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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?

Reduce, Reuse and Recycle Homes in Detroit

4 Jan 2017

table1“Would you cut down an old growth forest just to put the lumber in a landfill? That’s what typical demolition of a neighborhood does.” This was our introduction from Kevin at Workshop  – a Detroit-based furniture manufacturer that uses lumber reclaimed from Detroit’s vacant and abandoned building stock.  Detroit has been trying to save homes that can be saved but is moving quickly to demolish homes which are beyond repair to stabilize the remaining neighborhoods as the City continues to reinvent itself.

Detroit has reportedly demolished 10,700 homes since 2014 and has another 2,436 in the pipeline.  The bulk of these homes are demolished the way you’d expect – wrecking ball, dumpster, landfill.  However, some houses are being “deconstructed” rather than demolished. Reclaim Detroit is working to fight blight, create jobs for Detroiters, and prevent resources from being landfilled by using deconstruction and reuse techniques.  Their crews dismantle parts of buildings that would otherwise be destroyed, saving antique doors to old growth lumber, while training workers in the green construction and demolition industry. I’ve been told that the average Detroit house has some 10,000 board feet of reusable lumber which would normally go to waste.  Some sources I’ve read indicate that would equal some 20 tons, or roughly  1-3 acres, of trees.

My family and I have been trying to live our espoused values and, while separating our recyclables, trying to be more energy efficient and composting is a start, when we decided to get a new kitchen table (don’t worry, the old one has a new home), we explored options and found Workshop.  The table is old made new again and even is stamped with the address that was the source of the wood.   We’re looking forward to using it for many years to come.

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.

Protect the lakes – don’t flush your medicines – here’s how

24 Jun 2016

A few y13445475_10208142314013787_6103794917851915726_n (1)ears ago, the University of Michigan confirmed that it is a bad idea to put old medicines down the drain.  The State of Michigan agrees.  Here  is a link to the MDEQ’s website on this topic.  There have been concerns regarding the impacts of pharmaceuticals on wildlife, as most wastewater treatment plants are not designed or equipped to treat for medicines.

A few years ago, we had to rely on special programs to properly dispose of old medications,  but while recently helping my father-in-law, I learned that there are many more local drop off sites than before.  Here is one website that you can use to locate take-back locations. The Michigan State Police are now taking back medications at their 29 posts. The Oakland County Sheriff has launched Operation Medicine Cabinet with 33 locations across the County – these will accept all dry medicines.  If you have to put medications in the trash, here are instructions on how best to prepare them for disposal.

Why is flushing medicine a bad idea? The UM report talks about creating antibiotic resistant superbugs and there have been other reports about hormonal changes in fish, and finding traces of various prescription substances in drinking water (yes, what we flush can wind up in someone else’s drinking supply).

Earth Day 2016 – hopefully this year will be better

22 Apr 2016

NASA_Earth
On this, the 46th Earth Day, I have reflected on both how far we have come and how much further we have to go.  Certainly, our waters and air are cleaner than they were in 1970. Our energy and cars are cleaner as well. However, the environmental challenges our society now faces are more complex and more granular and, therefore, harder to “solve.” Think about algae in Lake Erie and invasive species throughout our lakes and lands – those are much harder to deal with than a handful of industrial polluters.

Given the events of the last year in Flint, Michigan has become the country’s “canary in a coal mine” with respect to lead. More people are talking about lead and know about it than literally ever before.  When John Oliver spends 18 minutes on it on HBO, you know it is permeating the nation’s consciousness.  In some cases, it is possible we are focusing too much on water and not enough on paint and dust.  Despite the political posturing and the recent criminal charges, I do expect that the politicians and regulators will, in the near term, step up  and we will see greater action on lead removal and protection. Unfortunately, that has been the pattern – major environmental problems result in new environmental initiatives.

Unfortunately, the Flint crisis is likely to delay, perhaps indefinitely, the State’s efforts on developing a Michigan energy policy and, despite his recent letter to State employees, regulatory paralysis will likely reign in Lansing. It is difficult to see State agency employees taking anything other than the most conservative of positions to avoid falling prey to the kinds of problems that occurred in and from the Flint crisis – criminal charges have a way of focusing the mind.

The lack of: (i) an energy policy; (ii) a current solid waste policy; and (iii) a fully funded sustainable program to support brownfield redevelopment (although long promised legislation on brownfield incentives was recently introduced) coupled with the greater focus on petroleum transport via pipeline, particularly, under the Great Lakes, makes me wonder how things will look here in Michigan on the next Earth Day.  Michiganders have always had a healthy respect for our environment – we were among the first in the nation to protect wetlands and waters – the 1950’s vintage easement on pipeline 5 under the straights of Mackinac was cutting edge in its time.  Will Michigan resume its previous environmental leadership or will we continue to struggle as we have for the last few years?  Being in a negative national spotlight is not something any of us sought but now that we’re here – perhaps it is time to step up and take a leadership role on the environment as we once did.  It will cost money and effort but the results – our health and the health of the environment are worth it.

Flint – the lessons we are learning: no longer out of sight – out of mind

22 Jan 2016

watertankIt seems the whole Country is talking about Flint.  There is justifiable outrage about the process, the horrible impact on the community and the failures to detect and swiftly respond to the Flint water crisis.  There has been a lot of finger pointing about who is responsible but little discussion about preventing this from happening again (as Governor Snyder promised).  Here are seven questions that I think people will,or should be, thinking about as the initial furor dies down:

1. Was using Flint River water a bad idea or a good idea that went horribly wrong?  The Flint water crisis was a failure of execution.  The Flint River was known to be a poor quality water source but that doesn’t mean that the decision to switch to the River was wrong from the start.  Without getting too far down the blame game – it is clear that in June of 2013 (almost 9 months before the water switch), the then-Emergency Manager hired an engineering firm to figure out how to manage the Flint River water.  There has been, to my knowledge, zero discussion of what that firm, Lockwood, Andrews & Newnam, did or what they were qualified to do.  Had they done their job properly and advised the City and Emergency Manager properly, either Flint would’ve not made the switch or would’ve treated the water properly.  I expect that there will be hearings about this eventually.

