East Lansing Income Tax Revenue 33% Higher Than Expected

While many Michigan cities and schools are slashing budgets in response to the economic fallout of the Covid-19 pandemic, East Lansing’s City Manager seems relatively optimistic.

At the Aug. 24 meeting of City Council, City Manager George Lahanas presented a financial update and told the Council that “there is not any large financial problems for us at this point.” Lahanas told the new Council that he was delivering “actually some pretty good news.”

While East Lansing’s biggest employer – Michigan State University – is instituting involuntary salary cuts and cutting retirement contributions, the City of East Lansing is giving non-emergency union workers a 3% pay increase for Fiscal Year 2021, which started on July 1, 2020, following previously-approved contracts.

Income tax receipts for 2019 are much higher than expected

The biggest positive economic news for the City of East Lansing’s government is that, in 2019 – the first year of East Lansing’s 12-year income tax – almost 33% more in gross revenue came into the City’s coffers than originally projected.

Two years before the income tax was approved by a majority of voters in 2018, consultant Plante Moran had estimated the annual gross revenue would come in around $10.4 million. But East Lansing Finance Director Jill Feldpausch says the total revenue for 2019 actually came in at about $13.8 million.

Refunds and returns are still being processed, so that number could still change. But it appears that, after paying administrative costs and about $5.4 million to the General Fund to make up for the property tax reduction enacted with the income tax, the 2019 income tax ended up netting about $8.1 million in new revenue, instead of the projected $5 million in new revenue.

The higher-than-expected income tax revenue was for a period entirely unaffected by the coronavirus, of course. However, on Aug. 24, Lahanas told Council that a possible $2-3 million drop in gross income tax revenue during 2020 from the pandemic would mean the City still brings in about what had originally been projected.

Lahanas didn’t mention what is happening economically at MSU, but East Lansing income tax revenues in 2020 can be expected to decline not only because of major budget cuts at MSU but also because many MSU faculty and staff will work mostly from home this year. Those working remotely from outside East Lansing won’t owe tax to East Lansing on income earned during that period.

East Lansing’s income tax proposal was designed explicitly to try to disproportionately tax non-resident workers at MSU. Pairing the new income tax with a property tax reduction was supposed to give East Lansing homeowner-workers a relative break in their total tax liability by reducing their property taxes while increasing their total income tax.

But now it appears that, at least for 2020, East Lansing residents will be carrying much more of the total East Lansing tax burden than expected, as many non-resident MSU employees are working from outside the City limits where they will be free of East Lansing’s income tax and not subject to the City’s property taxes.

At the same time, many frustrated residents of East Lansing have reported to ELi seeing little or no actual reduction in their total property tax bills, an effect of rising property values and voters passing many millages.

Early impacts of the pandemic on the City’s finances

Lahanas’s Aug. 24 presentation (see the slides here) focused mostly on the recent past, with little detailed discussion of revenue drops being caused by the pandemic.

Income from programming in Parks & Rec – most of which comes in the summer – has dropped precipitously, while Council decided to cut fees to local restaurants and bars to lessen the burden on those businesses.

Meanwhile, the City is seeing a major drop in revenue from the parking system. Asked via email by ELi for some hard numbers, Feldpausch responded that the first eight months of 2019 brought in about $2.6 million while the same period in 2020 brought in about $1.8 million. That’s been caused in part by Council’s decisions to offer more free and discounted parking to try to support local businesses.

Feldpausch said about the parking system, “We are hopeful there will be a recovery in the monthly amounts going forward, but that is dependent on the virus status and related decisions being made by businesses, MSU and visitors/residents of the downtown. We will continue to limit expenses to the best of our ability.”

Feldpausch did not say just how much parking ticket revenue is down. Tickets for parking violations normally bring about a million dollars a year to the City, but, “With less people out and about in the City, enforcement counts are naturally down.” Other punitive fines are also way down.

Some savings have been achieved during the pandemic by laying off or not hiring 124 “contingent staff” – those mostly part-time employees who would normally work in summer Parks & Rec programs, for example.

Savings also were achieved by using the federal emergency WorkShare program – a program that in effect paid City workers the same or more than their usual income to work less than usual. The City saved about $322,000, according to Lahanas, by reducing workers’ hours while the workers earned as much or even more than they normally would have, thanks to WorkShare and federal funding under the CARES Act for supplemental unemployment compensation. (That program ended July 31, and workers returned to normal hours.)

Progress with the pensions

The City has lately been making some progress on funding its pension plans. The “funded ratio” of the City’s retirement obligations has been going up. (This is the ratio that tells us how much of what is owed is “in the bank.”) The pensions have gone from about 49% funded in FY2019 to about 52% in FY2020.

The City’s funding ratio for its obligation for OPEB (Other Post-Employment Benefits, like retiree healthcare) have also gone up during the same period, from about 32% to 38%.

Under the measure passed by voters, of the new net revenues from the income tax, “20% [goes] to police and fire protection; 20% to the maintenance and improvement of streets and sidewalks, water and sewer systems, and parks, and recreation, and city-owned facilities; and, 60% to supplemental payments for unfunded pension liabilities for retired city employees.”

The income tax will end after a total of 12 years unless a majority of voters decide to renew it. The approximately-5-mill property tax reduction remains in effect while the income tax is in effect.

Chris Root contributed reporting to this article.