What’s Going on With the City of East Lansing’s Finances?

East Lansing’s City Council hasn’t yet started its formal consideration of the next fiscal year’s budget. But in preparation for that, the City’s administrators have started bringing forward numbers. And while the City Manager has said he sees “great news” in the big financial picture, a close look at the numbers suggests there is a great deal of uncertainty ahead.

The City is losing revenue from many streams because of the pandemic. Fines and fees, parking system revenue, court fees, revenue from Parks & Rec offerings – all these are way down. Funds MSU would normally pay East Lansing for help with public safety during big games have flatlined. When it’s all added up, it comes to millions of dollars.

And while the City’s administration talks about doing “conservative” budgeting, analysis of prior forecasts when compared to actual income shows City staff sometimes steadily overestimate future revenue. Have a look for example, at this graph of budgeted versus actual fines and forfeiture revenue since 2009:

Because of the pandemic, the current period is probably one of the most unpredictable East Lansing has ever faced, financially speaking.

What about the income tax?

Finance Director Jill Feldpausch told Council the subject of East Lansing’s relatively new income tax gives her heartburn, because it has been so hard to predict what will happen with it.

For the first calendar year of the tax, the pre-pandemic year of 2019, revenues came in about 33% higher than had been predicted in advance of voters approving the special tax for twelve years.

But the long pandemic period, during which thousands of MSU employees are working from home, could mean far less income subject to the tax as non-residents working from home can avoid the tax. This could go on for eighteen months for many, and longer for some.

City Manager George Lahanas told Council that he’s hoping Gov. Gretchen Whitmer pushes through her plan to bring special state relief to income-taxing cities like East Lansing. Last week, Mayor Aaron Stephens said that if the legislature okays Whitmer’s plan, it would mean a special $2.2M transfer from the state to the City of East Lansing.

But, Stephens said, that’s far from certain.

And, because the income tax taxes residents at 1.0% and nonresidents at 0.5%, during the pandemic period when thousands of nonresidents drop out of those tax rolls, a bigger percentage of that revenue will end up coming from residents. That wasn’t the intent when the income tax was passed.

Property taxes are climbing steadily higher on East Lansing homes, but not nearly as much on commercial properties here.

For the annual presentation of the Five-Year Forecast for the General Fund, made to Council on Feb. 16, East Lansing Tax Assessor David Lee explained that the East Lansing market for houses is going strong.

But “downward assessment changes” for commercial properties – particularly for office and retail parcels – means that the taxable values for commercial properties for 2021 and 2022 are expected to increase only 0.5%, while residential properties go up 2.0%.

MSU’s decision to have sophomores live on campus starting in fall 2022 could have additional impact on East Lansing’s property tax revenues. The move, combined with the big new “University Edge” development just over Lansing’s border (set to open by August this year), is likely to weaken the rental housing market in East Lansing. That’s good for renters, but bad for the property tax rolls and for the income tax that comes off rents.

City management has been using some creative approaches to the budgetary problems.

In discussions of the City’s finances, Lahanas has congratulated his staff on taking advantage of grants and putting off expenses as mean of helping to balance the budget.

Last year, for example, the City took advantage of the Work Share program, a federal program that allowed the City to use federal dollars from the CARES Act to pay City workers as much or even more than normal to actually work less. That saved the City about $317,000.

The City has also been pushing off expenses. But In some cases, that will ultimately cost more, as deferred maintenance means bigger problems later.

Such is the case, for example, with the parking system, for which staff has said they have deferred $450,000 in scheduled maintenance. For the Fiscal Year that ended June 30, 2020, the parking system earned about $400,000 less than expected. This fiscal year, it looks like it may come in a million dollars or more below pre-pandemic expectations. Deferred maintenance will drive up expenses in the long run, as the garages degrade faster than they otherwise would.

The Parks & Rec Department, meanwhile, is asking for a half-million-dollar transfer from the General Fund to make up for its money problems.

Director Tim McCaffrey has said the plunging revenues are causing big problems for his department.

The Family Aquatic Center will be closed again this year, but it’s costing $177,000 a year while it remains mothballed. In this fiscal year, ending June 2021, the City is expected to subsidize the Parks & Rec special childcare program by over $230,000, while it is helping only a few families compared to normal.

Despite the need for a large emergency influx of funds from the General Fund to stay in the black, the Parks & Rec Department has continued to make “asks” of the City for new projects. For example, McCaffrey has indicated interest in building a special new “Bankshot” court at Patriarche Park – the need for which was actually questioned by members of the Parks & Rec Advisory Commission at a recent meeting. McCaffrey’s long-standing approach has been to take on projects with matching state funds, but such projects require big injections of local money.

New public projects also mean more public maintenance costs in the future, as the City has learned with expenses associated with the Hannah Community Center, the Family Aquatic Center, and the trails extensions. The East Lansing income tax is being used in part to pay for things like new restrooms and a new pavilion at Patriarche Park. (Voters approved using 20% of the new net revenue of the tax for public infrastructure, including parks.)

What about the money raised via utilities?

Property and income taxes are not the only way East Lansing property owners and renters pay into the system. Those who have BWL as their electric service provider are also paying the City a five percent surcharge on their bills under a “franchise agreement” that is now being challenged in court.

That source is bringing in about $1.4 million a year to the City. If the court finds for the plaintiff in this class action suit, not only could the City lose that revenue, it could also have to pay back millions of dollars.

Meanwhile, ELi is hearing from many readers who are shocked at their increasing sewer and water bills, which show little sign of leveling off anytime soon as the City undertakes massive new infrastructure projects, particularly at the wastewater treatment plant. In just the last decade, water and sewer costs have doubled in East Lansing.

All in all, there’s a lot of financial uncertainty ahead for the City in the next few years, particularly this year.

Finance Director Feldpausch made that clear in her presentation, as her view came off as less sunny than Lahanas’.

Feldpausch did suggest the City will be able to keep making big supplemental payments of about $5M per year to the pension system as the City tries to ratchet up its “funded ratio” (the amount of money “in the bank” compared to what is owed). But those numbers are prone to shift – for example, as actuarial tables are showing government workers live longer than the average and MERS is adjusting its investment revenue expectations downward.

And East Lansing has a long way to go on that retiree-related debt. Feldpausch tells ELi that as of June 30, 2020, the City’s pension was at about 52% of its funded ratio, and the City’s debt for OPEB (mostly retiree healthcare) was at about 38%.

As of now, the City has not been laying workers off. In fact, it is expecting to provide cost of living pay increases of about 3% to many employees this year, and it continues to pay for benefits considered to be fairly generous – including, for some employees, pensions that include defined benefits (not only defined contributions).

One relatively small expense we did see disappear during recent presentations: Following ELi’s investigation into the City’s purchase of nearly $2 million in brand-new vehicles in the last year, City staff dropped plans to buy a $40,000 hybrid vehicle that had no stated purpose. Pressed, Lahanas explained to Council the plan had just been to keep this as a “pool” vehicle, but it’s no longer perceived as necessary.

The next few months will see Council move into discussions of the budget. If you want to communicate with Council, you can attend a scheduled meeting and speak during the public comment session, or write to Council by email.