The Local Government and School District Fiscal Accountability Act, MCL § 141.1501 et seq., (the “Act”) was intended to assist local governments in financial trouble. An emergency financial manager can be appointed under the Act to resolve the government’s financial situation. The Act gives the manager very expansive authority. The Act states:

“An emergency manager may … make, approve, or disapprove any … contract” and may “reject, modify, or terminate 1 or more terms and conditions of an existing contract.” MCL § 141.1519(1)(g) & (j).

This incredibly broad legal power could be used to invalidate existing agreements related to Brownfield financing and other economic incentives. No Court has yet to clarify how far this power extends. There are several cases which are challenging the constitutionality of the Act. In Valenti v. Snyder, No. 2:12-cv-11461-AJT-MJH, pending in the U.S. District Court for the Eastern District of Michigan, the Coalition of Unions of the City of Detroit alleges the Act violates the Contracts Clause of the U.S. Constitution because the Act empowers an emergency manager to terminate or modify collective bargaining agreements. In Brown v. Snyder, pending before the Michigan Supreme Court, No. 11-685-CZ, the plaintiffs, 28 Michigan residents, allege that the Act violates the non-delegation doctrine and elector’s rights.

We are unaware if there is any situation where an emergency financial manager has terminated a brownfield related arrangement. However, there are many communities who have had managers appointed and may others who are at risk. We are undertaking a survey of our clients’ situations in communities that are currently being managed by the financial managers and those governments which are could have one appointed in the near future.

There are several strategies, from a legal perspective, to reduce the risk of a brownfield plan or agreement from being terminated under the Act. A comprehensive review of the particular situation along with careful attention to legal issues can manage these problematic situations.

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Tax increment financing (“TIF”) is used by many owners of property to finance previously incurred eligible environmental costs. In essence, TIF uses increased tax revenue to reimburse owners for eligible costs. Developments of obsolete or contaminated property often result in an increase in the taxable value of real property which, in turn, cause additional tax revenue to be generated. Under a Brownfield TIF arrangement, instead of a source of additional funding for governments, the incremental increase in the tax revenue is used to pay eligible costs incurred by a developer through a reimbursement agreement with the local community.

Now that the City of Detroit has an EFM, those involved in Brownfield Plans should be aware of potential consequences. The new EFM, Kevyn Orr, has yet to use his incredibly broad legal powers to invalidate Brownfield plans or reimbursement agreements or portions of them in Detroit, but he has started to use these powers to assert control over union contracts (see Detroit News, 4/23/13). A unilateral termination of the entire agreement or portions of it are clearly within his powers. This means that developers counting on reimbursement through a TIF arrangement may be disappointed when a EFM terminates such arrangements.

A strategy that might be employed by an EFM, based on our sources, is to request a status report from each person benefitting from a Brownfield plan or reimbursement agreement. If the audit shows little or no economic benefit to the local community, the agreements could be terminated and TIF would no longer be available and, as a result, the governmental entity would not be obligated to reimburse those owners for such costs.

It might be wise for Brownfield plan beneficiaries to consider how to respond when such questions are asked. Further, it may be important for one to proactively communicate directly with the EFM to stave off any potential for such documents to be terminated or rejected. We will continue to monitor not only Detroit’s situation but others as EFMs are appointed for governments throughout Michigan.

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President Obama’s budget still has not been enacted. Many of the components of the budget may not survive the upcoming expected legislative wrangling, including the House-Senate conference procedures. But the budget does represent the President’s wish list.

Receiving extra emphasis this year are elements that encourage renewable energy projects. Perhaps most noteworthy is the extension of the renewable energy production tax credit, changing it from needing to be extended every year to be being a permanent tax credit. This would be a complement to the permanent status that Congress afforded the research and experimentation credit.

The production tax credit will affect the following renewable energy production facilities: wind, solar, hydroelectric, geothermal, hydroelectric as well as waste facilities that produce energy like municipal solid waste, landfill gas and biomass.

One caveat: in order to claim these tax credits, production of the facilities must begin by January 1, 2017 except for wind facilities, which must commence construction by January 1, 2020. The tax credit for wind facilities is being phased out, and will reduce each year between now and 2020. The tax credit for solar facilities will also decrease yearly beginning in 2020.

