KALAMAZOO, MICH. - When Mayor Bobby Hopewell approached one of the city's wealthiest patrons about helping plug a looming budget gap, he received an unusual response.
"He told me we were not thinking big enough," Hopewell said of his series of meetings this spring with William D. Johnston, a personal friend and chairman of a privately held wealth management company.
Those conversations turned into one of the nation's most unusual philanthropic initiatives, officially unveiled last month and poised to help remake government finances in the southwest Michigan city of 74,000. It also could set a precedent for a new type of government funding.
"This is investing in a city in a way that's never been done before," Kalamazoo City Manager Jim Ritsema said.
City officials say Johnston, together with his friend, retired drug company CEO William Parfet, pledged $70 million over the next three years to help solve a number of vexing municipal finance problems and also pay for lowering the property tax rate.
The idea of a municipal-led foundation isn't groundbreaking in the nation, or even in Michigan. Cities and towns across the country have solicited private funds to make up for cutbacks in government programs from parks to music to art to youth sports programs. Philanthropy's role in cities like Grand Rapids and Detroit are also credited with helping rejuvenate civic life. In Detroit's case, a coalition of foundations helped engineer a bankruptcy deal to secure city pensions and safeguard the city's premier art collection.
Kalamazoo's wrinkle on the idea, boosters say, builds on the city's success with its decade-old Kalamazoo Promise, the universal tuition-free college scholarship program awarded to every qualified graduate of the city's public school system. Its donors are anonymous, but their ambitions remain large.
Financing property tax reductions and closing operating budget holes, however, is a far different proposition than donating to pensions, saving city-owned art or anonymously paying for college tuition.
Some raise concerns that the new model could help displace the traditional role of government. It also potentially gives the wealthy donors more power over local government operations than perhaps was ever intended in an American-style democracy.
Others worry that the gift could be a way of pushing a political agenda that seeks to lower taxes outside the electoral process. But supporters say it's really the opposite: a mark of trust in government's ability aided by philanthropy to help solve long-standing community problems.
Experts in philanthropy stress that city leaders must take precautions before diving headfirst into a financial deal with some of the city's wealthiest citizens. And even then, others question whether it's the best use of donor dollars.
"I'm critical and here's why," said Dr. Leslie Lenkowsky, professor emeritus of public affairs and philanthropic studies at the School of Philanthropy at Indiana University. "The ultimate value of philanthropy is to do things that government can't or won't do."
It's philanthropy's independence that also allows it to make a unique contribution to the public good, he said. "We have a pluralistic notion of the public interest and some of that we run through government. But not all of it."
Kalamazoo City Commissioner David Anderson, who has served on the body for 11 years, praised the idea as "jaw-dropping" and "astounding" but added, "I think obviously there are a couple of problems. The strongest one is the perception of leverage being created for just a few rich people. So it has to be clear in the agreement that this is not a quid pro quo."
How it works
The millions would seed a new Foundation for Excellence while helping to cover a growing annual budget shortfall, projected at $2.75 million by 2021. The initial donation would also pay for slashing property taxes by one-third, eliminate the need for a new income tax and fund programs to reduce poverty and bolster youth employment, among other ideas.
It was Ritsema and Hopewell who approached Johnston and Parfet in a series of private meetings starting in February about the creation of a foundation to aid the city without raising taxes.
Those discussions were sparked after a blue ribbon panel of residents, businesses, nonprofits and education experts in December issued a report on the city's finances but failed to endorse a new city income tax, a measure that many saw as the quickest way to raise much-needed cash.
Before the foundation can get going, there will be public hearings, and the plan would have to be approved by local elected officials. The foundation would also try to raise an additional $300 million to $500 million endowment over the next three years to keep reducing property taxes until they're at half of heir current levels and provide new money for some government programs into perpetuity.
The Kalamazoo deal isn't inked yet, and some elected officials say they'll need to read the fine print before signing off on what would a historic tie-up between city government and Kalamazoo's richest benefactors. Donors and city leaders say the foundation will be run with strict performance metrics in place to ensure it remains on track.
But there are still many unanswered questions about the details of its philanthropic plans and its founders. The motivations of the donors, for example, remain mysterious. Parfet and Johnston did not return requests for comment and have not spoken publicly about the reasons for their proposed largess.
Need for tax reform?
For some, the donation looks like a novel, albeit last-ditch attempt through local charitable efforts to help overcome a statewide and systemic problem of inadequate financial support for local government.
"Michigan is unusually restrictive on revenue options for local government and also has a highly fragmented local government structure," said Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, a nonprofit, independent research organization in Kalamazoo.
Unlike most states, Michigan has no local option sales tax, and the state restricts how much localities can boost property tax. Kalamazoo, for example, has nearly half of all of its property off the tax rolls thanks to nonprofit organizations such as health care institutions and colleges.
"The combination particularly hampers cities that have little new land to develop, as one of the few ways you can raise property tax revenue is from new development," Bartik said. "Revenue sharing has been cut back by quite a bit. Local income taxes are one option for cities but are more problematic both politically and economically when you have a highly fragmented local government structure."
As a result of all this, many local governments are under severe financial strain and struggle to figure out how to finance local services
The latest check of the state's pulse isn't especially encouraging. After five years of steady statewide improvement, fewer Michigan communities report that they are better able to meet their fiscal needs this year.
A University of Michigan survey released last week polled top elected and appointed officials in the state's 1,856 units of local government. This year, 31% reported they were better able to meet financial needs. That is down from 38% last year saying they were better able to meet fiscal needs. The number of those who said they were less able to meet financial needs also grew in this year's report compared with 2015 results.
