East Lansing’s Council Decided Issuing Bonds to Reduce Pension Liabilities Is Too Risky

East Lansing’s Financial Health Review Team (FHT) recommended that the City Council consider having the City issue $30 or $40 million in bonds in order to make a lump-sum payment into the pension funds, thus reducing its unfunded liabilities. The goal would be to make the City’s annual required payments more manageable and more stable. Of course, by issuing bonds, the City would incur interest payments for the duration of the bonds.

The FHT discussed the issue of bonding extensively in 2016, but it did not do a full analysis of bonding, so it did not make an affirmative recommendation to Council.

City staff requested a financial analysis of the bonding option from MERS and, at its public meeting on May 17, 2017, the Council considered the bonding recommendation.

After a discussion of several problematic aspects of this proposal, the City Council decided not to pursue issuing bonds. City Manager George Lahanas noted several times that the financial projection of the bonding option that they were reviewing showed the rosiest, best-case scenario, while issuing bonds also entails considerable risk.

Bonding would be financially advantageous only if the interest owed on the bonds remained less than the future earnings on the borrowed money that would be invested by MERS, Lahanas pointed out. Ruth Beier, who was then Mayor Pro Tem, noted in response that there could be a major downturn in the market, but the City would still have to pay the fixed interest on the bonds.

Council Member Erik Altmann pointed out that bonding could only solve part of the problem (for reasons we will not go into here), leading Lahanas to say, “We are coming up with half a solution that isn’t a great solution anyway.”

Mayor Mark Meadows and Council Member Shanna Draheim concurred that bonding was not worth pursuing, and Lahanas and Beier concluded that seeking a different source of additional revenue was a better alternative.

The audio recording of the Council’s discussion of bonding on May 17, 2017, is available by clicking on agenda item #7 on the left side of the screen.

This article is part of a larger investigation of East Lansing’s government's response to the Financial Health Team’s recommendations about pension plans; click here to read the lead article for that investigation.