(itp of llttroit

IRVIN CORLEY, JR.

FISCAL ANALYST

CITY COUNCIL
FISCAL ANALYSIS DIVISION Coleman A Young Municipal Center 2 Woodward Avenue. Suite 218 Detroit. Michigan 48226 FAX (313) 224-2783 E-Mail: cc-nsccteci.oenonrnus

ANNE MARIE LANGAN

ASSISTANT FISCAL ANALYST

(313) 224-1076

(313) 224-1078

TO: FROM: DATE: RE:

COUNCIL MEMBERS Irvin Corley, Jr., Director September 17, 2012 Proposed Belle Isle Lease Agreement between the City of Detroit and the State of Michigan (Department Report)

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Introduction Your Honorable Body, the Fiscal Analysis Division is generally supportive of the proposed Belle Isle lease agreement between the City of Detroit and the State of Michigan that is currently before you for consideration. As you will see in the next section of this report, both operational and capital resources for Belle Isle have diminished significantly over the years. As a result, trash pickup, grass cutting services, general repairs and maintenance and capital improvements haphazard, sporadic or non-existent. Belle Isle are minimal. Belle Isle also suffers huge drainage and shoreline deterioration infrastructure constraints. In 1998, Mayor Dennis Archer presented a magnificent Belle Isle Master Plan to City Council that called for up to $180 million in renovations on the island. Of that amount the City of Detroit was to provide $123 million through general obligation bonds, revenue bonds and general fees (rentals, user fees, licenses, concessions, etc.). At the time, a $3 per car entrance fee or a $20 annual fee, along with other fees, were proposed to support $82 million in revenue
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on the island are

And unfortunately,

recreational programs offered on

problems. These are serious

concerns that the City cannot appropriately

address under its current budget

bonds. The State of Michigan was to provide $17 million through grants. Federal grants were to amount to $6 million. remaining $34 million. In 2006, Mayor Kwame Kilpatrick presented to City Council a revised Belle Isle Master Plan that called for up to $250 million in renovations on the island. Of that amount the City of Detroit was to provide $170 million again through general obligation bonds, revenue bonds and general fees. A $3 per car entrance fee or a $20 annual fee was still being discussed to help support at least $80 million in revenue bonds. The State of Michigan was to provide $16 million through grants. Federal grants were to amount to $5 million. And private foundations endowments were to provide the remaining $59 million. of the and And private foundations and endowments were to provide the

Obviously, the Belle Isle Master Plan did not get off the ground due to non-implementation the entrance fee, non-implementation recent re-enactment ratings. Historical Financial Information Attachment regarding Belle Isle of other fees due to programming limitations on the dollars for the island, notwithstanding island, and the inability to raise sizable foundation

of the Grand Prix races on Belle Isle. In addition, the City of Detroit has

extreme difficulty in selling general obligation bonds due to below investment grade bond

I shows the total Recreation Department budget shrinking from $60.2 million in FY

2004 to $12.3 million in FY 2013. As compelling, Recreation had over 700 budgeted employees in FY 2004 versus 87 budgeted for FY2013. A similar trend relates to Belle Isle. Attachment I shows that operational spending for the

island has dropped significantly as well: going from $6 million in FY2004 to $1 million in FY 2013. Similarly noticeable: the number of budgeted positions for Belle Isle went from 83 in FY 2004 down to 7 in FY 2013. The number of seasonals for Belle Isle has remained relatively flat: around 31 to 36. The City spends approximately from an appropriation ofthe $3 million annually on Belle Isle utility bills. These bills are paid in Recreation. The lion share

separate from the Belle Isle appropriation

utilities for Belle Isle represent sewerage bills, around $2.7 million, due to the drainage

problems on the island.

Also over the last 10 years, only approximately improvement expenditures for the island. Interestingly, improvements

$6 million has been spent on capital

projects for Belle Isle. And between FY2008 and FY 2013, there were no capital

the City's financial records show a $1 million free balance for capital for Belle Isle that remains unspent.

