The City’s Money Will Dry Up Within Five Years Without Adjustments, Financial Forecast Shows

City leaders will need to make budget adjustments, as a five-year financial forecast showed that the city will be out of money by 2030 if it stays on its current course. 

While the troubling report projects only five years out, city officials are already looking further ahead, nervously awaiting the income tax renewal vote. The tax is set to sunset in 2032 and if it is not renewed, the city will need to make serious spending cuts, find a new major source of revenue or face the possibility of bankruptcy. 

The forecast of the city’s general fund was presented at the Tuesday, Feb. 18 City Council meeting. Council talked about the need to possibly cut spending now, even with the huge boost provided by the income tax each year. The city collects roughly $14 million annually from the income tax. 

Councilmember Mark Meadows recapped that the city will be losing close to $2 million in annual revenue due to the ruling against the city in the Board of Water and Light (BWL) franchise fee lawsuit and could lose roughly $14 million annually if the income tax is not renewed by voters. 

“In 2031, are we facing bankruptcy?” Meadows asked. 

“I can’t answer that question,” replied Audrey Kincade, who was recently promoted to be the city’s chief financial officer.

“I think we are,” Meadows said. 

He went on to say that the city needs to ask for an extension of the income tax, “if nothing else.”

The BWL ruling Meadows referenced figures to cost the city between $1.5 million and $2 million annually in revenue, and will require a hefty payout to BWL customers who paid a “franchise fee” as part of their electric bill. Earlier this month, the Michigan Supreme Court ruled that the city instituted an illegal “disguised tax” when it asked BWL to collect franchise fees from East Lansing customers, money that was then rerouted to the city. 

Councilmember Erik Altmann pointed to a chart projecting that the city is bleeding money even with the income tax in place. Projections show that the city is expected to lose money this fiscal year, FY25, and then every fiscal year through 2030–as far out as the projection goes. 

“It’s not the best picture I’ve ever seen in a forecast,” Kincade said. “But it might not be the worst.

“What gives me a little heartache is seeing the use of fund balance in the $3 million every year, that’s a pretty big gap that’s growing each year,” she continued. “If things stay as they are, our fund balance looks to be negative by 2030.”

The city received a five-year forecast presentation last year as well. That projection also showed the city bleeding money in FY 25-29, but to a lesser extent than the current projections. In the projection last year, the city was slated to lose around $9.4 million over the five-year stretch. This year’s projection predicts roughly $17.9 million in losses over the same period, with the loss of income from the franchise fee explaining much of the difference. 

At the start of this fiscal year, the city had a little more than $20 million in fund balance. By the end of the projection, in 2030, that fund balance is exhausted. 

“That’s obviously not sustainable,” Altmann said. “Are we thinking about shorter term cuts to try to stave off the worst implication, in response to the Heos (BWL) decision?”

Belleman responded affirmatively, and said potential cuts will be presented during council’s upcoming budgeting process, which will take a much deeper dive into the numbers. Belleman said the city will also look for new sources of revenue. 

Councilmember Dana Watson asked Belleman to further explain what cuts are on the table. Belleman said he can’t give specifics now, but he is looking for ways to make up for the money that will be lost with the city no longer collecting the BWL franchise fee. 

Watson followed up by asking if staff members should be concerned about their jobs, to which Belleman quickly responded “No.” 

Income and expenses: A quick (and simplified) explanation of how the city makes and spends money.

Altmann commented during the meeting that there is no “magic pot of money” that governments run off of. So, when revenue streams like the BWL franchise fee are turned off, it may force the city to cut services to offset the lost revenue. 

Belleman’s promise to not lay off employees leaves limited room for cuts. 

Most years, about 75% of the city’s general fund expenses are personnel services. With the city recently conducting a wage study to see if its salaries are competitive, the possibility remains that some salaries are increased. 

The hefty sum the city must pay out on its pension liability each year will continue to be an anchor and with 60% of the income tax dedicated to paying off the pension debt, the path to funding the liability becomes much more complicated if the tax is not renewed. 

At a presentation given last year by the agency that administers the city’s pension plan, it was explained that the city paid about $17 million into the pension fund in 2022, well above the required $9.8 million. By paying more than the required amount, the city progressed to 63% funding on the plan. Belleman said last year that ideally the plan would be at least 75% funded. 

During Tuesday’s presentation, Kincade said that there were some unusual non-personnel one-time costs this fiscal year that increased the city’s expenses. She also said the city’s previous health insurer recently left the industry, which has brought an increase in healthcare expenses. 

Looking at revenue, Kincade said it can be hard to project capital coming in years in advance. 

The volatility of funding can be seen over the last few fiscal years. In FY24, the city’s revenue was about $60.6 million. This fiscal year, the city is expected to finish with about $48.8 million in revenue. 

Kincade explained that the drop in revenue is due to a couple of major grants the city benefited from last fiscal year, one from the federal American Rescue Plan Act (ARPA) and another that helped with pension payments. 

The report shows the city received about $13.3 million in grant funding in FY24, compared to just $2.4 million that is expected in FY25. 

The city’s two steady sources of revenue are the income tax and property taxes. This fiscal year, the general fund is expected to receive about $16.7 million from property taxes. 

The general fund is projected to receive between $9.5 million and $10.7 million from the income tax each year in the projection. In response to a question from Altmann, Kincade noted that the full benefit from the tax is not seen in the general fund. She noted that the tax contributes to other city funds, most notably about $4 million was transferred directly to pension liabilities this year, and that is not shown in the general fund. 

Altmann asked for information to be put together to show the net benefits of the income tax, as the city gears up to ask voters to renew the tax. 

Budget season is just beginning. 

The financial forecast presentation was just the start of budget season. In the coming months, city officials will ramp up discussions about action that can be taken to shore up the budget.