TAX IMPACT ON OAKLAND COUNTY RESIDENTS AND OTHER SIGNIFICANT BUSINESS ISSUES – RTA

PLAN II DRAFT

OAKLAND COUNTY, MICHIGAN

June 4, 2018

1) Three principal documents were provided to RTA Board members through early May 2018:

a) ‘Connect Southeast Michigan – Framework Summary’, March 2018. Released in mid-March.

Little or no financial information was contained in this document.

b) ‘Connect Southeast Michigan Transit Plan – Draft, dated May 2018. Released for a May 10, 2018
RTA Board meeting. (RTA Plan II).

c) Excel spreadsheet by county / Detroit for the 20-year projections by line item. Included both
operating and capital components. Released for a May 10, 2018 RTA Board meeting.

2) Overview of deficiencies, errors and omissions in the RTA Plan II:

a) Budgets can only be understood by way of the assumptions used to arrive at the amounts cited
in that budget. If the assumptions are based on incorrect metrics, the budget is likely wrong.

b) The 2018 RTA Plan II continues many of the same errors that existed in the 2016 RTA Plan.
Some of the errors in the RTA Plan II are actually worse than the prior Plan. Replicating the
same errors, errors previously identified to RTA staff, raises the question as to whether the
errors are intentional.

c) There was an apparent lack of involvement in the development of the operating and capital
budgets by the finance departments of the counties / Detroit with the second Plan. No County /
Detroit consensus was reached on the proposed budgets making clear that the Plan was not
appropriately vetted.

d) Per Plan II, property tax revenues comprise roughly 80% of the total revenues for the RTA Plan. .
Given the errors described below, the operating and capital budget presented in RTA Plan II are,
in my opinion, not suitable for justifying a ballot initiative of some$5.4 billion over 20 years. As
with the first Plan, the RTA Plan II demonstrates a lack of understanding of Michigan property
tax laws.

e) The alleged support of the business community and others for the RTA Plan framework
summary (‘a Plan to do a Plan’) is surprising, given that at the time of the announced support,
there was virtually no financial information that had been released by the RTA, making it
doubtful that any had analyzed the details of the RTA Plan II financial information before they
“formally” supported the Plan. One wonders how the RTA Plan II operating and financial plan
could have reasonably been supported before it was complete with financial details provided in
early May 2018.

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 f) The financial analysis and issues cited below generally involve Oakland County alone. It is clear
however that the same type of errors and omissions would be applicable to the analysis of other
counties and Detroit as well.

3) Property tax financial issues with the 20-year projection:

a) Allocation of Property Tax Revenues follows (based on RTA Plan II assertions):

i) Macomb County – 19.8%.

ii) Oakland County – 41.0%.
iii) Washtenaw County – 11.9%.
iv) Detroit – 3.2%.
v) Wayne County (sans Detroit) – 24.1%.
vi) Total – 100.0%.

Because the growth rate of the taxable value (and thereby property tax revenues) used for the
RTA levy for Oakland and Macomb Counties will likely continue to exceed that of Wayne County
and Detroit in the coming years, the relative future percentages of support from Oakland and
Macomb Counties can reasonably be expected to increase against Washtenaw and Wayne
Counties and Detroit, especially given the information noted below.

b) Wrong Taxing Period. Given the approach in the operations and capital projections, it is critical
that the base year be correct as the adjustment factors used in the projections are assumed
against that base. The RTA Plan II financial projections for property tax revenues begin with the
December 31, 2016 taxable value amounts instead of readily available December 31, 2017
values, values which would be used for a December 1, 2018 levy if the RTA tax were to pass in a
November 2018 vote.

The use of the wrong date resulted in an understatement of taxable value for Oakland County of
$2.58 billion (an actual increase of 4.71% year over year over 2016). This increase arose
primarily from new construction and the effect of the Consumers Price Index realized in
calendar 2017.

The incorrect date used understates Oakland County’s RTA property tax revenues presented in
the RTA Plan II by no less than $77.3 million over the 20-year term. (Meaning that the RTA tax
Plan immediately costs Oakland taxpayers more than asserted by the RTA supporters.) The same
error, i.e. use of the incorrect tax value year, was identified in the 2016 RTA Plan and yet the
practice of using the wrong year and understating true cost to Oakland taxpayers remains in the
current Plan.

c) Growth in Property Tax Revenues. The calculation of property tax revenues under Michigan’s
statutes is basically: millage rate (or, 1.5 mils for the RTA proposal) times taxable value =
property tax revenues levied. As such, over a 20-year term, the taxable value increases must be
projected to derive property tax revenues based off of the first-year revenues. The basic
increase in taxable value arise from two components – the Consumer’s Price Index (CPI) and
new construction.

