Fortifying farmland

There are 10 million acres of ag land in Michigan and nearly a third are enrolled in the state’s temporary farmland preservation program, commonly known as P.A. 116.

Those acres are enrolled with 41,700 agreements between landowners and the Michigan Department of Agriculture, which manages the program. It’s the largest and one of the oldest temporary farmland preservation programs in the country.

On any given day, the phones at MDA’s Farmland and Open Space Preservation Program office can ring dozens of times with inquiries from landowners, attorneys, certified public accountants, USDA, the state treasury department and others.

Key Points

• More than 3 million acres of farmland are enrolled in Public Act 116.

• At least 51% of enrolled land must be in active agriculture.

• In 2008, farmers received $35.9 million in tax credits.


Each year about 3,000 temporary agreements expire on Dec. 31, prompting requests for extensions or terminations, as well as requests for property splits, transfers and early terminations.

It’s a busy office, employing nine full-time employees, including Rich Harlow, the program manager for 20 years. “Our job is to provide service. If you need help or have questions, someone will answer the phone, not a machine,” he says.

MDA staff also provide yearly on-site inspections of property with permanent farmland protection easements to ensure there hasn’t been any non-agricultural development.

The program is one of the few under MDA that is not impacted by the current economic crunch. It’s funded by the recapture of Public Act 116 lien funds, which are generated when property previously enrolled in a temporary easement is removed from the program. To understand the functions of MDA, you first have to understand the programs.

The need

In the early 1970s, studies found that farmers were paying a disproportionate portion of their incomes in property taxes compared to other Michigan landowners. “The studies also looked at increases in population and how much ag land would be required to feed that growing population,” says Harlow. “The tax structure at that time was not supportive of agriculture.”

In 1974, the Farmland and Open Space Preservation Act, or P.A. 116, was put into law. While the act has four different components for farmland preservation, the most popular is the temporary program many just call P.A. 116.

To qualify, the parcel must be at least 40 acres (there are some exceptions) and at least 51% of the land must be in active agriculture. Landowners apply through their local governing body for approval before the application goes on to the state.

The agreement allows a farm owner to voluntarily surrender development rights on designated lands to keep the land in agriculture from a minimum of 10 years to 90 years. In return, the landowner may be entitled to a “tax credit.” The land is also exempt from special assessments, like sanitary sewer or water projects, street lights, or nonfarm drain projects. “Public access is not a requirement of the program,” Harlow adds.

The tax credit (a refund on property taxes) is commonly referred to as a “circuit breaker,” because it only kicks in when property taxes exceed 3.5% of household income, which includes off-farm income. As an example, if household income was $50,000, the most a landowner would pay in property taxes is $1,500 — anything more than that would be refunded. In 2008, farmers received $35.9 million in tax credits, equating to about $11.75 per acre, according to Caleb Buhs at the state treasury.

At the end of the agreement, a landowner can re-enroll for at least seven years, opt out, or do nothing. If he or she opts out, the last seven years of tax credits must be repaid. “The seven-year repayment was designed as a disincentive for short-term agreements, and it encourages farmland to stay in agriculture,” Harlow says.

The owner can avoid repayment by not taking the credits during the last seven years. If it is not paid, a lien is placed on the property for the amount due. Interest does not incur, and the payment is only due if the land use is converted to non-ag use or if ownership changes. “Often, landowners let these [liens] sit, and they become less over time with inflation,” Harlow says. There are 4,000 P.A. 116 liens on 320,000 acres in the state, equaling about $12 million. Under certain conditions, landowners can opt out of P.A. 116 before the agreement expires.

Adapting

The economy and changes in the state’s tax structure have created a need to modify P.A. 116 over the years.

The circuit breaker originally was 7%, but with passage of Proposal A, a 1993 law capping property taxes, the interest in P.A. 116 waned.

“In the 1980s when interest rates were so high, we had an all-time high enrollment of 6,000 to 8,000 new applications a year,” Harlow says. “Just prior to Proposal A, things had settled down, and we were getting 200 to 300 applications a year. After Proposal A, new applications dropped to about 100 a year. In a typical year, about 3,000 agreements come up for renewal. After Proposal A, about 70% would renew.”

In response, in 1996 and 1997, lawmakers opened a window of opportunity to immediately get out of P.A. 116 by repaying seven years of benefits. They could also shorten agreements to seven years. “About 3,000 opted out and about 5,000 shortened their agreements, which made them up for renewal again in 2004,” Harlow explains.

