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Infrastructure funding in the age of austerity – just don’t call it a “tax”

17 Jan 2017

As demands for municipal services increase, costs go up and tax revenues flatten or fall, what is a municipality to do?  Most Michigan politicians have decided that even to suggest more taxes is the kiss of death.  Everyone agrees Michigan’s roads need work.  The gas tax went up on January 1 and even that increase was widely viewed as an inadequate to fully improve our sub-par roads. Recently, a Michigan State study indicated that nationally, roughly 12% of households cannot afford the cost of water services and, if water rates rise to cover repair and upgrade expenses due to the aging of our systems and other factors, that unaffordability factor may go up to almost 36% in the next five years.

The Governor’s 2016 Infrastructure Commission, appointed in the wake of the Flint Water Crisis, reported that we need a modern infrastructure system to compete globally, to have economic prosperity, and to have healthy citizens and a healthy environment.  However, the Commission did not answer the all-important question of how to fund all of this work.  The Commission reports that Michigan lags behind every other state in the region in capital funding for infrastructure and that Michigan needs to spend $4 Billion more every year than it currently does just to align with an average state and the State’s needs.  This would be a 7% increase in spending.  The Commission did not address how Michigan should fund this shortfall.

The business group, Business Leaders for Michigan issued a report earlier this month. That Report reached the same conclusion and proposed that the State ramp up its spending and opened a door to creative and novel financing approaches including user fees which the Report indicated may be used to fund costs of “services, enhancements to increase the quality of life, and … administrative and regulatory processes.”  This report discusses such fundraising approaches as: fees per mile traveled (vs gasoline taxes); public-private partnerships; fees based on property value increase; fees which take into account all lifetime system costs; selling or leasing systems to raise funds for new infrastructure improvements; toll roads and other more “outside the box” approaches.

We have seen this before but not on a statewide approach such as when municipal governments try to fund environmental initiatives, such as stormwater management (required by federal law). The cities of Lansing, Jackson and Detroit all adopted stormwater “fees” based on the paved acreage of various properties within their jurisdiction.  Clearly, to the municipalities, this seems like a good idea – otherwise, why would they keep doing it? Reportedly, nine Michigan communities have created stormwater utilities to impose such charges (Adrian, Ann Arbor, Berkley, Chelsea, Harper Woods, Jackson, Marquette, New Baltimore, and St Clair Shores).

The Michigan Supreme Court established a three part test to distinguish between a fee and a tax: (1) “a user fee must serve a regulatory purpose rather than a revenue-raising purpose;” (2) “user fees must be proportionate to the necessary costs of the service;” and (3) “user fees must be voluntary.”  Bolt v Lansing, 459 Mich 152, 161-162 (1998)

Unfortunately for the municipalities, the Michigan Courts keep striking these fees down as illegal, hidden taxes.  In the case of Jackson County v City of Jackson, the plaintiffs challenged a stormwater management charge imposed by the Jackson City Council. The Court of Appeals ruled that the charge was a tax imposed in violation of §31 of the Headlee Amendment to the Michigan Constitution. The court held that the charge: (1) did not serve a regulatory purpose because it shifted funding of certain activities from the general fund to the charge; (2) was disproportionate to the benefits conferred upon the payor as there were no payor-specific benefits; and (3) was not voluntary because there was no way to avoid the charge by doing, or not doing, something.   The Court of Appeals cited Bolt v Lansing, which invalidated a similar stormwater charge on similar bases. Ultimately, both courts held these “charges” to be taxes subject to, and failing to meet, Headlee Amendment requirements.

Last year, the Michigan Legislature saw the introduction of a bill that would authorize such “fees,” regarding water and sewer, ostensibly to make them harder to defeat in Court under the Bolt test. The need is real and I am a big believer in top quality infrastructure which needs to be paid for.  My question is, with the 1978 Headlee Amendment that puts the size and cost of government in the hands of the taxpayers, and with a backdrop of fees rising beyond what some citizens can afford – can and should our Legislature try to pass this off by various “fees” without getting the voters’ approval as well as other “creative” solutions, some of which may cost the taxpayers less in the short run but more in the long run?  I’m all for the efficiencies in purchasing and scheduling that Governor Snyder has been pushing for but, as we watch more and more systems fail (like the recent Fraser sinkhole), it is clear that we cannot continue to push this off – if the citizens see that, they should be willing to pay for it. If these expenses get passed on in the form of fees which are not voted on and the citizenry gets hit with larger fees that they were not told about, who thinks that will play well at the voting booth?

