East Lansing’s Council Discusses New Tax Options

A public hearing held last Tuesday, February 27, marked the first occasion for East Lansing’s City Council to dig into the details of options for one or more new taxes it might propose to voters in 2018, following voters’ defeat of a proposed income tax in November 2017. The Council is looking for new revenue options as the City faces a potential budget crisis.

The Council did not come close to reaching a decision on a new tax proposal on February 27. Mayor Mark Meadows has said that Council will need to approve language by May 15 if they decide to place a proposal on the August 7 ballot.

Concurrent with considering options for new revenue, Council will be working on the Fiscal Year 2019 budget, with some significant cuts expected from a list of $3 million in recommended cuts over the next two years, a list prepared by City Manager George Lahanas at the Council’s request. The Council is scheduled to begin work on the budget on April 10 and approve the budget on May 7.

Focus on funding the City’s unfunded pension liability:

The Council spent the most time on Tuesday on a proposal for a City-wide income tax. It would have the same structure as the tax voted down in 2017 – a 1.0% income tax for residents and 0.5% tax for non-residents – but this year’s new draft contains added specific conditions in the ballot language itself. According to City Attorney Tom Yeadon, adding conditions in the ballot language would ensure voters that only the voters, not the Council, can change these conditions.

The proposed ballot language specifies that: (a) the first $5,000 of personal or business income would be excluded from the tax, (b) the first $5 million in income tax revenue received would be required to be deposited in the City's pension fund in order to address any unfunded liability, until the fund is fully funded, and (c) the income tax would end in 15 years (December 2033) unless reauthorized by the voters.

Currently, the City’s pension funds are only about 50% funded, with an unfunded liability that came to $87.7 million at the end of 2016. East Lansing’s pension obligation must be fully funded by 2040 to meet rules of the Municipal Employees’ Retirement System (MERS), which manages East Lansing’s pension funds.

At last Tuesday’s meeting (above), Mayor Pro Tem Erik Altmann pointed out that “the question is not whether we are going to make the pension payments; the question is what we will have to sacrifice in order to make [them]. These are constitutional obligations; these are moral obligations….We are talking here about planning the best way to pay off those payments with potential new avenues for revenue, but even if we don’t get these new revenues we will be making those pension payments anyway.”

Lahanas explained the rationale for the income tax proposal to raise $5 million annually in new revenue for 15 years to be used for pension payments. MERS projections show East Lansing’s total required pension payments peaking at $16.6 million in about ten years in order to reach the 2040 funding goal.

This payment schedule would significantly cut into services the City could provide. For comparison, Meadows pointed out that this $16.6 million is roughly equivalent to the City’s total current annual property tax revenue of $16.5 million, and it comes to about 47% of total annual expenditures from the General Fund.

These are not precise comparisons, but they give a sense of the scale of the financial problem the City is facing.

The viability of an income tax to solve the City’s pension problem:

The five-year financial forecast presented by Finance Director Jill Feldpausch (below) at the Council’s February 10 budget retreat included making only a $1 million supplemental payment to MERS, in addition to the increasing required annual payments ranging from $6.2 million to $8.4 million in each of the next five years. Without significant new sources of revenue, Lahanas said on Tuesday, that amount “is the maximum we could actually tolerate.”

But, without a significant source of new revenue, even these small additional payments to MERS are not possible without making $3 million in budget cuts over the next two years that the Council will soon be considering. And Councilmember Shanna Draheim pointed out that the payments that currently are planned are not enough to reach full funding.

To find out if the proposed income tax (if dedicated entirely to pension payments, as it is in the version discussed on Tuesday) would enable East Lansing to meet its pension obligations, Lahanas has asked MERS to prepare a report on the impact of adding a flat $5 million payment in each of the next 15 years. Lahanas told Council on Tuesday that MERS will provide this projection within 35 business days.

In the meantime, Lahanas prepared a very rough estimate of what the City’s pension funding status could look like if $5 million a year went from a new income tax into the pension fund. (The table he presented covers fiscal years starting in July of 2018.) Lahanas said the report just requested from MERS would show more clearly whether “a level payment is possible and doable” to make the necessary pension payments, given the City’s current situation.