Proposed Belle Isle Lease If your Honorable Body approves the proposed Belle Isle lease, the City of Detroit would still own Belle Isle, the State would be leasing Belle Isle for an initial 30 year term with two 30 year renewable options, and the island would become a State park operated and managed by the Michigan Department of Natural Resources (DNR) under State park standards. The DNR is funded by state general fund revenues, federal funds and a variety of restricted funds. Governor Snyder proposes a budget of $337.9 million for the FY2013 DNR budget. General fund sources represent 6% of this budget; federal sources 20%; with the remaining 75% coming primarily from about 40 State restricted funds. Restricted revenues, which by statute can only be used to support related programs, are generated from hunting and fishing licenses, state park entrance and camping fees, two percent of the gas tax, snowmobile registration and permits, and forest camping fees. A major restricted fund is the Michigan State Parks Endowment Fund. The intent of this fund is to aid the 97 State parks by providing them with a stable, consistent source of funding for years to come. Currently, all revenues from oil and gas bonuses, rentals, and royalties from Stateowned land are deposited in the State Parks Endowment Fund until the fund reaches a balance of $800 million. During 2010-11, the DNR received $12.5 million from the parks endowment fund. As of September 30, 2011, the parks endowment fund had total assets of $176 million. From the $337.9 million DNR budget, Governor Snyder proposes to spend $75.5 million on DNR's Parks and Recreation Division in FY 2013. The Parks and Recreation Division currently manages 97 state parks and recreation areas throughout Park located along the Detroit River in Detroit. approves the proposed Belle Isle lease. Michigan, including the Milliken State This division would manage Belle Isle, if Council

As can be seen, the State of Michigan has considerable potential resources available to provide operational, maintenance and repair support for Belle Isle under the lease agreement if approved by Council. Under the Belle Isle lease, the State's annual lease payment to the City would be zero. However, the State would be responsible for the operations, maintenance and repairs expenditures on Belle Isle on an annual basis in lieu of an annual lease payment.

Even though the Belle Isle lease contains an initial 30 year term with two additional 30 year lease options, both the City and the State during any lease term could opt out of the lease if obstacles are not resolved between the two parties after a grace period. Likewise, the City or the State could choose not to extend the lease beyond the initial 30 year period. At any rate, the State is proposing an initial 30 year lease term in order to possibly sell revenue bonds using DNR resources to provide funding for capital improvements on Belle Isle. This implies that the State would work in good faith to resolve any obstacles between the parties to ensure a full initial 30 years as a means of supporting any revenue bonds. Additionally, the Belle Isle lease requires that all revenues generated on Belle Isle from program special events, concessions, etc. be deposited in a DNR sub-

revenues, grants, endowments,

account for the sole purpose of using these resources to manage and improve Belle Isle. The State would provide annual reports on the sub-account's activity to the City, and would allow . the City to audit the sub-account. Any amounts remaining in the sub-account at the end of the The collection of Belle Isle revenues in the lease term would be remitted to the City of Detroit. on the island. Since Belle Isle would be operated as a State park under the lease, one key revenue source for the island would come from the annual $10 vehicle fee pass to enter the island. A Michigan citizen has the option to purchase a DNR park passport at the time of renewing his or her license plates. The Michigan citizen receives a license tab with a small P on it. Fortunately, the DNR park passport would enable the Michigan citizen to enter all of the State parks in Michigan, including Belle Isle if Council approves the lease. Any Michigan citizen who does not possess a park passportwould pay a $4 per day fee to enter Belle Isle under the lease. Non-Michigan citizens pay different rates. Meanwhile, walkers and bikers would enter Belle Isle for free. 4

sub-account could augment the State's ability to raise revenue bonds for capital improvements

Based on conversations with the State, if your Honorable Body approves the Belle Isle lease agreement, the island could receive the following improvements ,. Grass cutting and trash pickup on a regular rotation basis Clean and improved comfort stations open to the public Improved picnic shelters and some would be relocated closer to a waterfront Improved landscaping throughout Improved fishing piers Improved play-scapes it plans to make for Belle isle Exhibit E entitled "Phased the island location within a year:

So far, the State has not provided in writing the improvements your consideration Management lease. Under Exhibit B entitled "Identification would be under the jurisdiction to approve the Belle Isle lease agreement.

under the lease. Of course, it is essential that your Honorable Body review all exhibits before Approach of Belle Isle Dated July 2012" is critical to review to get a sense of what in regards to any proposed improvements to the island under the

the State is contemplating

of Roads and Bridges", the roads and bridges identified (MDOT) under

ofthe Michigan Department of Transportation

the term of the Belle Isle lease. MDOT would use Act 51 gas and weight tax revenue the City normally receives to fund any improvements on the Belle Isle roads and bridges in Exhibit B.

