The latest Annual Comprehensive Financial Report from the City of East Lansing has turned up some surprises.
The city’s income tax brought in $1.6 million more than expected in the last year reported, and the income tax is now bringing more revenue to the city’s general fund than property taxes are.
The report also shows the city’s expenditures on public safety came to almost $26 million in the last fiscal year, or about 56% of the general fund expenditures. About 90% of the revenue from the income tax plus property taxes to the general fund are going to public safety.
Meanwhile, about $5.7 million in property taxes are being diverted to or through the Downtown Development Authority, the Brownfield Redevelopment Authority and the Local Development Financing Authority through various tax capture schemes.
Also, with the opening of more dispensaries, marijuana tax revenue to the city is up from about $28,000 last year to about $169,000 this year.
While the health of the city’s defined benefit pension fund improved substantially in 2021 thanks to extra payments by the City and gains in the market, it’s expected to take a noticeable hit by the time 2022 ends because of market downturns.
East Lansing’s City Council members had their chance at the Dec. 13 meeting to hear the presentation of the Annual Comprehensive Financial Report (ACFR) and to ask questions.
The government-mandated report is key to “following the money,” but Council members who are non-experts in finance often struggle to figure out what to ask at this annual event, and this year was no exception. The report contains 180 pages of detailed tables and analysis, and its production requires a team of city financial staff and another of external auditors.
This year’s report covers the city’s last fiscal year, July 1, 2021, through June 30, 2022 (Fiscal Year 2022 or FY22). But because MERS (the Municipal Employees’ Retirement System of Michigan) reports on a calendar basis, the material presented on the city’s pensions covered CY2021.
At the Dec. 13 meeting, Mayor Ron Bacon’s inquiries focused on the health of the city’s pension fund, while Councilmember Lisa Babcock had questions about revenue sources and tax diversions, including questions about how much revenue is being diverted from the general fund to the DDA via DDA Tax Increment Financing (TIF) plan #2.
Councilmember Dana Watson’s comments were limited to clarification about what information was included where, and Councilmember Jessy Gregg had no remarks or questions. Councilmember George Brookover was absent.
After watching the presentation and comparing this year’s report to previous years’, ELi has identified some highlights that may interest our readership.
East Lansing is still lacking a permanent finance director and has new auditors.
Acting Finance Director Audrey Kincade presented this year’s report along with auditors Doug Deeter and Jason Salzwedel from Rehmann Robson.
These lead presenters differed from those in the recent past. Finance Director Jill Feldpausch left to take a job with Michigan State University Federal Credit Union in June. Six months later, the job as finance director of the city remains unfilled.
Additionally, Council decided this fiscal year to bid out audit work, hiring auditors from Rehmann Robson to replace those from Plante Moran. (This council has been more active than past councils in bidding out legal and financial consultancy work rather than simply maintaining contracts with previous consultants.)
Speaking before Council on Dec. 13, Kincade thanked her department’s staff and noted that “being down a finance director” and working with a new auditing team made this year’s reporting more challenging than usual.
But, she said, having a new set of auditors meant new questions that “shook up our procedures a little bit,” which she said made for a “positive process” for the city because change prevents complacency.
The income tax is back on the upswing, but property tax revenues to the general fund aren’t going up much.
With people headed back to work at Michigan State University and other East Lansing employment locations and with businesses seeing the return of customers since the pandemic shutdowns, the income tax revenue has rebounded for the City of East Lansing. (The parking system’s revenue is also bouncing back.)
In FY20, the income tax brought in about $13.8 million, then dropping during the FY21 pandemic shutdown year to $12.2 million. In FY22, it came back up to about $14.1 million, about $1.6 million more than anticipated in the budget.
Each year, the net revenue generated by the income tax is divided three ways: 60% goes to the pensions, 20% to parks and infrastructure, and 20% to public safety. According to this year’s financial report, “After three years of income tax, the City has completed nearly $11.5 million of supplemental pension payments and supported more than $3.8 million of current and future infrastructure and facility improvements.”
And, while the auditors did not point this out to Council, for the first time, revenue from the income tax to the general fund surpassed revenue from property tax to the general fund.
In FY22, property taxes brought approximately $14.1 million to the general fund, while the income tax brought about $14.35 million. By comparison, in FY21, property taxes brought the general fund $13.9 million, while the income tax brought $12.2 million.
Looking at these numbers, Babcock asked whether this means the City is becoming dependent on the income tax.
In response, City Manager George Lahanas pointed out the property tax is reduced by about 5 mills during the 12 years the voter-approved income tax is in effect. (This temporary property tax reduction was in the ballot about the property tax, the idea being that while residents would pay more because of the income tax, their property taxes would be reduced during the same period.)