2. Who should be preventing such problems?  In short, the EPA, the MDEQ, the Michigan Department of Public Health and the local government.  Governor Snyder’s own Task Force concluded that the MDEQ dropped the ball – stating that there was: (1) a culture of minimalist “technical compliance”  that failed to focus on the intent of the laws MDEQ was charged to implement; (2) a failure to respond in both substance and tone to the public’s concerns; (3) a failure to understand the federal lead and copper rule, particularly focusing on optimizing corrosion control – reportedly MDEQ told Flint that treatment for corrosion control was not needed until after two six month monitoring periods had been completed.

Allegations that MDEQ dropped bad results from its water testing seem to reflect the Governor’s Task Force’s concerns and, along with allegations that the Michigan Health Department hid lead health data, may lead to criminal charges.  Reports that both the Michigan Attorney General and the federal Justice Department are investigating may be leading some to have sleepless nights.

The EPA also bears responsibility – they recently (and almost certainly in response to Flint) released this Memorandum clarifying the requirement of corrosion control for communities with 50,000 or more residents.  Larger still is the assertion that EPA staff knew before June of 2015 that Flint wasn’t using required corrosion control and that a staff memo on the topic was buried.  On January 21, EPA issued a fairly scathing letter and emergency order to the State and City and so, “working together” seems a bit far off.

Both the State of Michigan and the EPA have established task forces and working groups looking at the causes of, and responses to, the Flint situation -my question is will there be correction at the agencies and better communication between them or will nothing change?

3. What about the rest of the State?  The Flint situation has further weakened the public’s trust in government’s ability to protect them.  Will this lead to people in Detroit, Lansing, Grand Rapids and elsewhere to question if their water systems are protective of human health?  Given that the nascent Great Lakes Water Authority (which serves almost half the State’s residents) is just getting off the ground and its system has parts dating back to the 1800s, will there be additional testing and assurances given that the tap water we all thought was safe really is?  For your information, here is a 2014 DWSD report that reflects “acceptable” amounts of lead in Detroit’s drinking water at taps they evaluated.

4. How to improve governmental transparency?  Governor Snyder released 274 pages of emails and, for the most part, my review reflects that the Governor was out of the loop until late September of 2015 and then, he began to mobilize the State to respond. Why it took until January for him to issue a disaster proclamation and seek Federal aid is not clear.  The Governor could have stonewalled on his emails but in the face of public pressure, he released them.  Some have made hay out of the fact that he did not release his 2013 emails – when the decision to switch the water source was made.  I doubt there’s anything there but agree that he should release those as well.  One thing that should come out of this is an amendment to Michigan’s Freedom of Information Act to remove the blanket exemption from the Governor and his aides.  In the interest of good government, the inner workings of the highest levels of the administration should be open to the public as much as the inner workings of any of the State’s agencies.  Michigan is only one of two states to have such a blanket exemption and I think it’s time for that to change.

5. Will Michigan change the Emergency Manager law?  Many on the left have castigated the Governor for the Emergency Manager law he championed, arguing that it is unfair and improperly denies the public their voting rights and right to elected representation.  While I am not going to debate that here, it appears that the Flint Emergency Managers (there were several of them during the time in question – itself a problem) operated in an informational vacuum. This letter from the Emergency Manager in March of 2014 reflects a decision to use the Flint River rather than Detroit Water and appears to have been made without public consultation or comment.  I can see calls to change the law here based on Flint’s experience.  Certainly, better oversight of Emergency Managers is a must.

6. What about the infrastructure?  Governor Snyder announced that he  is convening a commission to study Michigan’s infrastructure needs, threats, opportunities and costs. The commission will be charged with recommending action items and investments to protect our health and well-being. Top priorities will include: water and sewer infrastructure, energy and electrical grids, broadband modernization, and upgrading the aging Soo Locks. The commission will lay the groundwork for state and municipal actions to take place.  Bluntly, this is long overdue and, candidly, given how poorly Michigan’s recent road funding process went, I’m dubious about whether this will make a difference with our State Legislature.  This needs to be the State government’s number one priority.  However, given the political damage Governor Snyder has suffered, it seems that a program of major infrastructure investment is a long shot – necessary but unlikely.  Will our “fix on failure” approach continue? Given that estimates to fix the Flint water system run to $60 Million Dollars (or more), and the Detroit/Great Lakes system into the hundreds of millions, if not billions, do we have the intestinal fortitude to invest in the future and in our health and that of our children? Do we need to replace the lead pipes or is it acceptable to rely on corrosion control treatment?

7. Will anyone going to jail?  Many people have said “this is criminal” and under federal and State law, prosecutors will be looking to see if there was “reckless disregard of the consequences,” “gross negligence” or an “intentional failure to obtain or follow proper regulatory approval or direction” which may lead to possible criminal charges.  The failure to use corrosion control seems a likely focal point as it might satisfy one or more of the above standards – but the facts still need to come out.  It seems that the strongest argument for criminal charges may be the altering of reports or data, covering up the lead results or obstructing the investigation. Certainly, civil lawsuits will abound (and have begun) and civil penalties may be imposed but, generally, making a mistake, even one of this gigantic magnitude with these horrendous consequences is unlikely to support a criminal conviction.  That’s why we have ballot boxes.