The City of Detroit currently receives about $50 million in gas and weight tax revenue on an annual basis. Ten years ago, the City received about $60 million in gas and weight taxes. With shrinking gas and weight tax dollars coming in, it is the Fiscal Analysis Division's hope that a huge amount of these dollars would be diverted to Belle Isle under the lease. According to DPW, there are currently two bridge projects in the pipeline. installation of scour countermeasures is the rehabilitation One is the

on the MacArthur bridge, a $3 million project. The other

of the Woodside bridge over Canoe at a cost of $375,000. Gas and weight

tax dollars are being used to cover 20% of the MacArthur bridge project and 100% of the Woodside bridge project. Also according to DPW, there are 7.6 miles of roads classified as major roads on Belle Isle and 4.7 miles of local roads on Belle Isle. Under the current gas and weight tax formula, the City receives around $160,000 for annual maintenance for the Belle Isle roads. However, the City also receives federal funding that can be used towards the repaving and rehabilitation 5 of the

7.6 miles of major roads, and it is DPW's expectation to use federal funding for the major road improvements on Belle Isle.

As long as MDOT coordinates with DPW on the maintenance of major roads on Belle Isle, which could be primarily funded with the use of federal dollars, the Fiscal Analysis Division does not see a major reduction of existing gas and weight tax dollars for Belle Isle under the lease agreement. There would be a 90 day transition period to transfer management of Belle Isle from the City to the State. The Fiscal Analysis Division feels it will be critical that the State uses "best faith efforts" to hire Detroiters and keep existing vendors on Belle Isle. In addition, the "security" or public safety plan developed during the transition period will be crucial for determining the level security on the island as provided by the State under the State park program and the City. Perhaps, at some point, any Detroit police officers housed on the island could be redeployed to cover other areas of the City. In addition, the City could benefit operationally Isle lease agreement as follows: The 36 seasonals currently used for Belle Isle ground maintenance could be redeployedto other parks throughout citywide park work. The City currently spends approximately $6 million to operate Belle Isle. If the State takes over the operations and maintenance of the island, the City could use the $6 million to possibly hire 60 police officers or fire fighters. . Of the $6 million, $1.7 million is spent on floriculture, grounds, security, landscaping and construction throughout services. It should be noted that GSD would still maintain the green houses under the Belle Isle lease, if approved by Council. GSD spends about $100,000 annually to maintain the green houses. The Fiscal Analysis Division understands that the State would like for your Honorable Body to consider approving the Belle Isle lease by the last week in September 2012 in order to work on building maintenance, janitorial, GSD would be able to management. the City of Detroit. There are a total of about 80 seasonals for if Council were to consider approving the Belle

redeploy these services to other parts of the City to help provide more regular services the City, as Belle Isle currently takes up a lot of the work orders for these

appropriating improvements.

up to $2 million designed for Belle Isle that would be used to start Belle Isle

Although the Fiscal Analysis Division is supportive of the Belle Isle lease agreement based on the previous analysis, we do have many questions regarding the lease agreement, as enumerated below.

General Questions on the Belle Isle Lease Agreement The Fiscal Analysis Division posed these questions via email on Thursday, September 13, 2012 to Rodney Stokes of the Governor's office: 1. Since Belle Isle would be operated as a State park under the lease, please provide the MDNR's standard operational, maintenance and repair requirements for all State parks that would be made available for Belle Isle. 2. Please provide most recent MDNR budgeted revenue sources that would be used to fund Belle Isle operational, maintenance and repair expenditures, and to eventually support a bond sale for Belle Isle capital expenditures. If the Michigan Park Endowment Fund is the principal source for the State parks, please provide the revenue sources and current balance of the park endowment fund that would be the source of funds to help improve Belle Isle. It would be great to codify in the lease agreement that if an annual appropriation is not available for Belle Isle, then Belle Isle operational, maintenance and repair may be funded through the park endowment fund. 3. You indicated the State wants a 30 year lease to support any bond sale. Please provide a time table for MDNR bond sale for Belle Isle and approximate amount that would be raised under the sale. Are MDNR bonds sold through the Michigan Finance Authority? 4. Does the State still contemplate allocating up to $2 million in State's 2012-13 budget starting October 1st via a supplemental bill? If so, what specifically on Belle Isle would the money be used for?

5. Since the State budget issue for Belle Isle is imminent, what is the latest date this month that Council could vote on the Belle Isle lease? 6. Please provide estimate of the amount of MDOT funds used in the State's 2012-13 fiscal year that would be used for bridge and road repair on Belle Isle. Would additional gas and weight tax dollars be used for Belle Isle or would the City's gas and weight allocation be reduced for the Belle Isle projects? 7

7. 8.

