East Lansing’s City Council is set to consider votes on two issues causing a lot of talk around town: whether to declare East Lansing a Sanctuary City and whether to vote to again refinance the bonds (that is, the loan) used to buy the Downtown Development Authority’s Evergreen Avenue Properties.
Members of the public wishing to make comments on these and other issues will have an opportunity to do so near the 7 p.m. start of the Dec. 6 meeting at the Hannah Community Center. Citizens can also write into Council, although generally spoken comments appear to garner more attention from council members.
Official “Sanctuary City” status is on the table.
Sanctuary cities are typically defined as municipalities that protect their residents against retribution based on immigration status.
ELi reported that, in a movement spearheaded chiefly by Michigan State University undergraduates, the city’s Human Rights Commission passed a resolution on Nov. 18 in support of declaring East Lansing a Sanctuary City.
Advocates of the idea say the action will make it less frightening for undocumented immigrants to seek out help from police and healthcare providers, as well as providing other layers of safety.
The resolution passed by the HRC seeks to ensure that East Lansing “officials, including its law enforcement officers, shall not actively collaborate with federal agents solely for the purpose of enforcing federal immigration law and shall not use City resources or personnel to investigate, question, detain, apprehend, and/or register persons based solely on a civil violation of federal immigration law.”
The resolution also seeks to require the City Manager to report to City Council if the federal government is threatening “to withhold or withdraw federal funding as a result of the City’s policies” on this matter.
But the resolution requires the Council’s approval to actually take effect. Council is expected to debate and vote on the matter at Tuesday’s meeting.
Council is also being asked to refinance a loan whose principal hasn’t dropped in 13 years.
City staff want Council to approve a resolution authorizing Mayor Ron Bacon or Mayor Pro Tem Jessy Gregg to sign refinance bonds (that is, a refinance loan) on behalf of the City of East Lansing.
If issued, the bonds would refinance debt originally taken out in 2009 for the purpose of enabling the Downtown Development Authority to buy a series of properties on Evergreen Avenue to support a big redevelopment envisioned by now-imprisoned developer Scott Chappelle.
City Manager George Lahanas and the rest of the DDA have been hoping for years that Chappelle or another developer would solve the Evergreen Properties debt problem through a big redevelopment. But that solution has failed to materialize in the last 13 years as proposal after proposal has fallen apart.
The principal on the bonds is about what it was at the start, currently standing at about $5.1 million. That’s because the DDA has consistently elected to pay mostly interest—not principal—along with hundreds of thousands of dollars in fees to refinance the bonds in 2012 and 2015.
Already the DDA has spent over $1.8 million in public money just on interest and, by accepting a negative amortization (ballooning) structure, the DDA agreed to allow the principal to actually increase substantially.
City staff hasn’t responded to ELi’s questions about what the original principal was on these bonds, but records obtained earlier show the DDA paid no interest from 2009 through 2016. By 2012, the principal was up to $5.495 million, and by 2015, it was up to $5.655 million.
ELi has been working to get all the facts about these bonds, including what fees have been paid to consultants, but has been unable thus far. We filed a Freedom of Information Act (FOIA) request seeking the information on Nov. 18. The City Clerk has indicated the City needs more time “to search for and retrieve records” and will provide materials by Dec. 13. This is the maximum FOIA response time allowed under state law.
The DDA’s and city’s bond advisors and bond counsel only get paid for their work on these matters when new bonds are issued. This creates what is known as a “perverse incentive” system in terms of advice, as new bond advisor Steven Burke, President of Municipal Financial Consultants Inc. (MFCI), mentioned to the DDA at its last meeting on Nov. 17.
It’s that financial incentive system that classically leads to “churning” of municipal debt, often not in the public’s best interest. If the refinance goes through, MFCI and Dickinson Wright, the city’s bond counsel, will make tens of thousands of dollars each. If the refinance doesn’t go through and the existing bonds are allowed to continue, MFCI and Dickinson Wright will make nothing. In short, this system is weighted to incentivize advising the DDA and Council in favor of new bonds.
State law does stop the city from accepting any refinancing loan that is expected to cost more in interest in the long run. But a lot of assumptions must go into projections that claim money will be saved with refinancing. That’s especially true when variable rate bonds are involved and guesses have to be made about future interest rates.
Right now, the DDA’s bonds on the property constitute a variable-rate loan tied to the SOFR index. (SOFR stands for the Secured Overnight Financing Index.) The bonds are currently set to generate interest at SOFR + 1.40%, putting the current rate on the loan at 5.455%.
In 27 months from now (April 2025), a new margin kicks in, setting the rate at SOFR + 4.35% (that would currently come to 8.41%). That spike is part of why the bond advisors are recommending considering refinancing the existing bond soon.
That said, refinancing now and switching to a fixed rate (as is the plan) could set a higher-than-really-necessary rate, because interest rates right now may be higher than they will be in, say, a year. Staff and Burke acknowledge that rates could fall substantially in the future, after a refinance is locked in at a relatively high fixed rate.
The bond resolution says the refi rate would have to be no higher than 7%. But it’s safe to guess based on the history of these bonds that if the bond is refinanced to that level and then rates drop, the DDA and City will be advised to refinance again to lower the rate.
The City Council doesn’t have to act now to authorize Bacon or Gregg to sign off on refinancing the bond. They could wait and decide to do it later, although rates could go up before that point. They could also let the DDA’s existing loan run as it is, forcing the DDA to redirect more of its revenue to pay off the debt.
As ELi explained last week, the DDA is obtaining revenue from a special millage plus a tax capture scheme that is about to shoot up by $1 million/year and has no expiration date. But, rather than talking about paying off the Evergreen debt quickly – the surest way to pay less in interest in the long-run – members of the DDA are talking about using the coming income boom to hire their own staff and spend more on special projects.
The existing bonds have no prepayment penalty built in. That means the DDA or City could pay off the current debt with Huntington Bank at any time without paying a penalty.
But the refinance bonds that are described on Tuesday’s council agenda are expected to have a prepayment penalty built in for the first few years, according to what Burke has told ELi.
The existing bonds are set to be completed in 2035. The refinancing bonds would end the same year according to material provided in advance of Tuesday’s meeting.
ELi has previously reported that even when the DDA and Council have been told a bond refinance is in the best interests of the government, that has not always turned out to be the case.
The way the vote at Council is currently structured, Bacon and Gregg would not have to come back to Council for approval of many of the details of the refinancing bonds, and either could sign it without the consent of the other.
The City Clerk or Deputy City Clerk would be instructed to co-sign for the City, and the mayor, the city manager or the city’s finance director could negotiate the details without coming back to council.
A municipal finance expert (who asked not to be named for professional reasons) told ELi that, if the goal is really to reduce the interest being paid on these bonds, the best way to do this is to pay off the loan as soon as possible. That would save the public the most money.
“It sounds so simple,” he said, “because it’s so simple.”
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