Additional tax credits are proposed for qualifying advanced energy projects, which are defined as products that make substantial changes to existing manufacturing facilities or construct new ones that do the following:

Produce energy from renewable resources
Creates components for use with electric or hybrid vehicles
Creation of electric grids that support renewable energy sources
Creation of blended fuel technology
It will be interesting to see which of these budgetary items will become law and which will end up on the cutting room floor.

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The essence of the bill changes the way that utility-scale solar energy producers pay for power they produce and consume.

Right now, solar users can consume all of the electricity that they produce. These solar consumers then receive compensation for any power that they send to the grid. They are paid a retail rate for this solar power.

The new bill would change the compensation and payment setup. SB 438 as written would require solar consumers to purchase all of their electricity from the power company. Subsequently, they will be paid a wholesale, as opposed to retail rate for the power that they send to the grid.

Some solar energy advocates are wary of the bill, as solar producers will be compensated at a lower level than they were previously. This will mean that investments in solar energy will take longer to pay off. But utility companies contend that the original NEM formula was created in order to foster growth in the nascent solar energy industry. Now that solar energy is considered a more mature industry, they argue, the subsidized rates can be phased out.

Michigan Senate Bill 438 is currently being addressed at the committee level by the Senate Energy and Technology Committee. The bill was introduced by John Proos of St. Joseph.

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A Mixed Bag So Far

By Jeffrey D. Moss, Guest Blogger

CBO’s March 2012 Report

The Congressional Budget Office (“CBO”) has recently issued a report entitled “Federal Financial Support for the Development and Production of Fuels and Energy Technologies” which analyzes the impact of the Federal programs implemented to support the development and production of fuels and energy technology. The CBO report, issued March 6, 2012 concludes that the recent emphasis upon tax preferences and incentive programs for renewable fuels, and alternative energy sources such as solar and wind technologies have had mixed results. Although the most prominent story in the media relating to renewable energy is the failure and subsequent bankruptcy of Solyndra, a company which intended to bring a new form of solar panels to market and which received a $535 Million Federal loan guarantee as part of its financing, several incentives have made an impact. The failure of Solyndra is not the whole story.

Fossil Fuel Credits Just Keep on Going

Prior to 2005, almost the entire array of energy related tax preferences were aimed at the domestic production of fossil fuels such as oil and natural gas. The amount of preferences provided to all energy, including alternative energy, began increasing in 2006 and spiked for the periods 2009 through 2011, with renewable energy and energy efficiency receiving a 78% share of the incentives provided in 2011. Nevertheless, many significant renewable energy tax incentives expired at the end of 2011 and are currently not part of the 2012 budget.

Renewable Tax Credits Allowed To Expire

The credits for energy efficiency improvements to existing homes and the Section 1603 grants in lieu of production tax credits have expired, along with the excise tax credits for alcohol, fuels and excise tax credits for biodiesel. Together these four expiring tax credits combined for over 60% of the amount of credits provided in 2011. Therefore, in 2012, unless additional legislation is passed, the Federal Government will dedicate less than half of the incentives it provided in 2011 to energy. It would be difficult to conclude with finality that these incentives are not working when they have only been in place for three years.

Tax Credits Result in R&D Advances

The Congressional Budget Office did conclude that there has been significant research and development advances occurring during the past few years as a result of the tax incentives and preferences, however, it is difficult or impossible to quantify the future benefit that these R&D advances will make ultimately on the production of alternative energy. For more see the Congressional Budget Office report linked above.

Jeffrey D. Moss is a Member of Dawda, Mann, Mulcahy & Sadler, PLC. He concentrates his practice in the areas of business transactions, tax law, estate planning and tax exempt nonprofit matters.

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Governor Rick Snyder was adamant during the 2010 election campaign that Michigan would have to stop picking ‘winners and losers’ when it came to doling out governmental incentives for private businesses. Once in office, he eliminated many programs, including tax credits for historic and Brownfield developments and substantially reduced the film industry tax breaks.