Are there plans to reopen the Belle Isle golf course? Are there plans to renovate the Detroit boat club facilities?

9. The lease does not appear to speak to the State taking over vendor contracts or City employees becoming State employees relative to Belle Isle operations that were discussed during our meeting last week. Please explain why this language is omitted in the lease document. Meanwhile, how do you envision addressing these issues during the 90 day transition period? 10. Please provide a general breakdown of what would be addressed during the 90 day transition period. 11. The Fiscal Analysis Division feels the lease should also include the Detroit City Clerk's office in the Notices section of the lease. Please incorporate. 12. Fiscal's notes indicate the immediate improvements to Belle Isle (within a year) under the lease agreement: clean and safe efforts; all bathrooms working and open to the public; address erosion around shorelines; institute a regular grass cutting and trash pick up rotation (how regular?); move picnic shelters closer to water (how many shelters on the island and how many would go closer to the water?). Did we miss anything? 13. There are 3 or 4 Detroit police officers on the island. Does the Belle Isle safety plan contemplate providing State public safety personnel thereby redeploying the Detroit police officers to other City operations? The following questions are based on the Fiscal Analysis Division's detailed review of the lease agreement that were given to Mr. Stokes via email on September 13th: 1. Page 1, first whereas: To prevent any ambiguity about the definition of "Park" throughout the lease, I suggest the word "Park" be put in parentheses next to the first "Belle Isle Park" in the first whereas. 2. Page 2, section 2.1 Leased Premises: Please provide a copy of all exhibits referenced on page 10, section 9.14 List of Exhibits. 3. Page 2, section 2.2 Rent Consideration: Based on current expenditure experience, the City is spending about $6 million annually on Belle Isle. Since the State will be responsible for the management, operation and maintenance services of Belle Isle over the lease term, does the State have any preliminary budgets over the next 3,5 or more years for Belle Isle that would presumably be paid out ofthe DNR budget? 8

4. Page 2, section 2.3 Operations as a State Park: The State should be responsible for repairing any damages to any utility systems on Belle Isle that are caused by the State, and I suggest language be added to clarify that point so that, for example, the State would repair a street light on Belle Isle if it was damaged by a State vehicle. In addition, I suggest language be added that the State will make a good faith effort to retain current vendors on Belle Isle, as determined during the transition period. As written, the language implies that current vendors may no longer provide services on Belle Isle, which would be problematic for the City since these vendors pay taxes in the City and no doubt hire Detroiters. Likewise, I suggest language be added that the State will make a good faith effort to hire Detroiters if the State looks to add employees for Belle Isle. Although it's good that current employees on Belle Isle will be redeployed to other City operations, it would be even better that Detroiters are hired if the State brings on more employees for Belle Isle. 5. Page 3, section 2.3.1 Roads and Bridges: Much of the same issues previously mentioned for section 2.3 apply here. 6. Page ~, section 2.3.2 Fundingfor Roads and Bridges: Is it possible that the State's park endowment fund or proceeds from any bond sale instead be used to avoid reducing current allocations of transportation Act 51 dollars for the City for roads and bridges repairs on Belle Isle? 7. Page 3, section 2.4 DNR Rules and Orders: What are the current hours of operation on Belle Isle and how would that change if any under DNR State park rules? 8. Page 3, section 2.5 Recreation Passports: a person pays a daily $4 vehicle fee if a $10 annual passports is unavailable, correct? What infrastructure would be provided by the State to collect any vehicle fees? How does one go about obtaining a vehicle passport? 9. Page 3, section 2.6 Park Revenue: The words "private lease revenue" implies the State could sublease Belle Isle for any type of commercial endeavor. Are the words "private lease revenue" synonymous with the words "sublease revenue" to ensure all sublease revenue remain for the purposes of improving and managing Belle Isle? 10. Page 4, section 2.10 Law Enforcement ...: Any security plan that is developed should come to Council for approval. 11. Page 4, section 2.13 Non-Profit Entities: Does the State have any immediate plans its working on with the Belle Isle Conservancy for the benefit of the island if Council approves the lease agreement? 12. Page 5, section 3.2.1 Grants and Endowments: Is there a preliminary list of City of Detroit grants and endowments that would inure to the State for the benefit of Belle Isle under this section?
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13. Page 51 section 3.2.4 Personal Property: What type of personal property could the title of said personal property be transferred to the State under this lease without the vote of the people? 14. Page 6 section 4.1 Term: Language should be added to enable the City (lessor) to provide notice a year in advance to not extend the lease for the third 30 year term.
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15. Page 6 section 4.5 Quiet Enjoyment: Please explain. This section seems to contradict section 4.4 if the City is unsatisfied with the performance of the State under the lease term. This section also implies the State would do whatever within its powers to maintain peaceful and quiet enjoyment of Belle Isle regardless of whose on the island. In principal, this sounds good, but it negatively implies that the State could take measures to ensure "certain types" do not frequent the island.
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16. Page 71 section 5.1 No Representations: Does the State intend on performing any baseline environmental assessments on Belle lsle, for instance, for the hiking trails that would eventually be reopened? 17. Page 71 section 6.3 Leases: to clear up any arnblguitv, language should be added to ensure any revenue from any subleases on Belle Isle should be deposited in the Park sub-account since the words "sublease revenue" are not a part of section 2.6. 18. Page 8 section 6.4 Contracts, Licenses, and Permits: what type of licenses and permits the State may issue that are not currently issued by the City?
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19. Page 10 section 9.7 Appropriation of Funds: I suggest language be added that the State (lessee) would make a good faith effort to seek alternative funding sources (such as the State's park endowment fund) in any given year that appropriated funds are unavailable in the State's budget for Belle Isle management and improvements under the term of the lease.
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20. A general question: Will official agreements have to be designed for Historical, ZOOI the Detroit Yacht Club and the Detroit Boat Club to clarify rights and responsibilities of these entities under the terms of this lease? The Fiscal Analysis Division feels if your Honorable Body receives satisfactory responses to the questions above, we would recommend approval of the Belle Isle lease agreement. Attachment cc: Council Divisions Auditor General's Office Rodney Stokes, Governor's Office

