The following opinion is presented on-line for informational use only and does not replace the official version. (Mich. Dept. of Attorney General Web Site - http://www.ag.state.mi.us)

STATE OF MICHIGAN

BILL SCHUETTE, ATTORNEY GENERAL

2012 PA 396, which amended the Downtown Development Authority Act, 1975 PA 197, MCL 125.1651 et seq., to allow the capture of State Education Tax Act, MCL 211.901 et seq., revenues to pay for costs associated with a “catalyst development project,” MCL 125.1651(cc)(vi), does not result in an unconstitutional diversion of funds from the State School Aid Fund established by Const 1963, art 9, § 11.

The Michigan Strategic Fund’s proposal to provide funds from the Michigan Community Revitalization Program for the purpose of assisting in the demolition of the Joe Louis Arena after completion of the new arena at the Detroit Events Center does not violate section 88c(3)(a), MCL 125.2088c(3)(a), of the Michigan Strategic Fund Act, 1984 PA 270, MCL 125.2001 et seq., which section prohibits the use of such funds for the development of a stadium or arena for use by a professional sports team.

Opinion No. 7280

December 10, 2014

You first ask whether the enactment of 2012 PA 396, which amended the Downtown Development Authority Act (DDA Act), 1975 PA 197, MCL 125.1651 et seq., led to an unconstitutional diversion of school aid funds in violation of Const 1963, art 9, § 11. 

Article 9, § 11 of the Michigan Constitution established a State School Aid Fund funded by various tax revenues, and provides in part:

There shall be established a state school aid fund which shall be used exclusively for aid to school districts, higher education, and school employees’ retirement systems as provided by law.  Sixty percent of all taxes imposed at a rate of 4% on retailers on taxable sales at retail of tangible personal property, 100% of the proceeds of the sales and use taxes imposed at the additional rate of 2% provided for in section 8 of this article, and other tax revenues provided by law, shall be dedicated to this fund.  Payments from this fund shall be made in full on a scheduled basis, as provided by law. [Emphasis added.]

Article 9, § 11, in addition to mandating that certain tax revenues be dedicated to the School Aid Fund, authorizes the Legislature to provide by law for other tax revenues to be collected and dedicated to the School Aid Fund.  The State Education Tax Act, MCL 211.901 et seq., is one such tax.  The State education tax is levied on all property not exempt by law from ad valorem property taxes or that is not otherwise exempt. MCL 211.903.  Tax revenues collected at the local level under the State education tax are generally credited to the State School Aid Fund.  MCL 211.905.

The DDA Act was enacted to provide a tool to aid municipalities in correcting or preventing property value deterioration of business districts, thereby benefitting the economic growth of a designated development area.  See MCL 125.1651a(a) through (h).  The DDA Act provides for the establishment of downtown development authorities (DDAs) by cities, villages, and townships, and, inter alia, authorizes the levy and collection of taxes for DDA purposes and the use of tax increment financing (TIF) to finance development activities.  After a DDA is established, it may “capture” all or a portion of ad valorem taxes assessed against property by the municipality and other taxing authorities (including certain specific taxes) associated with the increase in the assessed or taxable value of properties in the district, realized since the district’s creation. MCL 125.1651a.[1]

One of the taxes subject to capture by a DDA is the State education tax.  Public Act 280 of 1994, however, amended the DDA Act to limit the capture of school taxes to amounts required to pay “eligible advances, eligible obligations, and other protected obligations” as defined by the DDA Act.  MCL 125.1651(cc)(ii) (emphasis added).  Public Act 396 of 2012 amended the DDA Act to define “other protected obligations” to include an “obligation incurred after July 31, 2012 by an authority, municipality, or other governmental unit to pay for costs associated with a catalyst development project.”  MCL 125.1651(w)(ix) (emphasis added).[2]  At the same time, the DDA Act was amended to include school taxes in the definition of tax increment revenues that could be captured, MCL 125.1651(cc)(vi),[3] and pledged, MCL 125.1664(6),[4] for the financing of a catalyst development project.  These amendments had the effect of allowing a DDA to include the capture of increased school tax revenues to, in whole or in part, publicly finance a portion of the costs of a “catalyst development project.”[5]

Not long after the enactment of the DDA Act in 1975, the Detroit City Council created the City of Detroit Downtown Development Authority (Detroit DDA) and established a downtown district as authorized by the DDA Act. Thereafter, the Detroit DDA established a development area and adopted a tax increment financing plan (TIF Plan) and development plan (Plan) for that development area.[6]  Since its creation, the Detroit DDA has or expects to capture over $1.5 billion dollars in incremental tax revenues to aid in the financing of almost $6 billion dollars of development projects.

As authorized by 2012 PA 396, the Detroit DDA initiated a catalyst development project, commonly known as the Detroit Events Center, which will house the Detroit Red Wings National Hockey League team and provide a venue for other year-round events.  To move forward with the catalyst development project, the Detroit DDA expanded its development area to include the Events Center and surrounding area to be developed, by restating its Plan to include such additions. City of Detroit officials approved these amendments by resolution.  Pursuant to the 2012 amendments to the DDA Act, the Detroit DDA is authorized to capture increased school tax revenues to finance costs associated with its catalyst development project—the Detroit Events Center.

The history of the DDA Act demonstrates that increased school taxes are subject to capture under certain circumstances.  This capture occurs before the State education tax is transferred to the School Aid Fund or other school taxes are transferred to local or intermediate school districts.  No money is thus transferred out of the School Aid Fund for DDA projects, including the Detroit Events Center.  Rather, pursuant to the statutory framework of the DDA Act, those captured school taxes were never dedicated to the School Aid Fund or local or intermediate school districts.  Indeed, pursuant to the Detroit DDA’s TIF Plan, it has for decades captured incremental tax revenues to finance certain previous economic development projects. 