What will 2017 Bring? Dramatic Change?

20 Dec 2016

edit_calendar_ssk_47433454In prior years, we knew that regulatory and environmental change was coming but we expected it to be slow and incremental.  With an unknown quantity like President Elect Trump, one thing is clear – no one really knows what may happen.  Here are a few possibilities:

1.  Coal/Cleaner Energy Generation – revitalizing the coal industry was part of Mr. Trump’s midwest stump speeches.  Will Mr. Trump be able to reverse Barack Obama’s Clean Power Plan? What about the Paris Climate Accord?  Certainly, his team is looking at both of those right now. The dispute in Michigan v. EPA, decided in June 2015, continues to rage.  In 2015, the US Supreme Court ruled that the EPA didn’t properly justify its rule governing mercury and toxic pollution (MATS) from power plants because it did not specifically address costs at the initial stage of the rulemaking process. In April, the EPA announced it was standing by its MATS rule and concluded that the benefits far outweighed the costs.  Petitioners continue to litigate whether the EPA properly evaluated costs.  Here in Michigan, new legislation has been passed (and is awaiting the Governor’s signature) intended to encourage additional investment in energy generation and transmission while balancing consumer choice and a greater percentage of renewable energy generation.  Will it work? At a reasonable cost?

2. Power Generation Subsidies/Oil/Gas Generation – Mr. Trump’s attacks on “crony capitalism” would seem to mean that he will stop financial incentives for solar and wind generation.  Will he also attack oil and natural gas supports in the tax code?  Will he open up ANWAR to oil/gas exploration?  Will he scale back attempts to regulate fracking?  This will be difficult in light of the December EPA Report  which concluded that fracking posed problems such as:  fracking water withdrawals compete with other water needs; spills of hydraulic fracturing fluids and chemicals or produced water may impair groundwater resources; injection of hydraulic fracturing fluids into wells may allow gases or liquids to move to groundwater resources; discharge of inadequately treated hydraulic fracturing wastewater to surface water resources; and contamination of groundwater due to disposal or storage of fracturing wastewater.

3. Pipelines – will Mr. Trump reverse the Obama administration’s dim view of oil and gas pipelines such as the Keystone XL and Dakota Access Pipelines?  How will this affect Michigan where public awareness of two 60+ year-old pipelines under the Mackinac Straits has galvanized both sides of the political spectrum into action.  In 2014, Michigan convened a pipeline task force which issued a report in 2015.  In September, 2015, the State entered into a written agreement with Enbridge to prevent the transport of heavy crude oil through the Straits Pipelines.  The task force also recommended that the pipelines be independently evaluated and that additional financial assurance be provided.  The State solicited Requests for Information and Proposals (RFPs) and Enbridge agreed to pay $3.6 Million for the evaluation of the Straits Pipelines.  An independent evaluation of alternatives to the Line 5 pipelines is also underway.  When those will be completed is not known.

4. Infrastructure – Mr. Trump campaigned on infrastructure (although to hear him tell it, that only encompasses airport quality), and Governor Snyder appointed a 21st Century Infrastructure Task Force which concluded that the State needed to be investing $4 Billion more than it was in infrastructure to address roads, bridges, internet, water, sewer and other infrastructure needs.  Given the recent nationally publicized Flint Water debacle, will Michigan find the intestinal fortitude to fully invest in infrastructure or will we continue to patch and delay?  Given the State’s recent fight against a federal judge’s order to deliver clean water, and Michigan legislators “default anti-tax setting,” the future does not bode well.

5. Brownfields – as previously reported, Michigan adopted legislation streamlining its brownfield funding laws and deferred action on Dan Gilbert’s “transformational” brownfield funding legislation.  Will that resurface in early 2017?  I expect it will.

6. Other issues – there are a number of other issues on the horizon including cleanup standards, the maturing of the Great Lakes Water Authority and its ability to deliver clean water and septic services at a reasonable price, Michigan’s effort to reimagine its solid waste program, water withdrawals and protection of the Great Lakes from invasive species and nutrients leading to algal blooms.

