Kicking off its financial season with a budget retreat last Saturday, the city of East Lansing showcased a municipality in dire financial straits.
East Lansing has budgeted a -5.9 percent revenue growth for 2017 compared to a -2.6 percent expenditure growth, resulting in a $1,273,145 deficit that would be taken out of the general fund, according to the city’s Long-Term Financial Forecast. The city hopes to reduce the year’s actual spending to $257,000 through cuts and revenue expansions, according to the city’s General Fund Five-Year Financial Forecast, but projects an additional $1,642,125 deficit for 2018.
Although she assured that there’s no chance it would be allowed to happen, acting East Lansing Finance Director Jill Feldpausch said without changes East Lansing’s general fund would run completely dry in the near future because of the deficit.
“If we do nothing, if we don’t identify revenues or changes in expenditures, our fund balance ... will basically be depleted in three years,” Feldpausch said.
Feldpausch said recommendations for cuts and revenue expansion will go before council at their Feb. 21 meeting in order to have next year’s budget ready by April.
“I think one of the things that it’s important for people to know is we have really made a lot of cuts and a lot of efficiencies in the last years, and that is not a well that is going to bring forward a lot of (solutions), it’s not going to close that $1.6 million dollar (fund balance) gap,” East Lansing City Councilmember Shanna Draheim said.
The Catalyst
East Lansing City Manager George Lahanas said East Lansing’s troubles began at the same time as many others: the housing market crash. The Great Recession took its toll on the city in more than one way.
Earlier in the Park District development saga, Lahanas said East Lansing bought properties behind Dublin Square at a high value before the housing crash, which they now owe $5.6-5.7 million on. The city and the Downtown Development Authority, or DDA, want to put the properties into development to recoup their costs, Lahanas said, and though the properties are currently covering their costs and interest through renting, payment will balloon in coming years. As of the most recent proposal, these buildings were intended to be redeveloped as part of the Park District project.
Another large burden the city faces are “legacy costs,” or money owed in the form of retirement funds, pensions and healthcare costs, which Lahanas said many cities struggle with. Lahanas said pensions took a huge dip in 2008, becoming further depleted by continuing to pay out benefits during the downturn.
East Lansing’s total “bonded indebtedness” encompassing construction, projects and infrastructure totals $49 million, which Lahanas said is reasonable for a government of their size. However, with additional legacy costs totaling approximately $120 million, the situation becomes much more dire.
Lahanas said the city’s bonded indebtedness is down from 82 million in 2007, as a significant number of debt items have expired, but legacy costs continue to move in the wrong direction.
State of Distress
After being knocked off their feet by the financial crisis, East Lansing’s financial woes continued. According to several East Lansing officials, such as Draheim and Lahanas, the state of Michigan’s city-unfriendly tax policies have hampered the city’s ability to bounce back.
“The situation in Michigan is extremely difficult, Michigan is a very, very unfavorable state towards city governments,” Lahanas said. “They set up their tax policies in a way that makes it very difficult for cities to be sustainable. ... They don’t provide access to revenue streams to the city, and they sort of control it and make it very difficult for cities to function.”
Property taxes account for roughly 50 percent of East Lansing’s revenue, the largest overall source, according to the city’s General Fund Five-Year Financial Forecast.
Michigan, through the Headlee Amendment and Proposal A, restricts the amount property taxes can raise in a single year and prevents property taxes from rising if the increase is higher than the rate of inflation. This, Lahanas said, has crippled city revenue from property tax, leading to the aforementioned debt on their rental properties. Lahanas said that while property value might increase 5 to 10 percent a year as the recession wears off, what the city earns in property tax might only go up a fraction of that.
“The reason that was put in place was to stop, during a booming market, a burden for taxpayers of having huge increases of taxes, but what happened was there was a crash in the market, so houses lost a huge amount of value overnight,” Lahanas said. “The value of those houses dropped and (the tenants) started paying taxes on a low value house, and now Proposal A and Headlee stop (property taxes) from going up again. ... Think about trying to run your household or your budget on what you made 20 years ago. It’s difficult.”
The rate of revenue sharing between the state and cities has also ensnared East Lansing’s recovery.
Cutting losses
The city, now tasked with escaping its financial hole, has found that digging less won’t fill it. Nevertheless, officials said some cutting back might once again be necessary.
“I think that’s sort of a two-part strategy, we’re going to try to get through the next couple years with making whatever adjustments we can possibly make, then we gotta think long term about how we’re gonna make up the deficit,” Councilmember Erik Altmann said.
A potential source of solutions comes in the form of the Financial Health Review Team. Convened last year at the request of council, the team made 42 financial recommendations in seven categories throughout the course of 2016, compiled in a final reported submitted 17 January, 2017. Lahanas said council will begin considering the recommendations one at a time during the coming months.
Michael Moquin, who chaired the review team, said the city approached him most likely because of his experience as a lawyer dealing with legacy costs.
“We can see that four or five years down the road it doesn’t work in terms of what our obligations are and our ability to pay for them,” Moquin said. “A lot of the times you don’t find until the ceiling has fallen in that you have a problem with your roof, so this was a proactive effort.”
Among the recommendations made by the review team are the establishment of a volunteer network of residents to help find and implement cost savings, as well as a 5 percent budget cut in City Services, with cuts chosen for minimal impact rather than an across-the-board cut.
“It’s never a good way, to just carte-blanche do five percent cuts across the board,” Feldpausch said. “Some departments are very small, other departments are very large ... there are some departments where the only way we can cut 5 percent is getting rid of the only person in the department.”
In search of income
No matter how much the city manages to reduce spending, however, more revenue is needed to put East Lansing’s finances back on track, Altmann said.
“We need more money, we have dis-invested in infrastructure, we have debts that we owe from past services, legacy costs, and we have a staff that is cut to the bone that is working overtime trying to maintain city services,” Altmann said. “There is no front on which we don’t need more money, that is the problem.”
Moquin said one considered revenue stream would be a city income tax, among one of the recommendations made by the review team, but one that might not be well received.
“It’s a very substantial decision that would have a lot of different views on it by citizens as well as perhaps by council itself, but nonetheless they need to look at that because of the potential revenues that could be generated,” Moquin said.
In another option, Altmann said he thinks special event parking prices should double within the next year, as game day activities generate a lot of the city’s costs.
“I’m not sure how strong the support would be for that amongst my colleagues, but basically we have a lot of people come into East Lansing for various events and so forth who consume city services and consume city infrastructure but don’t pay for any of it, so we need to find a way to start recouping those costs,” Altmann said.
The prospect of paying more for parking might sound like two pieces of styrofoam rubbing together to some students, but Altmann said the city can’t handle much more give without any take.
“People need to realize that we’re not on a sustainable course right now, we have a choice to make: either East Lansing is going to become a different city because services are going to decline dramatically, or we have to figure out how to pay the costs of what we’re (giving),” Altmann said. “The city is extraordinarily well managed at the moment, and the only reason we haven’t seen steep cuts in services is because the staff is working really, really hard to maintain levels of service and that can’t go on forever. People are going to burn out, we’re going to lose folks, we’re going to lose good employees because we can’t pay them enough and we’re overworking them.”