That means if and when the income tax ends, property tax revenues will increase by about 5 mills. Babcock asked about how much that would be, and Lahanas replied about $5.5 million this year.
In addition to the $14.1 million in property tax revenue going to the general fund, the solid waste management millage resulted in almost $2 million in property tax revenue and the public library millage resulted in about $2.17 million. (These are the amounts obtained after various tax capture plans redirect part of the gross revenues.)
Taxable value of properties is rising in the city, but the general fund is seeing only some of the benefit.
An examination of the rise of taxable value in the city suggests that property tax revenues in the general fund are not rising as fast as the income tax. This is in part because there are substantial amounts of property tax diversion occurring away from the general fund.
One table in the annual report shows that, in FY22, about $4.4 million in local taxes are being diverted from the usual taxing authorities, including the City of East Lansing, to pay for Brownfield Tax Increment Financing (TIF) plans. These are tax-capture schemes used to pay for expenses related to new development.
Additionally, about $1 million in local taxes, including taxes that would go to the City and the East Lansing Public Library, are being diverted to the Downtown Development Authority under DDA TIF #2. And, the Local Development Financing Authority is diverting almost a half-million in local property taxes per year.
The total taxable value of property in the city went up about $41M in the last fiscal year. That should lead to an increase of about $512,000 in property taxes. But the property tax revenue for the general fund went up only about $260,000 – about half of this total increase.
Meanwhile, property taxes going to the DDA increased by $130,000 in the last fiscal year (up from about $1.1 million to about 1.24 million). This includes the DDA special millage and taxes diverted from various local authorities, including the City of East Lansing, Ingham County, the East Lansing Public Library, CATA and the Lansing Airport authority.
These figures show us that the DDA’s property tax revenue increase in dollars was about 50% the size of the City’s general fund property tax revenue increase in dollars, even while the DDA’s expenses in FY22 came to only 8% of the size of the City’s general fund expenditures.
This also confirms what ELi has reported before: The DDA is seeing substantial revenue increases from property tax revenues, even while the City’s general fund property tax revenues look relatively flat.
It also appears that what we’re seeing is a substantial diversion of taxes away from the general fund through tax increment finance (TIF) plans, including Brownfield Plans and also the DDA’s TIF #2.
The cost of public safety continues to consume the biggest chunk of East Lansing’s general fund budget.
Public safety cost about $25.7 million in FY22, or about 56% of general fund expenditures. That total cost was flat from the year before. With positions going unfilled in the police department, public safety costs came in about $900,000 lower than budgeted.
Note that the city doesn’t include just police, fire, and EMT services under the category of “public safety”; it also includes services like building code inspections.
The defined benefit pension fund was doing a lot better last year, but it will take a hit this year.
By Dec. 31, 2021, the total pension liability for the City was at about $218 million, up $11 million from the year before. But the value of assets went up far more than liability. (That’s good.)
The “plan net position” – basically “what’s in the bank” – went up from $117 million at the end of CY20 to $135 million a year later, up about $18 million. This shifted the city’s funded ratio – what’s in the bank versus what is owed – up from 56% to about 62%.
But, the auditors warned Council during the Dec. 13 meeting, the city is going “to see a total back pedal” on the pension funding progress because of the stock market’s downturn in 2022.
The city has been making progress on the pension debt through steady supplemental payments aided by the income tax. The income tax will expire in 2030 unless a majority of voters approve a renewal.
Still, East Lansing made less progress in absolute dollar contribution to the pensions than the year before, and the City’s pension liability has risen about $60 million in the last decade. During the same period, the plan net position (funds “in the bank) has gone up only about $36 million.
The fact that the liability continues to rise will present a continued challenge to the city. The more the liability rises, the harder it is to catch up each year – the greater the payment needed to stay at the same funded ratio.
The City of East Lansing’s liability continues to rise because some employees of the city are still being awarded defined benefits pensions (including through hybrid pensions that combine defined benefit and defined contribution planas). Increase of liability can also be due in part, in some years, to changes of assumptions about things like how long retirees will live.
The city has also made progress on funding its retiree health promises – a system called OPEB for “other post-employment benefits.” But again, the auditors warned, the stock market downturn will mean a substantial loss in this fund in 2022.
Want to learn more or engage with Council?
You can find the entire financial report here and find a recording of the Dec. 13 presentation and discussion here. You can write to the City Council at email@example.com. If you’re interested in applying to be appointed to Council, check out this article from ELi.
Only ELi produces this type of independent investigative reporting on the City of East Lansing’s finances. Please consider making a tax-deductible contribution today to support this local journalism. We have matching funds through Dec. 31, 2022.