The idea behind this policy was that it was unfair to favor a certain industries or developments. Also, it was felt that tax credits were not the best way to entice employers to invest and create jobs and, instead, front loading developments with grants or loans was preferred. Already, the MSF has provided cash grants to facilitate developments. As an example, $2.5 million dollars was recently given by the MSF for the construction of a new DTE substation at Hyundai’s plant in Superior Township.

In December, the Governor signed a bill package which created the Michigan Business Development Program (“MBDP”) and the Michigan Community Revitalization Program (“MCRP”). These programs replace the tax credit programs previously administered by the Michigan Economic Growth Authority (“MEGA”) which distributed tax credits, including historic preservation and Brownfield credits.

New Programs

The MBDP provides up to $100 million in grants, loans or other economic assistance for highly competitive projects in Michigan. The applicant must be a “qualified business” that makes investments or create jobs in Michigan and the MBDP is principally designed to compete for projects that may otherwise go to other States. A qualified business will be limited to receiving $10 million a year and must be a business that is located in or operating in Michigan or that will locate and operate in Michigan. The business must create at least 50 jobs, but can also qualify if only 25 jobs are created in a rural area or are high tech jobs. Retail projects and “job retention” projects are not eligible. The elements MBDP review process similar to the old programs administered by MEGA in that there will be a qualified investment review and a written agreement between the developer and the MSF.

The MCRP can grant up to $1 million per project. Loans are available up to $10 million dollars. This program replaces the Brownfield and historic tax credit programs previously provided by MEGA. To be considered an MRCP eligible property, the Property must be one of the following:

• a “facility”, i.e., a place where contamination exists above residential criteria;
• a historic resource;
• blighted;
• functionally obsolete; or
• adjacent to or contiguous to a property meeting any of the above characteristics.

These criteria are very similar to the prior programs administered by MEGA. In fact, the same language is being used in the statutes as previously used in prior legislation. Perhaps the biggest hurdle for an applicant under the MCRP is that there must be a more rigorous demonstration of financial need through a proforma review. Therefore, the applicant will need to show that the project would not be viable without the proposed incentive; and it is felt that this is getting closer to the “but for” test. Also, local community support in the form of other tax abatements or incentives. It is also important to note that the terms of the loan documents appear to be fully negotiable as there are not specific guidelines identifying interest rates, recourse, term, etc.

Recently, program guidelines were published and here are the links to them:

MCRP – http://www.michiganadvantage.org/Michigan-Community-Revitalization-Program-Projects/

MBDP – http://www.michiganadvantage.org/Michigan-Business-Development-Program-Projects/

Overall View

Michigan’s new incentive programs are a venture into new territory. They are not modeled after other States with higher employment and who arguably have had more success than Michigan in retaining and attracting business. The funding for the programs pales in comparison to the previous administration’s budget for incentives. Our concern is that other States may still be perceived as being exceedingly competitive and attractive to employers because of the quick turnaround and lack of “red tape”.

It remains to be seen whether the new programs are really a change or whether Michigan will continue to pick ‘winners or losers’ through a discretionary application and vetting processes. For instance, there are a variety of uses which are not allowed to receive such incentives such as sports stadiums, casinos, retail projects or other projects which may “induce businesses” to leave Michigan. How much of the process is subjective? Will the same rules apply to large and small developments? Will the time frame involved be a non-starter for businesses looking to move quickly?

Businesses need certainty in order to operate effectively. Michigan needs to be competitive with other States who have large amounts of funds to throw at prospective employers. Although Michigan is taking a positive step by revamping some of the rules and regulations previously used to hand out economic benefits, there continues to be a bit of a uncertainty surrounding how the new programs will be implemented.

Advice
For developer’s seeking economic and tax incentives from the State of Michigan, it is important to establish an early relationship with the various governmental authorities (e.g. local community, MEDC, and MSF) through pre-application meetings and consultation. Further, a developer will need to be cognizant of the challenges associated with proving the financial soundness of the project as well as the access to other capital to make the project viable. We are told that the process in both programs will take at least 30 days, but it is likely to take a lot longer to bring all parties to the table to get the desired benefit. Stay tuned for more developments.

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