"For the first time since the end of the Great Recession, the trend of more and more local officials reporting gradual improvements in fiscal health overall has reversed," Thomas Ivacko, administrator and program manager of the university's Ford School's Center for Local, State, and Urban Policy, said. "The reversal includes jurisdictions of every size and type."
Overall, nearly half — 45% — of jurisdictions report no significant change in their fiscal health from last year. But most worrisome were county governments, 19% of which said their fiscal stress was high. That was up from 3% in 2015, Ivacko said.
Kalamazoo's philanthropic strategy is an approach that might help some communities that have lots of local wealth with an intense interest in the local community, Bartik said.
"But it raises the issue: Are there needed statewide policy reforms to deal with the overall local government finance problem?" the economist said.
Funding big ideas
According to draft plans in Kalamazoo, the initial $70.3 million would be spent across three years on three priorities: $7.6 million on budget stabilization, $32.7 on reducing property taxes to 12 mills from 19.2705 mills today and $30 million on investing in aspirational ideas such as new ways to alleviate poverty and provide better services to children.
The investments would be driven by an ongoing community decision-making process known as Imagine Kalamazoo 2025, the city’s master plan update process. Together with other money raised by the foundation in the future, the plan also calls for reducing the property tax eventually to 10 mills, which officials say would make Kalamazoo more competitive with its immediate neighboring cities and towns.
The plan calls for Kalamazoo’s elected leaders to direct the use of funds independently, but details still need to be worked out and approved by the city's commission. Public meetings before the commission on the issue are expected in September. The goal is to prepare the necessary documents to gain formal approval by the end of the year.
Aaron Dorfman, president and CEO of the National Committee for Responsive Philanthropy, which bills itself as the nation's only independent watchdog of foundations, said he's concerned about the personal benefit to the donors of such a large gift.
"Would the donors be better off making a donation rather than having to take a tax hit" from a future income tax?" Dorfman said. "If so, that's no way to do policy."
It''s all part of the inherent danger "when donors decide what should be a democratic decision," he said.
Mattie Jordan-Woods, executive director of the Northside Association for Community Development, believes opposition to the plan makes little sense at this point.
"I do not understand saying no, unless they are asking you to do things that's not right," said Jordan-Woods, who is 60 and has lived and worked in one of the city's predominantly African-American and lower-income neighborhoods for more than 30 years.
"I think that there are a lot of people who really love the city and that's what we have here," she said. "I love the city too, but I don’t have any money."
Critics "keep saying, it’s a tax write-off" for the donors, she said. But Jordan-Woods had a response for the skeptics.
"Well, they still don't have to give it here," she said. "And they are."
Rip Rapson, president of the Troy-based Kresge Foundation, which pledged $100 million for a so-called Grand Bargain to help Detroit speed an exit from the nation's largest municipal bankruptcy, said there's "not much to fault in the kind of courage it takes for such a big risk."
Philanthropy's track record
Though the donors aren't talking, one of their largest joint endeavors has been on public display at the city's Western Michigan University.
In 2011, Parfet, then the chairman and chief executive officer of MPI Research and the great-grandson of W.E. Upjohn, donated a 330,000-square-foot building in downtown Kalamazoo to serve as the future home of the university's medical school.
The property was on the original plot of land acquired by W. E. Upjohn to begin the Upjohn Co. and housed at the research facility where Motrin, Xanax and Rogaine were developed. Today, Parfet is also chairman of Gov. Rick Snyder's political action committee.
On March 11, 2014, the university announced the new medical school would be named for Dr. Homer Stryker, an alumnus and founder of Stryker Corporation. The move honored the once-anonymous donors of a $100-million gift — one of the largest single gifts in the history of higher education — from Stryker's granddaughter, Ronda Stryker, and her husband, William Johnston, who was also a university trustee and heads up Greenleaf Companies as chairman. The university's website lists Johnston's home as Portage, which is just outside Kalamazoo.
Forbes' wealthiest Americans list last year included two members of the Stryker family, whose company makes replacement joints and other medical devices. Ronda Stryker is worth $3.7 billion, placing her 159th.
Many Kalamazoo leaders say they welcome the latest generosity from the offspring of the Upjohn and Stryker families, and are loath to look a gift horse in the mouth without cause.
"I'm excited about the opportunity," City Commissioner Erin Knott. "There is just wide support for this." She added the city's challenge will be raising the related foundation endowment, estimated between $300 and $500 million.
The Kalamazoo Promise blazed a new trail for place-based philanthropy and earned the city a national reputation, but the program is still working to improve success for the city's poorest and nonwhite students, who have lagged in completing college degrees.
Still, the enormity of the ongoing gift and the attention it has received "helped stabilize the community. I think it has brought the community together," said Promise executive director Bob Jorth.
The 10-year program has spent more than $80 million so far to allow 4,200 students to attend college. Studies have shown its effect on boosting the city's college attendance rates, public school population and some property values. But it's less clear how much the program may have directly fueled the city's population growth and business climate.
The population of the city saw a decline in the 1980s because of the loss of manufacturing jobs, particularly in the automotive industry, mirroring statewide trends. Globalization forced downsizing and job losses at Upjohn, the area’s largest employer, which would eventually merge with Pfizer, then the world’s largest pharmaceutical company.
In the last five years, Kalamazoo's population has grown slightly, by 2.4% between 2010 and 2015, according to the U.S. Census. Almost half of all residents occupy homes they own. Almost 90% of adults over the age of 25 have a high school degree or higher, but only one-third have college degrees or higher. About 35% live in poverty, census figures show.
“The Kalamazoo Promise has shown us what is possible when we, as a community, ask ourselves, ‘What can we do for our community? What can we do to address a challenge?’ ” Hopewell. said “This will provide an opportunity for this community to unite around a common vision to truly make Kalamazoo a city of promise.”
Detroit Free Press