Would an Income Tax Really Solve East Lansing's Budget Woes?

City of East Lansing leaders tell ELi that if the proposed income tax passes on August 7, it will not solve East Lansing’s substantial financial problems. But all say the proposed income tax could matter quite significantly to quality of life in East Lansing, including keeping the Hannah Community Center open, better staffing emergency services, and paving roads.

Without the income tax, they say, things look grim. Numbers provided by the City bear this out.

On Tuesday night, East Lansing’s City Council voted 5-0 to pass the Fiscal Year 2019 budget, amounting to about $35.5 million. In a press release, the City made clear cuts in that budget are being made “as a method of freeing up additional funding for the City’s pension obligations.” East Lansing is facing what Finance Director Jill Feldpausch and her predecessor have called a “staggering” debt from retirement-related obligations.

Questioned yesterday by ELi about what we’re really looking at, City Manager George Lahanas, Council Member Ruth Beier (a professional economist), and Feldpausch all responded that passing the income tax would mean saving the Hannah Community Center and the Aquatic Center, getting some problem roads paved, and securing key funding for police, fire, and paramedic personnel.

All three acknowledge that budget cuts and/or other sources of new revenue are still going to be necessary even if the tax passes. But without an income tax or some other new major source of revenue, the City is looking at a situation where, in about fifteen years, all of its property tax income (about half the City’s annual budget) will be needed just to pay required pension obligations. That, Beier has said, is the equivalent of bankruptcy.

The problem arises primarily from the ballooning pension debt. MERS, the system that administers the City’s pension fund, is requiring larger and larger payments to bring East Lansing’s funded ratio (the ratio of how much is saved to how much is owed) well above its current level of about 50%. The City has been trying to make larger payments than required now in an attempt to prevent the required payments from becoming virtually unmanageable a few years down the line. The City has also worked to some extent on reducing pension costs.

Like many other Michigan cities, East Lansing has been facing a flat income for over a decade while costs have been rising, due primarily to inflation. The flat income arises in large measure from the State’s decision to cut back tax revenue-sharing with cities and to maintain policies that depress local income from property taxes.

What was cut from the coming year’s budget

Cuts to the 2019 East Lansing budget include reduction in emergency service personnel, including elimination of police and fire/paramedic positions (as ELi had reported would happen). The budget also eliminated funding for the Community Relations Coalition, for membership in the Lansing Economic Area Partnership (LEAP), and for video-recording and televising of City Council and Planning Commission meetings.

In this budget, which takes effect July 1, there is less money for infrastructure repair and for some Parks & Rec services. Funding would also have been fully cut to several local human service agencies in this budget if a last-minute, unexpected windfall had not come from the Department of Housing and Urban Development (HUD). As ELi reported, Council voted 3-2 on Tuesday to direct those unexpected HUD funds to social services.

More drastic cuts coming if the income tax doesn’t pass

If the income tax does not pass, Council is anticipating that the next budget will involve elimination of additional police and fire/paramedic staff plus closure of the Hannah Community Center and Family Aquatic Center. (See ELi’s special reports on the costs associated with Hannah and the Aquatic Center.)

These are high-ticket items. What the City has been trying to do with cuts is to free up millions of dollars to make supplemental payments to the pension fund.

What happens if the income tax passes?

If the income tax proposal passes, the City will see a decrease of several million dollars in property tax revenue because, last November, voters approved a measure which automatically lowers property taxes (effectively by about 10%) if an income tax is instituted. But the income tax is expected to gross about $10 million.

When all is said and done, East Lansing estimates it will obtain about $5 million in new net revenue if the income tax passes. The August 7 ballot proposal specifies that 20% (about $1 million) of that net income will go to infrastructure repairs (including roads) and Parks & Rec, 20% (about $1 million) to emergency services, and 60% (about $3 million) to the pension debt.

The Finance Director says the income tax would matter significantly

Asked what difference an income tax would make, Finance Director Jill Feldpausch (below) told ELi via email yesterday, “if an income tax is in place, I do believe Hannah and the Aquatic Center can stay open….If we have a different source (i.e. the income tax) to pay that supplemental pension payment, we do not need to cut these other programs/services.”

“In addition,” she says, “the capital repairs that are needed [for Parks & Rec facilities] can utilize the 20% income tax dedication for infrastructure/facilities over a number of years if the income tax passes.”

The substantial income boost from the income tax would help stop the ballooning of the pension debt, and that’s what makes a big difference in the long run. In Feldpausch’s words, “if we put more money in, we will pay off sooner and the funding percentages will increase at a faster pace.” She adds, “We are committed to making as much supplemental payments to the plan as we can afford as it will only help us in the long term.” (The City has for several years been making large extra payments.)

The Council Member who is an economist agrees with that assessment

At Tuesday night’s meeting, Council Member Ruth Beier said a “yes” vote on the income tax means keeping Hannah and the Aquatic Center open, at least under this City Council – later Councils could always vote differently – and a “no” vote means those facilities close and there are more cuts to emergency services.