Gilbert Transformational Brownfield Legislation Stalls

12 Dec 2016

MOnroeblock9Dan Gilbert’s team drafted legislation based on the current Brownfield law.  This legislation was  moving rapidly through the Michigan Legislature until the Michigan Speaker of the House announced that the House would wait until next year to move the bills forward.  While this seems to have killed the bills for now, some are still lobbying for them to become law before 2017.

Articles had appeared in the local papers describing two proposed towers for the Monroe block of downtown Detroit (pictured), These articles include statements that the buildings won’t be built without this legislation being enacted (and presumably implemented in their favor).

The legislation is based on an existing approach – when a project increases property value, the taxes on that increased value can be captured and used to pay for  “eligible expenses.” Typically, these TIF (tax increment financing) programs put the risk of failure on the developer (where it belongs) while they increase the potential return by reimbursing the developer for expenses it would otherwise absorb.  The current brownfield law allows communities to issue bonds and pledge their full faith and credit, but in the brownfield “universe” that almost never happens.

The brownfield TIF law allows reimbursements for cleaning up contamination and taking protective measures and, in more urban communities, for costs of site preparation and infrastructure improvements.   This State, like many others, has decided that these incentives are necessary to entice developers to take desired risks. This is not a tax credit, nor, do the taxpayers of the State front any money to the developer.  If the development does not result in the increase in taxes expected, the developer loses. Without a bond, if there is no tax increment, the community/state owes the developer nothing.  Further, the community is held harmless because the predevelopment property taxes continue to go to the government as they did before project development. In short, this is a kind of “deferred gratification” for the taxing authorities as they must wait until the developer is repaid to get taxes on the increased property values (certain taxes are exempted from the TIF program and so there is some immediate benefit to the community).

So what’s the fuss about the Gilbert legislation?  These bills take the Brownfield TIF and put it on a massive dose of steroids. In addition to capturing real property taxes,  the Gilbert team proposes to capture both income taxes and sales taxes generated on a property following its redevelopment, if the project is “transformational.” This legislation vastly broadens the eligible expenses which can be reimbursed.  Instead of covering only environmental cleanups, environmental due care and communal benefits like infrastructure, the Gilbert legislation would allow a developer to be reimbursed for all of its construction costs. This is bold and would almost certainly lead to new, riskier developments. A developer could wind up with a significant competitive advantage because his costs are could be fully reimbursed. This could allow such a developer to undercut the market or amass significant profits.  The potential for market distortion appears to have been overlooked by the few commentators who have spoken on the subject.

The legislation includes a cap on the number of such transformational projects per year and per community and with a maximum of $50 Million in the first year’s capture for new projects. It is tiered so what is transformational (based on a dollar amount) varies based on the size of the community. This was a sop to smaller communities to get their support for this legislation as was a provision putting funds into the State’s Brownfield revolving fund. There are also some exemptions from the spending requirements including one that seems directed right at Flint.

“Transformational” can mean many different things  but the legislation’s focus is whether a project will transform local economic development, community revitalization, growth in population, commercial activity and employment.

The legislation received little notice until recently. Interestingly, it has been criticized by those on the left and on the right. A Free Press column calling this legalized “serfdom” for employees seems over-the-top. Yes, taxes will be collected and ultimately reimbursed to the developer.  I don’t see that equaling employee slavery. The Mackinac Center piece is a bit closer to the mark. They complain of “crony capitalism.”  The fact that only a few developers can get these projects approved per year and one per community per year does seem like the sort of favoritism inherent in crony capitalism. Further, the fact that the projects are limited to extremely expensive ones (on a range between $15 Million and $500 Million depending on county population), again, seems to mean that only the elite get benefits that are not available to the ordinary developer. In that regard, as the Mackinac Center points out, this is no different than any TIF financing model (and there are many of them in use throughout Michigan and the US).  This is the world we live in as evidenced by President-Elect Trump’s efforts to keep a Carrier plant in Indiana.

The capture of sales and income taxes would be new to Michigan and would put Michigan in the minority of states that allow such capture.

What has not been commented on is the need for a mechanism to ensure that the taxpayers of the State of Michigan are held harmless – so that the income and sales taxes to be captured are truly new to the State and not the result of a business moving its operations from one place to another.  This mechanism (and others needed) are to be developed later.  This is a practical consideration with large implications.  The State’s review of this legislation thus far includes an admission that the Legislature has no idea how much this might actually cost the State in revenue if it passes as is.