Although there has been no challenge to the tax captures provided in the DDA Act since its enactment, the Michigan Supreme Court upheld the constitutionality of tax increment financing under the Local Development Financing Act (LDFA), 1986 PA 281, MCL 125.2151 et seq., an act that is comparable to the DDA Act, in Advisory Opinion on Constitutionality of 1986 PA 281, 430 Mich 93; 422 NW2d 186 (1988).  There the Court addressed whether the LDFA’s tax increment financing provisions unconstitutionally diverted tax revenues from taxing entities in violation of Const 1963, art 9, § 6, which limits the rate of general ad valorem taxes.  The Court first stated that “[t]he statute is vested with a presumption of constitutionality, and it is not our role to second-guess the Legislature regarding the wisdom of tax increment financing from a policy perspective.”  Advisory Opinion on Constitutionality of 1986 PA 281, 430 Mich at 110 (footnote omitted).  The Court then noted the plain language of art 9, § 6, and held that the LDFA’s financing provisions did not violate the constitution because art 9, § 6 did not proscribe the use of tax revenue but limited the amount that could be levied.  Thus, the LDFA’s tax increment financing provisions, which allowed the captured revenue to be used for a different, designated purpose, did not violate the constitution.

Consistent with the Supreme Court’s opinion, the Attorney General in OAG, 1991-1992, No 6687, p 60, (July 12, 1991), opined that voted millages for specific purposes that are levied on the captured assessed value must be transmitted to the tax increment authorities involved – in that instance, DDAs and Tax Increment Finance Authorities, 1980 PA 450, MCL 125.1801 et seq.  The Attorney General reasoned that the statutes did not provide an exception to the tax capture, and therefore, “there is no room for judicial construction.”  OAG No 6687 at p 61.  The Legislature has the power “to alter the purposes for which tax revenues are expended, and . . . the Legislature has done so.”  OAG No 6687 at p 62, citing Advisory Opinion on Constitutionality of 1986 PA 281, 430 Mich at 111-115. 

Here, art 9, § 11 simply authorizes the Legislature to “provide[ ] by law” for “other tax revenues” to be dedicated to the School Aid Fund, which the Legislature did in enacting the State education tax.  The constitution, however, does not prohibit the Legislature from subsequently determining that State education tax revenues may be subject to capture and enacting legislation to authorize the capture.  Such a conclusion would require reading additional words into art 9, § 11.

It is my opinion, therefore, that 2012 PA 396, which amended the DDA Act to allow the capture of State education taxes to pay for costs associated with a catalyst development project, does not result in an unconstitutional diversion of funds from the State School Aid Fund established by Const 1963, art 9, § 11.[7] 

You next ask whether the Michigan Strategic Fund’s planned $6,000,000 “other economic benefit” to aid in the demolition of the Joe Louis Arena in the City of Detroit violates section 88c(3)(a), MCL 125.2088c(3)(a), of the Michigan Strategic Fund Act (MSF Act), 1984 PA 270, MCL 125.2001 et seq. 

In connection with the City of Detroit’s emergence from bankruptcy, the City of Detroit and the Detroit DDA also seek to redevelop the site of the municipally-owned Joe Louis Arena—the Joe Louis Arena Redevelopment Project.  The Michigan Strategic Fund (Fund) agreed to support a portion of the cost of the redevelopment through its existing Michigan Community Revitalization Program (Program), provided all of the statutory requirements for such program and the Fund’s additional conditions were met.  The amount of support provided through the Program would be approximately $6,000,000.  The use of these funds would be limited to assisting in the demolition of the Joe Louis Arena.

Section 88c(3) of the MSF Act provides, in part:

(3) The fund board shall ensure that a recipient of money under sections 88d, 88e, 88f, 88g, 88q, and 88r and chapter 8C agrees as a condition of receiving the money not to use the money for any of the following:

(a) The development of a stadium or arena for use by a professional sports team.  [Emphasis added.]

The Program from which the money will be utilized falls under Chapter 8C, MCL 125.2090 through 125.2090d, of the MSF Act.  Thus, the money is subject to the restriction that it not be used for the “development of a stadium or arena for use by a professional sports team.”

As noted above, the Fund has committed the Program’s monies to be used for the demolition of Joe Louis Arena and to prepare that site for redevelopment through the Joe Louis Arena Redevelopment Project.  Notably, the new Detroit Events Center is not being constructed on the Joe Louis Arena site, but rather at a site over a mile away from the existing arena.  Chapter 8C of the MSF Act provides that “demolition, construction, alteration, rehabilitation, or improvement of buildings” is an “eligible investment,” MCL 125.2090a(d)(i), for which Program “incentives” (money) may be used.  MCL 125.2090b(1) and (4).  Program money has not been pledged for the development of the separately located Detroit Events Center, which clearly is the “development of a stadium or arena for use by a professional sports team.”  Under these circumstances, the Fund’s committal of Program money for the demolition of Joe Louis Arena does not violate section 88c(3)(a) of the MSF Act.

It is my opinion, therefore, that the Michigan Strategic Fund’s proposal to provide funds from the Michigan Community Revitalization Program for the purpose of assisting in the demolition of the Joe Louis Area after completion of the new arena at the Detroit Events Center does not violate section 88c(3)(a) of the MSF Act, which prohibits the use of such funds for the development of a stadium or arena for use by a professional sports team.[8]                                                               

                                                                     
BILL SCHUETTE

Attorney General