Catching Up With Brian Chapman, Sault Ste. Marie City Manager

David Haynes sits down with Brian Chapman, City Manager for Sault Ste. Marie to catch up on the latest issues surrounding municipal finance and rural government, including the issue of "dark stores" and the importance of intergovernmental work in rural communities.

Sault Ste. Marie is one of Michigan's international cities, bordering Canada, and home to a large federal workforce involved with the Soo Locks, a major hospital (War Memorial) and Lake Superior State University.

Transcript

David Haynes:

Good day, everybody. And welcome again to another great edition of Rural Insights Podcasts and Video Series. The way we try to feature people in the know about the Upper Peninsula, and today's guest has been with us before, Brian Chapman. He's the city manager of Sault Ste. Marie. One of... Last time I had three or four international cities in the state of Michigan, a very, very unique declaration, and also has some interesting impacts on how life is led and some different responsibility. So, that's very great. And of course, it's one of our largest, not first or second largest, city in the peninsula. So, a lot is important that's going on. Brian Chapman is also a graduate of Northern Michigan University, and he has his Masters in Public Administration from Northern also. And had the unfortunate experience with that, I think, having me as a professor, but...

So, other than that... Brian, thank you so much. I know you're busy and I'm going to try to keep it short today, because I don't want to take up too much of your time because your staff said that if I take too much time, they'll never let me back in. So, I'm going to... I got to keep it tight.

I'd like to talk today about municipal finance and rural government. It's a discussion all over the country. Certainly as cities, rural and urban, suburban, big and small have faced COVID costs and faced, these days, also looking at what's happening with gun violence in their communities and all sorts of issues. Talk to me a little bit about the challenges of it. You've done a great job and your city has been active in trying to deal with this issue of big box stores, taking a dark store exemption and costing the city's money. I know four of the cities in the U.P. Have talked to me of big cities... have talked to me about this. There's not been an increase, as far as I know, in yours or the other larger cities in the U.P. and property taxes up until this year. I think there's not been an increase in state aid to municipalities. I'm not sure what happened this year. So, talk to us about what all this has meant to you and what you see in the future here.

Brian Chapman:

Yeah, so we... It's a timely conversation too, because we just wrapped up our budget process. We're on a July 1 fiscal year and June 30th. So, we're ending one fiscal year, and we're getting ready for another one. So, we adopted a budget beginning of June, and looking at the revenue side of our budget, things get pretty tight. Our expenditures continue to increase. There's still a COVID impact or supply chain impact. The price of gas has gone up. So, we're seeing our expenses go up significantly. But on the revenue side, there's not that much growth though. The city of Sault Ste. Marie, we haven't been fortunate enough to have a great deal of new development or redevelopment that would increase that tax base. We've been pretty stagnant, for lack of a better term. We've been pretty stagnant with our development.

So, our property tax revenue, I think there's a slight increase in it that's coming from kind of the Prop A Headlee process there. And I think it's only about 3%, which isn't a lot, but like you said, we haven't seen a lot of increases in the last few years because the Prop A and Headlee combined. I think they limit property tax growth to rate of inflation or 5%, whichever is less. So, we haven't seen this massive growth in our tax revenue stream. And realistically, you don't see some tax growth until somebody sells their property, it changes hands, and becomes untaxed. It gets reassessed. So, we haven't had a lot of that happening up here. So, our property taxes remain stagnant. Our shared revenue system, which is the Constitutionary Statute or Constitution and State Statute Revenue Sharing System. We've seen some increases on the constitutional side of things because the legislator can't really touch that pot of money.

But on the statute side of everything, that's a discussion that comes up annually with the state's Budget Appropriation Process. And we're seeing a little bit of increase this year. I think the state has some extra funds that they're trying to divert to the local municipalities. I think Governor Whitmer, in her budget proposal, maybe had upwards of 10%. I think the house or the Senate concurred with that recommendation. But the opposite chamber of that wants to see that lower down a little bit. So, our property taxes combined with the state shared revenue system accounts for a major portion of our budget, I want to say about two thirds of our general fund operating budget.

So, when those two line items don't see a lot of growth, we obviously have an issue with our expenditure side and not being able to grow our services. So, like I mentioned, we just finished our budget process here in June. We adopted a budget and it was another tough, grueling year. We have a lot of needs. We have a lot of wants. We have a lot of deferred maintenance equipment. That's going bad. We have police cars that have 160,000 miles on them. I mean, we have a lot of items that we have to replace, and it gets difficult when your revenues can't carry your expenditures. Your expenditures continue to grow at a rate that's not sustainable. So...

David Haynes:

What other options does a city have other than what you described? I mean, is there a business raises their prices, university raises tuition, goes after gifts? What are some of the things you city managers think about when you think about revenue sources?