If the payments made possible by a new tax dedicated to pensions are sufficient to bring the pension to full funding (by 2040 or sooner), Lahanas said that the City’s regular annual pension payments would then come to an “extremely manageable” $2.5 million per year, instead of the much larger payments the City has been making to try to catch up.

Public input on the tax options:

Only one person came to the public hearing to comment on the revenue proposals. MSU faculty member Tyrone Rooney described his experience with the MSU defined contribution pension system and shared his calculation that it would cost him one year of his retirement to pay a new income tax over the next 27 years. His point was that, instead of contributing an equivalent amount into his own retirement, those funds would go to City employees’ pensions. Rooney asked what contribution City employees were making to their pensions to share the burden with the City’s taxpayers.

Lahanas (above) explained a number of changes that have been made in East Lansing employee pension plans. Among these is that older employees have increased their contribution by 2-3%, depending on their position, pay, and bargaining unit.

“That is something we plan to continue,” Lahanas said at the Council meeting, “except we’ve had extremely low wage growth….In seven years, we have had 5 to 5.5% [total] wage growth, which is abysmal. We are no longer actually competitive [in the job market as an employer] with those positions. So, I think we have to be thinking about having some wage growth, and then being able to also potentially capture more cost-sharing as well for contribution to pensions going forward,” he told Council.

Written communications from the community to Council:

The Council also received many written letters and messages about budget cuts and tax proposals. (View them all here.)

The Arts Commission and several of its members and supporters wrote to ask for continuing funding for arts, culture, and festivals. Several people noted that the relatively modest level of City funding for the Great Lakes Folk Festival, East Lansing Arts Festival, and Summer Solstice Jazz Festival has leveraged regional, state, and national funding, and that these events attract people to live in and visit East Lansing. The Arts Commission also expressed particular concern about maintaining the coordinator position for the arts and festivals.

Several people wrote to express support for the Hannah Community Center, including All-of-us-Express Children’s Theater and the Mid-Michigan Cooperative Invasive Species Management Area that holds trainings at Hannah.

Daphne O’Regan, former member of the East Lansing School Board, and her neighbor Kriss Ostrom compiled a three-page, detailed list of possible budget cuts, most of which have not appeared on any list being considered by the Council. (See pages 4-8 of the compilation.)

Jessy Gregg urged the City to negotiate with Ingham County about making the Family Aquatic Center an Ingham County Park, particularly because 70% of its users live outside East Lansing. Gregg is Secretary of the Ingham County Parks and Recreation Commission. (Disclosure: She is also an ELi reporter.)

Citizens for East Lansing’s Future, the registered “vote no” ballot committee that opposed the November 2017 income tax proposal, wrote a letter to Council members the day after the hearing saying, “the city must demonstrate action on reforms first — before asking residents to pay even more in taxes” and that it must “[use] the collective bargaining process to find substantial cost savings for all current and future city employees.”

That letter also urged reconvening the Financial Health Review Team, and listed 12 actions the City should take that would “seek public-private partnerships, remove unnecessary regulations that impede economic growth and job creation, and pursue regional partnerships to consolidate and streamline services.” The letter was not signed by any individuals. The ballot committee reports list John McNamara as Treasurer and Thomas Morgan as Record Keeper, whose firm, Morgan Communications, LLC, performed consulting services for the committee.

Millage proposals being reviewed by Council:

In considering what, if anything, to put on the ballot, at the public hearing, Council discussed several millage proposals. These were based on recommendations made by the Financial Health Team (FHT) in 2016, although the FHT's major recommendation for new revenue had been the income tax proposed last year.

Parks and Rec Director Tim McCaffery presented Council with an estimate of $14.1 million for recommended repairs to the Parks and Rec system that could be funded with a 20-year debt millage. The Parks and Recreation Commission wrote to support this proposed bond resolution for Parks and Recreation facilities, arguing that this could be adopted in addition to a new revenue source to fund needed pension payments.

Lahanas briefly presented three other revenue options: an override of the Headlee Cap, a new authority that could assess mills for public safety employee pension payments, and a debt millage for street repairs.

This month, Council will meet again on March 13 for a discussion-only, non-voting meeting and on March 30 for a regular meeting. The agendas for these meetings are not yet available. People can send written communications on any topic to Councilmembers at: council@cityofeastlansing.com.

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