutko’s organization, however, is funded in part through tax increment financing—a mechanism which facilitates the diversion of tax dollars to a taxing authority. In the case of the Ann Arbor Local District Financing Authority (LDFA), tax dollars that authority diverts come from the Ann Arbor Public Schools and are used almost entirely to fund a contract for services with Ann Arbor SPARK.

Thanks to three months of footwork on the part of Rep. Jeff Irwin on behalf of The Ann Arbor Independent, Michigan Treasury officials have finally confirmed that the state, despite being required to do so by law, is not fully reimbursing school districts throughout the state from which economic development organizations siphon funding.

This admission by state Treasury officials puts local politicians in a bind: those who vote in support of extending the Ann Arbor LDFA’s charter—which expires in 2015—will be voting to take funding from education by way of the local school district. Over the last seven years, the LDFA has diverted almost $9 million dollars from the AAPS, up to as much as half of which has never been reimbursed by the Michigan School Aid Fund, according to information provided by Rep. Irwin.

The LDFA “district” is drawn along the boundary of the Downtown Development Authority’s district. Within that boundary, property tax dollars are diverted from the Ann Arbor Public Schools (LDFA), Washtenaw Community College (DDA), City of Ann Arbor (DDA) and the Ann Arbor District Library (DDA).

Between 2009 and 2014, the amount diverted to the LDFA has grown from $1.2 million to $2 million annually. Meanwhile, according to the school district’s most recent audit, students and parents paid the AAPS $750,000 in pay-to-play athletic fees in a shifting of costs onto parents who, in 2013, paid over $175 million in taxes directly to the AAPS.

The Myth of State Reimbursement

Taxpayers are frequently unfamiliar with tax increment financing. TIF uses future gains in taxes to subsidize current improvements, which are projected to create the conditions for projected gains. The completion of a public or private project often results in an increase in the value of surrounding real estate, which generates additional tax revenue.

TIF was originated in 1952 to capture funding for improvements in distressed, underdeveloped, or under-utilized parts of a jurisdiction where development might otherwise not occur.

The TIF method has been discontinued in the state it began in, California. Regardless, thousands of TIF districts still currently operate nationwide in the US, from small to mid-sized cities, as well as in over 100 cities in Michigan.

In Michigan, organizations such as Downtown Development Authorities, TIF Authorities and Local District Financing Authorities (LDFA) are projected to divert over $665,000,000 from the state’s public schools, libraries, community colleges and city general funds, according to officials in the Michigan Department of Treasury as well as data supplied to The Ann Arbor Independent.

Local elected officials, including Mayor Hieftje as well as City Council members, have for years told the public that money diverted by the LDFA and given over to Ann Arbor SPARK in a contract-for-services arrangement, is annually repaid to the local school district by the state.

At a City Council meeting, after Council members tried to reallocate $75,000 from the city’s General Fund to human services instead of to Ann Arbor SPARK, the Mayor, who sits on the Board of Ann Arbor SPARK, expressed frustration:

“Anyone who thinks money that goes to the LDFA takes funding away from the schools is just wrong. That just doesn’t happen,” he said.

The City of Ann Arbor website states: “The (LDFA’s)tax capture is based on the increase in taxable value due to new development and appreciation above the base year of 2002. These dollars come from taxes committed to schools and are, by law, repaid to the local school district by the state so their funding remains whole. So in effect, the State funds the LDFA.”

Answering the Reimbursement Question

In March 2014, The Ann Arbor Independent asked Ann Arbor’s state representative, Jeff Irwin, to find out exactly how much money Ann Arbor’s local LDFA and DDA divert. We also asked him to find out exactly how much of the LDFA TIF money is repaid by the state.

In his March 20 response to the request that he work with Treasury officials to produce the information, Rep. Irwin said, “In the meantime, I think it’s important to mention that, regardless of whether and how these TIF funds are replaced, AAPS is a donor district. Therefore, since Ann Arbor sends so much more money to Lansing than we receive in per pupil allotments, these TIF captures don’t have a direct effect on AAPS.”

However, after speaking at length with officials from the Michigan Treasury Department, on June 4 Rep. Irwin reversed himself and said:

“The DDA capture (or LDFA capture) is reimbursed to local districts so that any TIF draws on the local revenue are replaced to the local schools. However, the GF (General Fund) does not reimburse the SAF (School Aid Fund) for the statewide impact of these tax captures. Therefore, statewide there is a reduction of available dollars for schools commensurate with the reassignment of those revenues to DDAs or LDFAs.”

Treasury officials, through Rep. Irwin, have effectively contradicted public claims made by local appointed and elected officials since 2010, when SPARK’s job creation and retention data began to be scrutinized and questioned by local media.

The Public School Skim

In 2001, the Michigan Economic Development Corporation (MEDC) created eleven SmartZones throughout Michigan, including Ann Arbor/Ypsilanti.

According to the city’s website, “The purpose of the Ann Arbor/Ypsilanti SmartZone (LDFA) is to provide capital needed for the facilitation of the commercialization of research products being developed at University of Michigan and Eastern Michigan University and the development of private high technology enterprises that, but for this organization, would be deferred, or located outside of the SmartZone area.”

In the LDFA’s June 28, 2002 application to the Michigan Economic Development Corporation for initial funding, the list of founding partners includes:

The University of Michigan Patent Office (Technology Trasfer)
Eastern Michigan University
Washtenaw Community College
MichBio
Butzel Long
Miller Canfield Paddock Stone
Price Waterhouse Coopers
Arbor Partner
Arboretum Ventures
Ardesta
M Group
North Coast Technology Investors

A report prepared by Michigan Economic Development head Michael Finney for Gov. Snyder shows that since 2006, 20 of the 60 business loans originated by Ann Arbor SPARK have been defaulted on. Stephen Lange Ranzini sits on the city’s Economic Development Board and is a bank president. In response to a question about whether a 30 percent default rate is excessive, he said this in an emailed response:

“The answer to your question depends upon what kind of loans you are originating and the credit worthiness of the borrower pool. For example, if you were originating high risk credit card loans (to individuals or businesses), you might have a default rate that high, but you’d better be charging an interest rate above the Michigan state usury rate of 25% per annum (which is legal for national banks located in another state with a higher usury limit (such as South Dakota)), or you will go broke.”

Ranzini went on to explain, “If you are doing venture capital, 1/3rd failure rate isn’t so bad really, but again you’d better be charging a much higher interest rate (perhaps as much as 25%. So, to answer your question, unless there was equity upside and the lender was exempt from the usury limits, there would be no way to make a 20 in 60 default rate work in a viable business, unless the loans were well collateralized and the losses on each loan that defaults were very low.”

SPARK originated several of the defaulted loans without collateral and charged interest rates of between 9-12 percent. If Stephen Ranzini’s analysis is accurate, SPARK has lost millions in public money that was never recovered, including money which would have gone to public school coffers.

SPARK entity didn’t go broke, because it continues to be given taxpayer funds from both local, county and state sources.

Dr. Swift has been vocal in her criticisms of Gov. Snyder and Michigan legislators who, she has said, are underfunding K-12 education. Swift has not, to date, challenged the TIF district which feeds public school tax dollars to SPARK. Neither has she spoken in public about the School Aid Fund money which is reduced by the LDFA that exists in her school district.

Would the superintendent come out against the renewal of the LFDA’s charter in 2015? She’s not talking. It was made clear, however, from Freedom of Information Act requests filed that AAPS officials are aware of the LDFA’s impact on their bottom line.