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 Concerns follow:

i) The ‘growth factor’ used for Oakland County in the RTA Plan II was .37% per year
representing the CPI, new construction, less several deductions over a 20-year period.
Clearly, this is an understatement as the taxable value growth arising from 2016 to 2017 –
alone was 4.71%, or roughly 12.7 years of the taxable value growth expected as outlined in
the RTA Plan II alone!
ii) In the 2016 RTA Plan, a similar error occurred. In that RTA Plan the growth factor was based
on .12% PLUS the CPI. In the current RTA Plan, the CPI factor was apparently omitted, but in
other parts of the RTA Plan II is assumed to be 2.4% for the 20-year period. CPI is a major
component to the means by which taxable values grow under Michigan property tax
statutes.
iii) Per the Plan’s text, the .37% was based on housing units built – one house; one unit –
irrespective of the taxable value of the house built. In this instance, an 800 foot bungalow
exhibits the same taxable value increase as part of the growth factor as a $5 million
mansion.

In addition, the use of housing units built as a basis of the taxable value growth factor totally
ignores industrial, commercial and manufacturing new construction and effectively assumes
NO taxable value increases for the next 20 years!

iv) The RTA Plan II cites – 2.4% as the expected CPI over the life of the Plan – yet, uses .37% as
the growth factor in conflict with Michigan property tax statutes.
v) Using the RTA CPI of 2.4% and adding a modest 1.6% for new construction (net of various
offset reductions some of which were discussed in the RTA Plan II) over a 20-year period,
the property tax amounts that would be levied would be roughly $2.56 billion from Oakland
County (including the correction for the wrong taxable year); the RTA Plan projected $1.71
billion to be collected. The understatement of RTA property tax revenues from Oakland
County alone would be roughly $848 million!
vi) Similar understatements would occur due to the same error in the other counties. No
detailed calculation for these counties or Detroit was prepared with this analysis. However,
if Oakland County is roughly 40% of the total RTA Plan II property tax revenues (before
considering the effects of the error), the total revenue underestimation could be as great as
$1.5 billion to $2.0 billion in the RTA Plan II.
vii) As a secondary consideration, the taxable value growth for new construction within Oakland
County is expected to largely occur in the present ‘opt-out’ areas of the Act 196 Authority,
meaning the more significant underestimation of property tax revenues occurs in areas with
the least amount of RTA Plan II services over the 20-year period.
viii) Given this significant understatement of property tax revenues, Oakland County’s
contribution to regional transit (along with Macomb County’s) is woefully understated
relative to Wayne and Washtenaw Counties and Detroit.

Given the above, it is conceivable that the setting of the millage rate of 1.5 mils will raise funds
well beyond the expectations of the use of those funds as expressed in the RTA Plan II and
should have been lowered is the above erroneous assumptions had been properly considered.

d) ‘Opt-out Communities’ Impact with Corrected Property Tax Information. The RTA Plan calls for
$30 million in total to be distributed to ‘Home Service’ areas, i.e. generally to ‘opt-out’

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 communities throughout the four-county region. The reference to ‘opt-out’ communities herein
is basically those outside of the current Act 196 service footprint.

Concerns follow:

i) Assuming Oakland’s share of the revenue was 41% (noted in the RTA Plan II above and not
adjusted for the wrong period or growth factor) and assuming the Home Service funds
would be distributed on the same basis as property tax revenue levied, (an assumption not
binding on any RTA Board) the Oakland opt-out communities would receive $12.3 million
annually for roughly 38 communities to split. Over the 20-year period this comes to $246
million.
ii) The ‘opt-out’ communities included in the adjusted $2.56 billion in Oakland County’s RTA
property tax revenues would be taxed some $1.19 billion. When considering the amounts
to be expended in the Oakland County, the taxpayers in the ‘opt-out’ communities would be
effectively transferring roughly $945 million in their property taxes to RTA-preferred
communities outside of those opt-out areas.
iii) The allocation any resources to any of the so-called Home Service Areas at any level is NOT
guaranteed and can be withheld by the RTA Board with a simple majority vote. This is
another error that existed in the RTA 2016 Plan that Oakland County attempted to remedy
by securing a legally binding guarantee as part of the 2016 RTA Plan but the RTA refused to
take up the issue.

e) Personal Property Taxable Value Phase Out. The Plan failed to address the phase out of certain
personal property taxes. The personal property revenues associated with portions of the
commercial and manufacturing taxable value (estimated at $200 million in taxable value) will be
totally phased out over the next several years.

In addition, the utility companies have just secured the introduction of legislation that would
fully eliminate their taxable value for personal property taxes over the coming years with no
taxable value being considered for those purchases beyond December 31, 2017. In the event
that the utility personal property taxable value legislation is passed and fully eliminates this tax,
it would represent a 2.04% loss in taxable value (based on December 31, 2017 values) over the
coming years.

