Private Capital Injections Boosts Kalamazoo, Mich. City Finances

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DALLAS – A $70 million injection of private capital from local philanthropists will boost Kalamazoo, Michigan, said Moody's Investors Service.

"This public private funding model is credit positive for Kalamazoo because it will provide the city with significant additional resources and sets up a framework to leverage non-traditional revenues," Moody's analysts wrote in a report.

The lump sum injection to its Foundation for Excellence Fund is equal to nearly 35% of Kalamazoo's general fund budget and will be used to stabilize the city's finances, reduce the local property tax burden and provide resources for economic development and community improvements.

The initial $70 million will cover initiative costs for three years. The city will work to secure additional contributions with a $500 million goal to fund the foundation for future years.

"This is a major opportunity for Kalamazoo," Mayor Bobby J. Hopewell said in a press release. "This option not only offers a solution to our structural revenue problems, but also provides tax relief for city residents and still creates the opportunity for significantly more investment in our city and its people."

With the donation the city plans to reduce its property tax levy by 40% over the next three years. Without it, Kalamazoo officials projected a general fund deficit of $1 million by 2018 and a deficit of $2.75 million by 2021.

Moody's downgraded the city's rating to A1 from Aa3 last year on the back of declining revenue and the city's high fixed costs. The rating agency also downgraded the city's lease revenue debt because lease payments are secured by the city's general obligation limited tax pledge.

Although the city has made significant budget cuts, its ability to raise revenues is stymied by Michigan's property tax restrictions. A 1978 local tax limitation known as the Headlee Amendment and 1994's Proposal A have limited the collection of taxes on existing properties. The 1978 tax limitation took away local authority to levy taxes other than property taxes and limited their ability to raise revenue.

Prop A limits the taxable value of a property. It can only increase by the rate of inflation or 5%, whichever is less. Under the Proposal A cap there are two ways taxable value can exceed the inflation cap: new or improved property or the sale of existing property. A property's value can decrease, however, which places taxing entities in a precarious position as the amount of money they can assess goes down.

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Michigan
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