The City of Kalamazoo has a revenue problem.
The local government does not collect property taxes on a majority of the land within its borders, yet property taxes and intergovernmental contributions account for more than 70 percent of the city’s budget.
That’s because nearly 52 percent of the property in the city is either owned by a nonprofit organization and tax-exempt or in foreclosure. Either way, the city only collects property taxes on a fraction of its land mass.
On top of that, Kalamazoo is also one of the larger cities in the state that doesn’t levy an income tax on residents or people working in the city.
In light of the diminished or flat revenues that are projected for years to come thanks to cuts to intergovernmental contributions and lower property tax revenue, some local officials have called Kalamazoo’s budget situation structurally unsound.
“Our fiscal concerns are going to continue indefinitely,” said Jerome Kisscorni, economic development manager for the City of Kalamazoo. “We’re going to have to deal with those.”
A landlocked city encompassing slightly more than 25 square miles, Kalamazoo will be hard pressed to expand its borders and grow outward. That’s put the focus on both growing density in the city center and in adding multi-story buildings.
“We’re not going to be able to grow out (to expand the tax base),” Kisscorni said.
Within its current borders, the prevalence of tax-exempt nonprofits is a bit of a double-edged sword. The nonprofit hospitals and higher education institutions are sizable employment providers and economic drivers, but they aren’t contributing to city maintenance and other essential services, of which they are significant users, Kisscorni said.
“This is more of structural problem in municipalities statewide, and it probably has to be addressed at state level,” he said.
Thanks to the repeal of the industrial personal property tax in the lame-duck session last December, the city stands to lose another $2.2 million in revenue over 10 years.
Now, some local officials are discussing how to address the city’s systemic challenge.
“We have heard the question, ‘What do we do about tax-exempt entities and how do you handle them?’” Kisscorni said. “Should there be minimum tax on them for essential services?”
However, he said those are questions that the city cannot answer. Any resolution must come at the state level, he said.
“Our hands are tied,” Kisscorni said.
But not all Kalamazoo officials think the city’s situation is as dire as it appears on paper.
“I don’t think the amount of tax-exempt property we have is going to make a great impact,” said Mark Hatton, development manager for the City of Kalamazoo.
That said, Hatton thinks the city must pay close attention to the remaining developable property it owns and to other land-use issues within the city.
“It does heighten the awareness and urgency of us trying to be proactive with what we control,” he said.
Kalamazoo’s situation is a product of a number of factors. For years, the city encouraged the growth of the nonprofit and institutional segments of the community, which continue to add value to the city even if they don’t contribute any tax revenue, Hatton said.
Moreover, the properties in foreclosure were a result of the recession and not of some action the city took, he added.
Hatton said the prevalence of tax-exempt properties, the lack of a city income tax and the loss of a portion of personal property tax revenues is just the reality in which the City of Kalamazoo must operate. The situation reaffirms that the city needs to encourage future development in uses that will increase the city’s tax base.
“This makes our work more important,” he said.
Speaking at the Urban Land Institute’s public-private partnership forum in Lansing in March, Hatton said the Arcadia Ales expansion project is an example of how the city is working with its partners at the state level and within the greater community to find the right kind of developments.
Last year, Arcadia announced it would build a new brewery in the River’s Edge brownfield site along the Kalamazoo River in the city. The city had held on to the riverfront property for years. While a number of developers proposed projects on the site, the city held off for an ideal user, finally giving the green light on redevelopment to the Arcadia project, Hatton said.
Patience for the right project allowed city planners to get what they wanted out of the site, namely incremental job growth, riverfront enhancement and encouragement for similar developments on the surrounding properties once the brewery is completed, he said.
The city hopes the project functions as a linchpin to spur other redevelopment that will help increase the tax base.
“We hope this project continues to extend the redevelopment we’ve seen within the downtown,” Hatton said.
Because the downtown district is constrained within its existing boundaries, city officials are encouraging projects that can add density, which is often accomplished with multi-story facilities.
One such project is The Exchange. Phoenix Properties LLC proposed the $24.5 million, eight-story mixed-use development at the southeast corner of Michigan and Rose Street. The company proposed 50 residential units, 50,000 square feet of offices and 16,000 square feet of retail space for the site.
While Phoenix has yet to break ground on The Exchange, it would be the first major new construction to provide more density downtown, sources said.
It’s a project that Hatton would like to see come together.
“We’ve extended our agreement with Phoenix Properties and are hopeful that moves forward,” he said. “It’s a complex project. It’s big and conditions and financing are always where the rubber meets the road.”
If and when The Exchange breaks ground, the project should provide a basic template for how major new construction could happen in the city, a process built around collaboration between local government and developers, Hatton said.
“There needs to be a collective vision,” he said. “We don’t do the private-sector work for a reason. They know what works. We need to create a shared vision for our sites, and that’s pretty easy to get to if we work together early on.”