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George Jackson, CEO of the DEGC Kriss Andrews, Program Manager Jack Martin, CFO Chris Brown, COO Cheryl Johnson, Finance Director Brent Hartzell, Interim Budget Director Floyd Stanley, Deputy Budget Director Ron Brundidge, DPW Director Kizzi Montgomery, Mayor's Office
14, 2012.doc

ICJ:i\CASH FLOW\Belle Isle lease with State September

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Attachment I Historical Financial Information (In Million's) Description FY 2004 FY 2005 FY 2006 budget: $60.2 11.3 9.8 ($43.7) 687 491 199 194 ($29.6) ($14.9) ($27.2) 9.3 20.3 6.6 ($48.9) 717 activity: $5.6 $2.9 0.3 ($2.6) 55 36 0.3 ($5.3) 83 36 36 81 ($4.8) 0.3 $5.1 $0.6 0.2 ($0.4) 16 36 $0.6 0.2 ($0.4) 16 36 $0.7 0.3 ($0.4) 11 36 $0.7 0.3 ($0.4) 10 31 $0.6 0.3 ($0.3) 8 31 $0.6 0.3 ($0.3) 8 31 $53.5 $38.9 $35.2 $33.8 $30.1 2.9 ($27.2) 194 $24.9 1.9 ($23.0) 178 $22.2 2 ($20.2) 143 $19.7 1.6 ($18.1) 141 FY 2007 FY 2008 Recreation department Appropriations Revenues Net tax cost Positions (FTEs) Belle Isle operational Expenditures Revenues Net Loss Belle Isle budgeted FTEs Belle Isle budgeted Seasonals Belle Isle capital expenditures: Budgeted capital expenditures $2.1 $2.1 Actual capital expenditures (3) $1.0 $1.8 $0.6 (1) $1.0 $1.0 $0.9 $1.1 (2) $0.1 Regarding Belle Isle

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

$12.3

0.9

($11.4)

87

.$0.9 (4)

0.3

($0.6)

31

(1) $1 million in bonds was also budgeted for the Belle Isle Nature Zoo in FY 2006. (2) The FY 2008 bond sale did not take place due to the City's below investment grade ratings. (3) Actual capital expenditures (4) 2012-13 operational loss of $9,000.
I:\CASH FLOW\Belle Isle Historfcal Financial Information September 14, 2012.xls

may exceed budget due to the inclusion of encumbered financials based on budget. 2012-13 year-to-date

amounts from previous budgets. Belle Isle expenditures

are $86,000; $77,000 in revenues; net