Brian Chapman:

So, we are impacted by state statute. And again, I don't think it's necessarily the... I don't think it was Prop A, I think it's the Headlee amendment compounded with the Bolt v. Lansing. So, we have property taxes. We have the state shared revenue system, but then another portion of our general fund are user fees. So, if you have... If you use an ambulance, we bill out to your insurance company. If you're renting a park, you're renting a boat slip, whatever the case may be, we have user fees, but even under state statute and a little bit of court law, we're capped at how we can come up with those fees.

So, the fees have to represent, for lack of better term, the amount of effort that goes into the service. So, we can't just blindly come up with a fee that says you are going to be charged X amount of dollars for this particular service. There has to be an actual rhyme or reason, kind of a justification, for that fee. So, that's one item we think about. There are some other tools in the toolbox. They're not very... They're political; they're special assessments. So, if we're doing a road project, there may be some fees that we can associate to the property owner for their benefit. There are other types of special assessments we could look at. Some communities have a public safety assessment. They use that to either fund the general operations of a police department or fire department, or they'll use it for capital purchases and just kind of have that money coming in.

David Haynes:

Those will require a vote of the people, do they all?

Brian Chapman:

So, some of them do. So, some special assessments... Special assessments just need to be... There's a process in our charter. It needs commission approval. And I think the public safety special assessment, that's dictated by state statute, but that is commission approval also. So, it's a little bit easier. But when you start getting into actual tax increases, a new millage, going above what you're allocated tax rate is based on Prop A and Headlee, then you got to go to a vote with people. And it gets a little bit more difficult. It gets a little bit more challenging. And it's... Especially in today's... The economy, the climate that we're in right now, when gas just shot up to $5.19, and everything's being more expensive. It's tough to go to the vote of the people and ask for additional funding because they're also feeling the pinch personally, with their own grocery bills, their gas bills, their heating bills, whatever the case may be.

So, there's a lot of things we have to think about when we start looking at fees and revenues, the time of the ask, is it conducive to the economy and the local people support and increase? I know I saw on the news recently, the city of Marquette is possibly going for an additional tax rate increase about like 2.7 mills. And I believe that's underneath their statutory allotment. So, I think that can happen at the commission level. But once you start getting above that, you have to do it as a vote of the people. And it has to be authorized by state law. We could do a Parks Assessment. We could do a few different things, but they're not easy processes, right? And they're not always easy discussions to have.

David Haynes:

And voters are not prone these days to vote for tax increases.

Brian Chapman:

No, they... There was a period when the economy was kind of humming along. And there was a... I don't remember if it was U of M or maybe it was a Michigan Municipal League, but they keep an eye on the special millages that are being proposed. And for a while there, when everything was good, they were seeing those paths at a higher rate. I think about 70%, 80%, which is pretty good. But now the economy has changed. The climate has changed a little bit, and we're waiting to see if some of those special requests do get knocked off. I do have a theory that, I think, if people understand truly what their taxes are going for, and it's a cause they believe in, I think they will pass them. But at the same time, people have to look at their own checkbook and say, "Well, if I have a choice, am I going to vote for this increase in taxes? Or am I going to make sure I have money on the table for food gas, et cetera?"

David Haynes:

Childcare, all those expenses with inflation going on.

Brian Chapman:

Yeah.

David Haynes:

Absolutely. What... When's the last time you think you had, in Sault Ste. Marie City, a vote of the people on taxes?

Brian Chapman:

Oh...

David Haynes:

Has it happened in the last decade?

Brian Chapman:

It's been a while. So, the city actually only assesses three millages. So, we have our tax rate, our tax millage. We have a police and fire pension that helps pay the pension cost association with our police department and fire department, and we've had that for the longest time. And then we have a special millage for refuse and composting and stuff like that. It's a very small one, but it helps fund those operations. So, we have those three millages. I think the two... They were voted on long, long time ago, way before I was here.

David Haynes:

Is dark stores still a problem in for cities in the U.P.?

Brian Chapman:

Dark stores are still a problem. I would say, they're not a problem for the Sault right now because we lost that battle. So, it is what it is. We've spent the money for the attorney fees to fight the case. We ended up losing. So, it's not an active problem. It's a problem in the sense that those big box stores aren't paying their fair share of the taxes. So, like I was saying, when our expenses go up and our taxes, the small business owners having to pay more taxes than what those big box stores are. So, it was still a problem in that sense. We've had a development group approach us about bringing in a new box store and even kind of looking at the history of the dark stores and what big box stores can do to a local economy and what they really bring.

