Three Council Members Question DDA’s Finances as Bond Refinance Is Authorized

East Lansing’s City Council voted 3-1 on Tuesday night to authorize a refinancing of the Downtown Development Authority’s $5.1 million debt, originally acquired in 2009 for the purchase of the Evergreen Properties for big redevelopment.

With Mayor Ron Bacon absent, Councilmembers George Brookover, Dana Watson and Jessy Gregg voted in favor of authorizing issuance of a refinance of the bond debt. Outgoing Councilmember Lisa Babcock was the lone no vote.

The refinance will happen only if the refinance bond (essentially a refinancing loan) is projected by the City’s financial adviser to save money over the life of the debt. Whether that can be achieved depends on what rate banks will be willing to offer for the refinancing – something that won’t be determined until the City formally seeks offers from banks in January in a competitive process.

If it goes through, the refinance will convert the debt from what is now an unpredictable variable rate to a fixed rate. According to the resolution passed by Council, the fixed rate will not exceed 7%. The term of the new debt would run to 2035, the same as the existing debt.

Rumblings of displeasure about the DDA’s finances arose during the discussion.

The vote in favor of the refinance did not come without signals from three Council members – Brookover, Watson and Babcock – that they have significant concerns about the DDA’s finances, particularly how the finances are structured.

At issue for Watson is the tax diversions happening under the DDA’s tax capture plan known as DDA TIF #2. TIF stands for “tax increment financing,” and DDA TIF #2 captures taxes from a large area of downtown.

In the DDA TIF #2 district, property taxes that would otherwise go to the City of East Lansing, the CATA bus system, Lansing Community College (LCC), the Capital Area Airport Authority and also Ingham County are being captured and given to the DDA instead of those taxing authorities.

Watson indicated she isn’t happy that DDA TIF #2 is diverting $94,000 a year in taxes meant for LCC. She asked for and received confirmation that, instead of LCC getting that money, the DDA is getting it for its own use.

According to figures given in writing to Council by city staff on Tuesday, in this year alone, TIF #2 is diverting to the DDA’s coffers a total of $358,000 in City tax revenues (money that could otherwise go to policing or pension debt, for example), $74,000 of CATA tax revenues, $16,000 of Capital City Airport tax revenues, $261,000 of Ingham County tax revenues and $50,000 of East Lansing Public Library tax revenues.

We have not previously seen reference to a capture of library tax revenues for DDA TIF #2, and state records obtained by ELi show no library capture for DDA TIF #2. ELi has sent questions to the city about why city staff said yesterday that library taxes are being diverted under this TIF plan when we can’t find evidence of this in other records, including the state treasury’s.

The amounts being diverted through DDA TIF #2 are set to rise steadily in the coming years as the value of properties in the district increase and as more and more properties that had taxes diverted for Brownfield redevelopment TIF will instead be paying into DDA TIF #2.

The tax diversion from DDA TIF #2 is projected to go up by about $1 million in the next year and by about $2 million in the next five years.

Watson, who is employed by Ingham County as a public health worker, started raising for the first time in public the question of how it might be possible to end TIF #2 and allow those taxes to flow not to the DDA but to the various taxing authorities, including the City of East Lansing, Ingham County, LCC, CATA and the airport authority (and possibly also the public library, as noted above).

Meanwhile, Babcock indicated she is deeply frustrated that the DDA has failed to pay down the Evergreen Properties purchase debt significantly in the 13 years since it started.

The principal of the original debt in 2009 was about $5.5 million. Today,  the DDA still owes $5.1 million, after having spent over $1.8 million of public funds on interest payments. The DDA voted for years to make interest-only payments and to let the interest at times balloon. Costs associated with refinances also added to the debt.

As for Brookover, he said at Council on Tuesday, “Let me just say this: I have some concerns about the DDA, OK?”

Brookover considered aloud how the Council could force the DDA to pay off its debt sooner than 2035, the length allowed by the bonds’ terms. He noted this is difficult, because “the fact of the matter is the DDA is an independent legal board and it can do whatever it wants to do.”

Reminded by the City’s bond attorney Roger Swets that the City does have the power to approve (and, therefore, amend or reduce) the DDA’s budget, Brookover answered, “So, we can emasculate them from a budget standpoint, but they can still go ahead to vote the way they want to vote.”

Council members also expressed concern over who would make the final decision on the refinance.

The way the presented resolution was worded, either the mayor, city manager or finance director can sign off on the refinancing bond independent of any further consultation. (The mayor pro tem, which is now Jessy Gregg, can also legally substitute for the mayor.)

But Brookover toyed with the idea of requiring that the matter come back to City Council for final approval. Babcock also wanted to see that happen, pushing the idea and asking dozens of skeptical questions.

Nevertheless, in the end, Brookover, Watson and Gregg were convinced that having it come back to the full Council only added unproductive complications to the matter.

They understood from their advisers that the time between the banks’ offers and when the decision would have to be made by a Council majority would be only a matter of a few hours; banks need a prompt answer before rates change again.

They also were assured that, by law, the refinance can only be approved by the mayor, mayor pro tem, city manager or finance director if the refinance is estimated to represent a net cost savings over the life of the refinance fixed-rate bonds compared to the existing variable-rate bonds. The net cost savings must include the cost of doing the refinance.