Why is this important? It is because spending decisions made upon revenue projections that will
not be met will require adjustments to the resource allocations used in the build-out process.
The costs of any given line/route will not go down, so the RTA Board, at their whim, can move
money out of one area (say, a Home Services area) and send it elsewhere, further exacerbating
the inequities inherent in RTA Plan II.

f) Tax Increment Financing Authorities (TIFAs). The RTA Plan likely understates the effect of the
property tax revenue shunted off to TIFAS. The RTA Plan uses 2.2% and likely a more
representative percentage over the 20-year term would be 3.5% - or an overstatement
adjustment of perhaps $20 million.

In Detroit’s case, the TIFAs shunt 28.8% of all revenues levied and this factor appears to have
been properly incorporated in the RTA projections. However, the dollars the regional voters
would be supporting are for transit operations, not TIFA operations – estimated to be $52

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 million over the 20-year period. Much of this revenue would flow into the downtown
operations as that is where a great deal of captured value in Detroit exists.

g) Chargeback Provision / Delinquencies. Oakland County’s delinquency loses from the

Delinquent Tax Revolving Fund process are about .5%; the RTA Plan used a reduction factor of
1.0%. This understates revenue for Oakland County (.5% x $2.56 billion = $13 million).

Conversely, using the 1% reduction factor noted above for Detroit and comparing it to the
collections as noted in the City’s 2017 CAFR for the collection period 2015, the amount of
uncollected property taxes rate was 26.5%, not 1%, meaning the City’s expected property tax
collections for RTA operations are overstated.

h) Impossible Fluctuations in Property Tax Revenues. In the RTA’s detailed property revenue line
items for the individual county and Detroit projections reflects substantial fluctuations in the
transit revenue collected in each county from year to year – some as much as 40%+ from year to
year. Basically, this cannot happen under Michigan statutes. Once a reduction occurs, the
taxable value resets downward and the only means by which taxable value can increase would
be through CPI increases and new construction. The impact on total RTA Plan II projections has
not been calculated, but has been corrected in the above calculations by Oakland County.

4) Capital Cost Assumption. While the RTA Plan is not specific in the nature and location of the capital
Plans, the Plan reflects a cost increase factor of 3.4% for capital costs (2.4% CPI and an additional
factor of 1.0% for added inflation relating to construction costs). In southeastern Michigan
competition for construction labor is fierce given the number of construction projects underway.
Additionally, the federal government is imposing tariffs on a number of construction products that
will result in inflation increases beyond that which is normally experienced (steel and aluminum
being just examples).

While it is difficult to assess what level of inflation that should be applied to construction projects
over the 20-year time frame, the 3.4% used in the RTA Plan II is understated easily into the near to
mid-term future. This factor is then critical for the infrastructure build-out for the RTA Plan II
including projects such as roads, rail and other construction projects.

5) Policy-related issues:

a) Supplanting and Loss of Millage. One of the largest business issues in determining the viability
of the RTA Plan is the assumption that the Act 196 millages in Wayne and Oakland Counties and
that the passage of the SMART millage in Macomb County in August 2018 and in future years
will always occur.

Similarly, the apparent assumption in the RTA Plan II is that the Detroit City Council will keep
appropriating roughly $80 million from its General Fund in operating subsidies to the Detroit
Department of Transportation (DDOT) and the PeopleMover. In the law, and in the RTA Plan II,
there is no minimum appropriation requirement for either the operating subsidy from the City
Council of from millage proceeds. Should the City Council withhold this level of appropriations
from DDOT and the PeopleMover, it is likely that pressures will be provided on the RTA Board to
use RTA funds to cover a reduction of the City’s operating subsidy for DDOT. The expansion of

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 RTA funds to cover a reduction of City Council’s appropriation would require only a simple
majority vote of the RTA Board. Similar concerns exist for failure of local millages.

b) 85% True-up. While the RTA legislation requires that a minimum of 85% of the RTA tax levy be
spent on transit services in the county from which the taxes were extracted, there is no
mandatory effective provision for a ‘true-up’ of the distribution of funds to the county in which
they were raised. The policy and accounting issues involved in adequately addressing this matter
are far from easy. How often is a true-up conducted? Who conducts the true-up? Given that
the millage is a zero-sum arrangement and moneys expended in the ‘wrong’ county is already
gone at the time of any reconciliation, which constituency group takes a reduction in future
service to compensate for the prior shortfalls?

The accounting system in use clearly hasn’t addressed the costs allocated by service line for
actual costs incurred. This can be very difficult to capture in the normal course of operations.
While the RTA Board passed a resolution on this matter in the 2016 RTA Plan, it did so before
the results of a regional accounting sub-group tasked with identifying the business issues and
resolutions to those issues had reported their findings to the Board.

There can be no viable Plan without this matter being resolved.