The conversation has kind of changed at the local level to, "All right." It used to be, "We want these big stores. These are big anchor institutions. They can support the local economy. They're good for us." But given the issues that have kind of came of them, some of the perception has changed a little bit. And it's being framed in the sense of, are these really worth it to our community? Because they do take away business from your local downtowns. And if that's an anchor that you want, strong downtown, you want them in there. Do you want the dark store case issues? Is it really worth its weight for a community?

David Haynes:

Well, and also added to the loss of revenue would be the increase, especially during COVID, of online shopping.

Brian Chapman:

Correct.

David Haynes:

And the competition between a big box online on Amazon or whatever, and a small business and it's cost.

Brian Chapman:

Yeah.

David Haynes:

You know, what you've been talking about is... This what, I think, listeners will take. I think of this is how much intergovernment relations impacts here. You're dependent on what level of government to approve something, and you're dependent on what another level of government does to get you to a certain spot. How much time do you think you spend? I suspect it's a great deal of time on intergovernmental relations, whether it's with the state, the federal, the local school district... Talk about the city manager, and the city's life about intergovernmental work.

Brian Chapman:

It's incredibly important. I mean, at the local level, our intergovernmental relations come with our school district. We just assigned a new contract for our school resource officers who we're trying to provide those. We work with our county counterparts, street word, for bidding opportunities, project piggyback, stuff like that. But when it really comes to what's impacting us, it really comes down from the state government. And we spend a great deal of time advocating against certain laws or advocating for laws. We have a very good, very close working relationship with the Michigan Municipal League, which acts as our state advocacy group. I'm on a finance committee. I've got staff members on other committees, and we do. We spend a great deal of time trying to stay up on the state's business because what they do has a major impact on us.

And then at the federal level, we work really close with our local elected officials. A lot of that is more grant and funding opportunities, and trying to stay up on that. And give feedback on programs and what works, what doesn't work. But I would say the vast majority of our time on intergovernment relations is just really at the state level and making sure the elected state officials understand that there's an impact at the local level for some of the laws they propose and pass. So, even the short term rental issues, I remember meeting with one of our elected officials and he had a very concrete idea that short-term rentals had no impact. It should be managed at the state level. But after he met with some of the local units of government, he met with me and my commission, we painted a very different picture. And he could then see the impact that a state mandated short term rental program or quota could have on a local unit of government.

So, we spend a great deal of time trying to work with them and the state administrators so they understand what kind of impact they'll have on the local unit of government. Because it's... At the end of the day, a lot of the things they're proposing is funding. It's going to be money out of our coffers, or it's going to be an increase in expenditure to accommodate their mandate.

So for example, it's kind of a touchy one, but the state has personal property tax. And when that first came down years ago, each city received a hefty amount of personal property tax based on the businesses in their community. And in order to be a more business friendly environment, the state did away with a large portion of it. And that hurt communities. What they recently did... I think there is an exemption under $80,000 of personal property tax is exempt. They don't have to pay it, but they just upped it from $80 to $160,000. And I think talking to my assessor, we may have had 60 or so payers under personal property tax. And with that exemption, it drops us down to maybe five. So, I mean, that's all money that's coming out of our budget that we use to pay for cops, firefighters, streets, all that stuff. So, it has a real impact to the local level.

David Haynes:

It struck me as I listened to the... Everyone talked about, and I've talked to a lot of municipal leaders in the U.P. about this issue with short term rentals. And I've said to some of the state, "It's amazing for state people to think that this could be good for a local community." I don't know. I mean, everyone's reaction outside of Lansing is the same thing. "What? How would that help us to have you set something?" Right? I mean, that's sort of, it's been fascinating to me. This is one of the disconnects-

Brian Chapman:

Yep.

David Haynes:

About it. Also speaks to the importance of intergovernment relations, which you just did by making sure the state leaders understood what the heck means here.

Brian Chapman:

Yes.

David Haynes:

Well, Brian, I want to thank you. I don't want to keep your time up. Thank you. This has been really, really fascinating. I know our listeners will like it, and I... We're not going to talk about it because we haven't had a chance to make sure we are, but you are the... There was just a recent statewide story about the Sault area high school, having on an elite list of 19 schools in the state had the highest levels of low income young people go to college for your program. It's an amazing number when you look at the statistics, and the something I'd love to talk about, the importance of this educated workforce to a thriving international city like Sault Ste. Marie.

Brian Chapman:

Yeah. That'd be great. It's we have a great school district. We really do. I was surprised when we first got here, but yeah, I'd love to have that conversation with you.

David Haynes:

All right. My friend have a great week. Thank you for giving me this time. I know you're busy, so I really appreciate it.

Brian Chapman:

Anytime, sir. Thank you.