CHICAGO — After years of struggling with debt, residents of a small Michigan town voted to bite the bullet and tax themselves to pay off bonds tied to a failed real estate development.
The predicament of Sylvan Township, population 2,833, is far from unique in Michigan. Its residents voted to more than quintuple their local township tax rate for 20 years to pay off $12.5 million of bonds. In so doing they chose the certainty of a higher tax rate over uncertainty posed by litigation over the debt.
The 4.4-mill property tax increase passed by only seven votes out of nearly 1,000 cast in an election last year.
It pushes the local township rate to 5.4 mills from under 1 mill, is projected to generate around $750,000 a year, and will be dedicated solely to debt-service payments to pay off debt issued to build a water and sewer system for a now-failed commercial and residential development on vacant farmland.
Township property owners also pay property taxes to the school district, county and special districts, bringing the total mill rate above 30.
The millage increase squeaked by in August, but the issue dominated the city’s general election, and voters threw every incumbent out of office last November. A new slate of officials took charge of the township after the election.
The property tax increase marked a victory for Washtenaw County, which had attached its full-faith-and-credit pledge to the $12.5 million of bonds originally issued in 2001 on behalf of Sylvan, which is 18 miles west of Ann Arbor. The county was forced to cover debt-service payments on the debt starting in 2011 when the township could no longer afford the obligation.
“This must have been an extremely hard thing for the taxpayers to do,” Washtenaw County Treasurer Catherine McClary said. “No one was happy with 4.4 mills on top of 1 mill. But they did it and they’re bringing some stabilization to the township. It was a very calm, sensible way to solve what was a very, very difficult problem and I think the solution can prove to be a model for other areas that are facing the same problem.”
Like Washtenaw, many counties in Michigan attached their general obligation pledge to bonds issued on behalf of municipalities that would have had trouble accessing the market on their own.
Many of the special assessment developments failed to generate projected revenue, leaving the small governments, or the counties, on the hook for the lingering debt.
“This is a problem sporadically throughout the state,” McClary said. “I personally have recommended that the county not use its full faith and credit for the townships, and recommended that the county has a debt policy so if they are extending their full faith and credit there is some criteria around that.”
In 2001, then triple-A rated Washtenaw County issued $12.5 million of bonds and loaned the proceeds to Sylvan Township to finance construction of a water and sewer system to support a new residential and commercial development on farmland near Interstate 94.
The development was expected to feature up to 1,000 new homes.
The debt was expected to be paid by a special assessment generated by the district’s revenues, but features the county’s limited-tax general obligation pledge.
The development failed to grow as planned. One of the areas remains vacant farmland, while another has roughly 88 homes, a township official said.
To generate some relief, the county refinanced $9.77 million of outstanding bonds in April 2010, delaying principal payments until 2014, pushing out the final maturity to 2026 from 2022, and making the bonds noncallable.
The 2012 interest-only payments were $175,000 twice a year. Starting in 2014, the payments are scheduled to spike to $625,000, then spiking again in 2023 to $920,000 and $1 million in 2025 and 2026.
Sylvan voters rejected an effort to raise taxes to cover the obligation in November 2011.
The county worked with the township and financial advisors throughout the year, and last August voters approved the measure by only seven votes.
It is projected to raise roughly $780,000 a year to pay off debt service as well as another $1.2 million of back taxes owed to the county for the development.
“I’m sure the county is breathing a huge sigh of relief,” said Scott Cooper, the township supervisor who beat out the incumbent for the job in November.
“The people were pretty angry, saying how could the county put us in the mess,” he said.
“For the county, this was not their first rodeo, and for a municipality as small as ours, a bedroom community that now has to absorb nearly $13 million of debt because the developers did not develop the land, it creates quite a problem for the average homeowner.”
He said the millage increase will mean $800 to $1,000 more annually for the next 20 years for most homeowners, many of whom do not receive the water or sewer services.
Cooper and McClary agreed that the millage hike has already had a stabilizing influence on Sylvan, erasing years of uncertainty that hung over the township over how the debt was going to be paid. “It was unknown whether it was going to be 8% for 10 years or 18% for a couple years or what,” Cooper said.
“Realtors felt they had an obligation to tell people that the township couldn’t pay its bonds, and that there was going to be some solution but nobody knew what it was,” McClary said. “Now you can tell people the tax rate.”
Nearby Livingston County, a triple-A rated county in south central Michigan, faces a similar problem with one of its townships.
Handy Township issued sewer debt in 2005 to finance infrastructure at a development that has since failed to generate enough revenue.
Like Washtenaw, the county refinanced the bonds in 2012, pushing out the final maturity by five years to lower near-term debt payments and generate relief for the township.
The township is expected to not be able to cover the debt payments by 2014, Livingston County administrator Belinda Peters said.
Like Washtenaw, Livingston has the option under Michigan law to go to court and ask a judge for a consent judgment that would essentially be a court-ordered property tax increase to pay off the debt. But the county hopes to avoid the courts, according to Peters.
“We’re still in the early stages and we’re being very proactive,” she said. “The positive alternative would be for everyone to understand the underlying causes and come up with a plan to levy the millage over time to make the bond payments.”
Peters estimated that a 1.5-mill increase would generate enough to cover the payments.
“A consent judgment is a court-ordered solution,” Peters said.
“We’d prefer to be able to work something out through a grass-roots effort with voters understanding the issue of special assessments and what’s going on with the recession.”
The county is coming to market with $7.5 million of water and sewer refunding bonds next week.
In a rating report on the deal, Moody’s Investors Service listed indirect municipality debt as a possible challenge to the triple-A-rated county.
“Exposure to contingent liabilities in the form of debt issued on behalf of and expected to be repaid by underlying municipalities” is a challenge, Moody’s said in the report.
Peters and Sylvan Township’s Cooper both said they still hope their local real-estate markets will improve enough to provide some relief for homeowners faced with the extra debt burden.
“It’s still early,” Peters said. “Depending on the economy, [the property tax increase] could be pushed back a little further. There are many moving parts and we’re trying to work our way through it.”
In Sylvan Township, the new city administration is eyeing several options to lessen the cost of operating and maintaining the water system that was built with a capacity for 5,000 customers but now has 88.
It is considering partnering with neighboring municipalities, taking on a large commercial customer, or attracting new homeowners to the area to share the burden.
Cooper has another idea as well.
“We just wish we had someone like Mayor Bloomberg from New York,” he said.
“Maybe he’d love to have a township named after him,” Cooper said plaintively. “We would rename this Bloomberg Township if he would donate $12 million and take us out of our pain.”