Beier (below) detailed by email yesterday what it looks like if the City can put $3 million a year from the income tax towards supplemental payments for the pension debt. The bottom line is this: “as long as the funded percentage turns around, our required contribution [to the pensions] will not grow to an unsustainable level.”

She explains, “Our internal projections using MERS numbers show that an extra contribution of $5 million per year [$3 million from the income tax plus the $2 million extra the City has been working to contribute] makes a difference in the funded percentage right away, gets us to 70% funding within 8 years, and keeps the general fund contribution” to the pension debt “at current levels or lower.”

Says Beier, “It is realistic to tell people that Parks and Rec will be held steady if the income tax passes. The reason that Hannah and the Aquatic Center have to close if we don't get the income tax is that we have to find at least $3 million to put in pensions. If we get that revenue from an income tax, we can continue to afford our current parks and rec program.”

The City Manager acknowledges the income tax wouldn’t “cure” the problem

Answering questions from ELi in person yesterday, City Manager George Lahanas said of the income tax proposal, “It’s not an absolute fix. What I can say is it will help make significant progress” on the debt problem. He said the City would have “to continue to try to be aggressive” in terms of getting extra payments into the pension system.

Below: Lahanas (center) at the recent Center City District celebration.

He explained, “The income tax won’t give us dollars to operate Hannah, but it will give us dollars to make large pension payments, subsidize public safety, and make limited capital improvements. We will make progress on these things, and that’s the best we can say at this time.”

Says Lahanas, “People will see a difference” in their local lives. “A million dollars of infrastructure and facilities improvements – people will see a difference.”

The Mayor now agrees Hannah would stay open if the income tax passes

ELi reported that at the May 14 meeting of Council, where Council voted unanimously to put the income tax on the ballot, four Council members called for a clear statement from the City about what a “yes” versus “no” vote would look like in the lives of the people of East Lansing. But Mayor Mark Meadows said he was not interested in having specifics laid out before the vote.

This week, Meadows appears to have fallen in line with his colleagues. He took time Tuesday night to say he might have been “misunderstood.”

Below: Mark Meadows at the recent Center City District celebration.

“I’ll just say I don’t believe that we need to close Hannah,” if the income tax passes, Meadows said Tuesday. “I don’t believe we need to close the Aquatic Center. I don’t think we need additional cuts to fire and police and we would probably be looking at ways to restore some of those numbers.” He added that he sees less police staffing as “a dangerous situation” where crime might move in, because “crime looks for an opportunity.”

In yesterday’s press release following passage of the budget, Meadows reiterated his current position: “A new revenue source would allow the City to preserve existing public safety staffing levels and maintain the operation of the East Lansing Hannah Community Center.”

What the rest of Council has to say

At Tuesday’s meeting, Council Member Erik Altmann said Council had “a much clearer direction” from the people of the City than last November, when a different income tax proposal failed to pass by about 400 votes. He said it’s clear now that people care about police and fire, Parks & Rec, and especially Hannah.

“We don’t have any choice” about an income tax, Altmann (below) said. “We are not bluffing.” If the income tax passes, “then there is exactly no reason to close the Hannah Community Center.” He said this meant “people have a clearer choice. Do they want to pay for these things or not?” He noted that the State recently rejected East Lansing’s appeal to avoid further State investigation into its pension problem, calling that “a somewhat ominous sign.”

Council Member Aaron Stephens agreed with his colleagues, and Council Member Shanna Draheim called this year’s cuts “deep and harsh reductions.” She added, “As a community, what we need and want will continue to evolve.”

On the issue of the income tax, Draheim was as clear as her colleagues that it's necessary. She said she had to question the sense of anyone who thinks it would be better to let things go to the point where an emergency manager might be appointed.

Critics of an income tax call for a different solution

Various critics of the income tax have suggested the City has been financially mismanaged enough to warrant inviting state-level review and even state-level control. During the run-up to the last income tax vote, MSU’s then-President Lou Anna Simon accused the City of financial mismanagement.

The perception that the City has been badly managed is not held only by those who oppose an income tax. A recent poll paid for by the City showed general support for an income tax as a solution to the City’s problems while also showing majority dissatisfaction with the City’s financial management.

The Lansing Regional Chamber of Commerce has said that a majority of its East Lansing business members “strongly oppose” an income tax, and that their members prefer that the City “reform legacy costs.” (“Legacy” is a reference to pension obligations.)

Asked to specify what that would look like, the Chamber’s Eric Dimoff tells ELi, “we’re currently in the process of gathering additional information regarding the City budget, taking a closer look at where money is being spent, how and where funds are allocated for City services, and getting additional feedback and input from our members.”

It looks likely that on this round, as the last, Council will be fully on the “yes” side, and the Lansing Regional Chamber of Commerce will be fully on the “no” side. What remains to be seen is where the voters land.