Questions were also raised about how the advisers are being paid.

Council and the DDA have been advised in this matter by financial adviser Steven Burke, President of Municipal Financial Consultants Inc. (MFCI) alongside bond attorney Swets from the law firm Dickinson Wright.

Council sought competitive bids on these advisory services earlier this year, and MFCI and Dickinson Wright won the contracts then.

As is standard in the industry, despite having advised the DDA, staff and Council on this possible bond refinance for several months, Burke and Swets will only get paid if the bond refinance goes through.

As Swets put it, “Our advice is basically gratis until a bond closes.”

Swets said if a refinance closes, he will be paid about $21,000. Burke said he would be paid about $19,000.

But Swets and Burke emphasized that the fact that their compensation depends on a refinance would not influence their advice. Burke noted their legal and fiduciary responsibility is to give the best advice to the DDA and the City and not to push for a refinance just so they can get paid.

Burke said his job is to lay out the options to the city and then let the council-authorized agent – the mayor, mayor pro tem, city manager or finance director – make the final call.

The details of the refinance are not yet determined.

Burke explained that the market conditions right now are exceptionally unusual, with rates for longer-term borrowing much lower than short-term and rates changing at a fast and unpredictable pace. That makes it hard to predict whether a favorable refinance offer will be obtained in January. If rates look bad then, they may try again later if rates become more favorable.

Burke also explained that if a refinance is not obtained, the DDA is facing substantially increased payments starting in April 2025, when the existing loans are set to crank up the interest rate margin by another 3%. (The rate on the current bond is set to convert from SOFR plus 1.40%, which is currently 5.455%, to 30-day Term SOFR plus 4.35%, which is currently 8.405%.)

If the DDA can’t make its payments, the City will have to rescue the DDA financially. That said, the DDA’s projected revenues show substantial increases in the coming years. The DDA is soon expecting to obtain $1 million extra per year in diverted taxes just from three new buildings under the DDA TIF #2 tax capture scheme: the MSUFCU building, The Graduate Hotel, and The Abbot Apartments next door.

Burke presented a plan to set up the bond refinance so there will be no prepayment penalty after the first year, allowing the possibility for the DDA to pay off the debt much sooner than 2035 without paying a penalty. If the DDA does pay the debt off soon, substantial amounts of money could be saved on interest payments.

But Gregg indicated she doesn’t want to see the DDA’s budget “completely eviscerated” for the purposes of paying off this debt. She said if that happens, the cost of things the DDA is now paying for – like extra lighting and security cameras downtown – will fall to the “other funding sources in the city,” like the city’s general fund.

Gregg is correct that the DDA’s budget has been used in recent years to pay for City staff, downtown amenities and safety measures, including some overtime for police officers working downtown at night. The DDA’s budget also been used for things like facade improvement on private businesses and for the Albert EL Fresco social area. (Gregg owns a downtown business that has had activities supported by public fund expenditures in East Lansing.)

The City Manager said the redevelopment and tax-capture processes have been handled well.

For his part, City Manager George Lahanas defended what has been done by the DDA since he became a member of that governmental agency by virtue of being the city’s CEO.

He said with taxes from the MSUFCU, The Abbot and The Graduate soon being diverted into the TIF #2 tax capture scheme, the DDA is “only two years out from handling the debt in a very efficient way.”

Lahanas said the city has taken “reasonable steps” in dealing with the problem of the Evergreen Properties and the blight that existed nearby prior to Chicago-based developers DRW Convexity building The Abbot and The Graduate.

He referred to another tax capture scheme that allowed the city to fix infrastructure in that area and said that, now that the buildings on the DDA’s Evergreen Avenue properties are knocked down, “We’re in a much better situation than we were a decade ago to move forward in development. So, I would portray this as taking a very difficult situation and making it into a success.”

But in the end, Council members signaled they want to talk more about the DDA, its finances and its power.

Brookover made clear he was voting in favor of the refinance with the goal of saving money on the loans, but he wants to push the DDA to pay off the debt as soon as possible.

He questioned what would be Council’s “interaction with the DDA going down the line in terms of continuing methodologies for repaying this principal, especially as when I understand the situation, they’re going to get a significant boost in their income….The reality is I think as a council we need to look at that interrelationship and emphasize the pay-down.”

Watson asked questions about when TIF #2 would or could be ended. As it stands now, it will never end unless Council votes to end it.

But Lahanas resisted Watson’s suggestion that TIF #2 should end. He said tax capture is one of the rare revenue opportunities available to the City of East Lansing to pull tax revenues away from other jurisdictions into East Lansing’s own coffers.

“There are so many places the City has been constrained in revenue,” Lahanas said. “There’s one area where the city has a more favorable ability [to raise money] and that’s with TIF plans. So, I don’t think we should necessarily run from the one opportunity we have to be able to have some growth and be able to have some additional revenue.”

Looking to move Council on to the actual vote on the bond refinance, Gregg noted to Watson that the issue of the bond refinance vote didn’t require Council getting into “the deeper question of our relationship with the DDA.”

“If these bonds disappeared tomorrow, with the DDA the way it is,” Gregg said, “that TIF would still be leveled” on the City’s general fund, Ingham County, LCC, CATA and the airport (and possibly the library). The matter of DDA TIF #2 is a separate one from the bond.

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