Finally, in 2001 legislation passed to drop the circuit breaker to 3.5%. Combined with a 1996 provision that allowed for removal of up to 2 acres of land for family members or farm employees to build, the program regained its former appeal.

“We had about 6,500 agreements up for renewal in 2004,” Harlow says. “Renewal rate is now at 90%.”

Interest continues to grow, especially in the current economy and with the program’s current incentives, Harlow adds. “We had 235 new applications in 2004. Typically, we have about 300 agreements a year that are not renewed. Last year, we had 500 new applications, so we are now more than replacing the ones that opt out.”

Harlow says the program has been effective, but there’s still room for change. With about 50% of Michigan’s farmers not being full time, “they are not eligible for P.A. 116, and farmers with higher incomes don’t get the benefit,” Harlow says.

“There are ways we can provide incentives or assistance to help them be successful, which will help keep the land in agriculture. The Michigan State University Product Center is one avenue encouraging value-added agriculture and innovative processing … providing the economic incentive to keep agriculture viable,” he adds.

To learn more, contact MDA’s Farmland Preservation Office at 517-373-3328, or contact Harlow at harlowr@michigan.gov.

Preservation programs

In addition to temporary farmland preservation easements, P.A. 116 includes other farmland and open space preservation programs, such as:

Local Open Space Easements. Provides a temporary restriction for 10 to 90 years, renewable in seven-year increments. Local governments approve applications and forgive a portion of the landowners’ property taxes.

There are 45 easements covering 6,000 acres, generally around cities.

Designated Open Space Easements. Includes the same provisions as the local open space easement but has specific qualifications, such as being near a designated natural river or historic site, or adjacent to an environmental area designated under the Michigan’s Shorelands Protection and Management Act. The state pays the local unit of government a portion of property taxes. There are 16 of these easements, covering about 4,500 acres.

Donation and Purchase of Development Rights, or PDR. This program accepts donated permanent conservation easements, and up until 2000, also allowed the state to directly purchase development rights from landowners, permanently restricting farmland. The first purchase was made in 1994; 72 acres of vineyards on the highest point on Old Mission Peninsula, owned by Chateau Grand Traverse, was bought for $6,000 an acre. From 1994 to 2000, 66 permanent conservation easements were bought on 15,884 acres, for an average of $1,600 an acre, and were funded by recapture of P.A. 116 liens.

Michigan Agriculture Preservation Fund. In 2000, legislators discontinued the state PDR program and developed the Ag Preservation Fund, which allows local units of government that meet the criteria by developing a master plan, scoring system and other obligations (24 have currently done so) to apply for matching grants from the state. Applications are scored by the local board (generally counties) before submitting to the state. At least 25% of purchase price (capped at $5,000 an acre) must be provided by the county or the landowner. The state will match 25% and the federal government 50%. If the federal government is not a partner, the state has to supply 75%. There are 11 local PDR conservation easements using state grant funds on 936 acres.

With no dedicated funding source, the state has not awarded grants for three years. “It’s a bit awkward because to fund PDR, we need more land to come out of P.A. 116, and that’s counterproductive when you look at the big picture,” says Rich Harlow, Michigan Department of Agriculture program manager. “We need a funding source that is consistent.”

The program does allow donated permanent easements. So far, there are 29 on 4,786 acres. The largest at 906 acres was from the Richardson family in Kalamazoo County. An additional 883 acres is under a permanent easement in Shiawassee County, donated by the Scherrard family.

P.A. 116 temporary applications by year

2009 — 500

2008 — 379
2007 — 390
2006 — 358
2005 — 492
2004 — 235

2003 — 336

2002 — 377

2001 — 291

2000 — 211

1999 — 136

1998 — 136

1997 — 186

1996 — 112

1995 —   78


09103002A.tif
PreSERVATION a PRIORITY: Elizabeth Juras (left); Rich Harlow, manager; Jarrod Thelen; and Lexava Smith work at MDA’s Farmland and Open Space Preservation Program. Others in the program not pictured are Sue Carpenter, Katharine McGarry, Theresa Sherwood, Scott Zeeb and Ginger Bardenhagen.

09103002B.tif

BUSY OFFICE: Rich Harlow, MDA Farmland and Open Space Preservation Program manager, oversees about 3,000 P.A. 116 agreements that expire each year.

This article published in the September, 2010 edition of MICHIGAN FARMER.

All rights reserved. Copyright Farm Progress Cos. 2010.