Will this package of bills pass?  I expect it will.  If not this month, then early next year.  If the Legislature doesn’t address some of the concerns expressed above, we may find ourselves with some major projects and some unintended consequences not too far down the road.

Michigan alternative electrical generation – Henry Ford is not a good analogy

5 Oct 2015

utility workA recent op ed in Crains Detroit Business argued that legislation pending in Lansing regarding Michigan’s electrical system is wrongheaded. The authors focus on the proposed elimination of the renewable portfolio standard (RPS requiring 10% of Michigan’s electricity be generated by renewables by this year) by the legislation and argue that the legislation will cost Michigan energy jobs. They argue that  Henry Ford wouldn’t have built his automobiles here if there wasn’t a legislative infrastructure to support buyers of his cars.  I think I agree with the authors that we should retain the RPS, but their argument doesn’t persuade me. I believe that the future will include a greater mix of sources of electricity. It will not be simply large power coal-fired plants owned by large utilities providing us electricity.

However, without any historical discussion, they suggest that Henry Ford located his operations in Michigan because somehow the regulatory climate supported buyers of his cars, because in their words Lansing didn’t “kowtow” to the horse and buggy industry and paved streets and put up traffic lights. That’s simply not true.  Detroit’s mayor Hazen Pingree began a push to pave streets in the 1890’s and Ford didn’t begin production of his Model T until 1908 (making over 10,000 of them in 1909).  The traffic light wasn’t patented until 1918 and reportedly the first one was installed in Detroit in 1920 – again, well after Mr. Ford had begun his operations (in 1920, Ford reportedly manufactured 1 Million cars worldwide).

As most students of Detroit history know, the automobile industry focused on Detroit because Henry Ford was from here, there was a history of manufacturing, and there was easy access to raw materials. There was no amazing roadway system which led Ford to conclude “this is the place to build the automobile.”  In short, it was an accident of luck, history, geography and economics. I think a better analogy is the railroads, which required a dedicated infrastructure as Congress wanted to open the western United States to commerce and did so by granting rights, privileges and land so that the railroads could establish their “grid” at a lower cost.

The authors of the op ed pay short shrift to the discussion of the legislation’s other major change – elimination of net metering, but it appears that they view this as problematic also. Net metering is the current system whereby individuals and small businesses that generate their own electricity can sell it back to the grid.  The net metering issue is not over whether individual electricity generators can or should sell power back to the grid – rather, it’s what should be the price of that sale. Currently, individual generators can sell power back to the grid at the retail price of electricity charged by the utilities. This has been a boon for encouraging individuals and others to put up wind turbines and solar cells. The ability to sell excess electricity at the same price that the utility charges certainly means a faster payback which means more people will invest in it.

Utilities argue that this is a subsidy and they’re right.  Individual generators do not have to meet regulatory requirements relating to the power that they generate, nor do they have the costs of ensuring long-term reliability or the overhead costs of delivering power to consumers.  If you took your home-grown tomatoes to Kroger or Meijer, would you expect the law to require the store to buy them from you and at the same price the store sells tomatoes? Of course not.  In my view, the question is not whether there should be an incentive for individuals to create distributed power but, rather, how much of an incentive is fair to incentivize distributed power generation and fair to those who will continue to depend on the existing grid that will need upkeep.

We have an infrastructure in place that requires maintenance and upgrading for the 21st-century.  This is not a problem with a simple one-size-fits all-solution. The Legislature needs a more nuanced approach than simply blowing up the current system, but let’s get the arguments right.

What will be the top stories of 2015?

23 Jan 2015

edit_calendar_ssk_47433454Happy new year!  I know it’s almost February but as this is my first blog post of the year, I thought (particularly after hearing the State of the Union and the State of the State speeches)  I’d predict the big stories of 2015 in no particular order:

  • Wetland Rules – the EPA and the Army Corps of Engineers finally proposed rules in 2014  to address the fallout of the Rapanos case.  The proposal was met with a firestorm of disapproval, particularly from the farming world.  Will they ever finalize them?
  • Brownfield TIF Legislation – after all that work last year, will the Legislature take up streamlining this program and expanding it to allow Michigan to be even more competitive in redeveloping brownfields?
  • EPA Greenhouse Gas Rules vs. Congress – in September, 2013, EPA issued a proposal for carbon pollution from new power plants; in June  2014, EPA issued a proposal to cut carbon pollution from existing power plants – the GOP and coal and oil interests in Congress have fought this for some time.  Will the rules be adopted and enforced?  Will there be enough time for electricity generators to get alternative plans in place before being forced to shutter their oldest, least efficient and most polluting plants?
  • Keystone Pipeline – President Obama and Congress have been locked in a politically charged dispute over the Keystone XL pipeline for almost 3 years now – he seemed to indicate in the State of the Union that he’d veto legislation – will he?
  • Energy Policy – Governor Snyder has pushed for an energy policy, legislation is expected this year and the Governor recently mentioned an intention to develop a new energy agency that would make Michigan more competitive for business.  What that will entail in light of the likely changes due to federal regulations will be interesting to see – will Michigan upgrade or discard its renewable portfolio standard? Can Michigan reduce electrical cost while improving both reliability and environmental performance?
  • Water Policy – the Governor’s long-awaited great lakes policy is expected this year.
  • Pipelines – in addition to the Keystone pipeline, there has been a lot of interest in pipelines in, under and around the Great Lakes – could there be federal and state changes there?
  • Detroit’s Water Authority – it is supposed to morph into a regional authority – as I said previously, the easy part was getting to the agreement last year – will the hard work succeed or will it fail, causing major shockwaves for roughly half of the State’s population?

The votes are in – now comes the hard part

13 Oct 2014

Photo Credit: Christine Cousins, www.christinecousins.com

Photo Credit: Christine Cousins, www.christinecousins.com

Each of the major players (Detroit and Wayne, Oakland and Macomb counties) have now all approved joining the newly formed Great Lakes Water and Sewer Authority; so, we’re good to go and everything is fine, right?  Well, not so fast.  All the votes mean so far is that the Authority exists and that it has four members under the terms of a Memorandum of Agreement and Articles of Incorporation.  Frankly, there wasn’t much doubt that it would be approved and the only question was Macomb.  Once Detroit and Wayne approved it (which was fairly certain), if Oakland or Macomb didn’t, the governor would appoint their representatives and  they could be charged more than those who joined. Landlocked Oakland was a “gimme.” Macomb, with access to Lake St. Clair could have opted to develop its own system – as others have done. (more…)

Climate change and infrastructure

27 May 2014

bumperstickerAfter that 100 year winter we just came out of, and the potholes it left behind, everyone seems to be talking about infrastructure.  Even the Michigan Legislature and Chamber of Commerce are supporting tax increases to support road and bridge repairs.  While potholes are annoying, sinkholes and bridge failures can be some pretty serious stuff, as has been recently reported.   President Obama has also spoken recently about infrastructure investment as he asks Congress to appropriate additional highway funds.

There has also been a slew of recent news about climate change including a national assessment report and reports of major antarctic melting.  Given all this news, our investments in infrastructure should take climate change into account. We all know about freeze-thaw and the havoc it can wreak on our roads and bridges. With weather becoming less predictable and more extreme, as we rebuild our infrastructure, we certainly need to think about doing it right the first time including:

  • Designing tougher, more resilient, lower maintenance roadways, bridges, facilities and roadsides;
  • Incorporating materials which will perform more consistently in weather extremes;
  • Better controls of runoff including pavement redesign and strengthening drain, river and stream banks and ditches to prevent erosion;
  • Stronger and lower maintenance bridge design;
  • Changes in roadside vegetation to ensure survival and water uptake during floods as well as drought and erosion resiliency;
  • Larger capacity pumps/pump stations to prevent freeway flooding; and
  • Better sewer and water lines to prevent failures as we experience more freeze-thaw, deeper frosts and drought conditions.

While the east and west coasts are expected to take the biggest climate-based hit (think Katrina, Sandy and California droughts and wildfires) drought, higher temperatures and stronger storm events threaten roads and we have already seen Great Lakes levels impact shipping and commerce.  A recent government report discussed the likely impacts on energy infrastructure including:

  • increased demands for electricity;
  • greater stress on the grid as we experience stronger storms; and
  • power plants’ vulnerability to water shortages.

From roads to utility lines, water lines and sewers, we are on the cusp of a brave new world.  I, for one, think that if we are about to invest billions in putting Michigan back together after many decades of neglect, we ought to do it with our eyes on the future and do it right the first time.  If that costs more, it will be worth it in failures and crises avoided down the road and will provide a base from which Michigan’s economy can grow.