Ask ELi: Why an Income Tax?

Saturday, September 23, 2017, 7:50 am
By: 
Jessy Gregg

Editor’s note: We ran a survey this week to ask how voters are thinking—and what they are wondering—about the paired City income tax and City property tax reduction proposals. This was an anonymous online survey, not a scientific poll, so the results are not representative of registered East Lansing voters. We’ve asked ELi Government reporter Jessy Gregg to tackle ELi readers’ questions, and below you’ll find the first in a series of explanations about these proposals. (As a reminder, ELi is nonpartisan and nonprofit, and we do not produce editorials.)

We received a total of 136 responses. Of those, 46% plan to vote in favor of the income tax, and 40% against, as shown above. On the property tax reduction question, 55% of our respondents plan to vote in favor, and 29% against, as shown below. (The property tax reduction will only occur if the income tax passes.)

For background on how the income tax and property tax reductions would work together, and the logic behind pairing them, see ELi’s earlier report from Jessy Gregg.

How serious is the financial problem of the City?

The real estate crash in 2007 hit with a one-two punch, simultaneously dropping the value of the investment portfolio which backs our employees’ pensions and dropping property values. The portfolio value drop left us with a lot of funds to make up to meet obligations. The property value drop resulted in less money coming in to the public coffers, which is a real problem as the City’s general fund is drawn primarily from property taxes.

This City’s pension liability (the projected amount that East Lansing is obligated to pay out to cover the cost of retirees’ pension and health care) was funded at close to 85% before the crash. When the Financial Health Review Team prepared their Pension Legacy Cost-Summary in 2016, the City’s pension liability was funded at 58.1%. It has since gone down to about 56%. (Read more about the Financial Health Team’s review of this problem in a special ELi report from Chris Root.)

The pension fund is managed by the Municipal Employee Retirement Service (MERS), which manages most municipal and county pension funds in Michigan. Many are underfunded, although East Lansing’s is worse than average.

To address the continuing problem of communities coming up short on their pension fund liabilities, MERS has mandated that all communities increase their required contributions until their pension funds are 100% funded.

MERS has “established a schedule to accomplish this which remains relatively flat for a short period of time and then ramps up dramatically,” Mayor Mark Meadows explains. “Shortly, it will consume all of our property tax revenues, and when that happens, we will need to dramatically reduce services to our citizens, lay off more employees, reduce hours of operation, reduce trash pickups, and [implement] a host of other reductions.”

About two-thirds of East Lansing’s $130 million unfunded pension liability is for public safety officers. Public safety labor disputes are subject to binding arbitration under Michigan’s Act 312 (to which MSU’s police force is, by contrast, not bound). That law limits the power of local government with regard to negotiating benefit packages for Police and Firefighters.

By federal law, Police and Fire Fighters do not pay into Social Security and so do not receive Social Security benefits in retirement, so their only source of retirement income is their pension. To try to reduce expenditures, in 1993 East Lansing renegotiated the pension packages for incoming employees, eliminating retiree health care.

With limited power to renegotiate these employees’ benefits and pension, the only sure way for East Lansing to reduce future pension liability in terms of public safety costs is to reduce the size of the Police and Fire departments. The only other real option, City leaders say, is to increase revenues.

For more about the City’s economic situation and how we got here, see this ELi interview with the City Manager: Responding to MSU President, Lahanas Defends City’s Financial Management

Below: City Manager George Lahanas

Why does City Council think an income tax is a good way to raise revenues?

Michigan law limits its cities in terms of opportunities to raise funds.

Sales tax is capped at 6% and the State collects the full amount, returning only a small portion of that money to cities in the form of revenue-sharing. The State of Michigan ranks 50th in the nation in terms of State revenue-sharing.

Revenue-raising options left to cities include voter-approved bonds, like the bonds East Lansing voters have previously approved for Parks & Recreation, fees on City services such as garbage collection and sewage disposal, fees for using facilities like the Aquatic Center, property taxes, and income taxes.

About twenty percent of East Lansing’s land is taken up by a non-profit, State-owned property (Michigan State University) which pays no property taxes but which requires the City to provide emergency services. MSU has been calculated to cost the city between $1.5 million (if you go by MSU’s estimate) and $3 million a year (by East Lansing’s estimate) in public safety costs to East Lansing. That cost has been accruing to City property taxpayers for many years.

The Financial Health Team recommended consideration of an income tax as a way to spread the tax liability out to non-resident workers who commute into the City, understanding that the majority of those work at MSU. Some Councilmembers have specifically said they see the income tax as a way to get revenue via MSU to help East Lansing’s bottom line, because for years East Lansing taxpayers have borne the cost of providing emergency services to MSU without full compensation from the State.

Why didn’t East Lansing take the deal offered by MSU, so that residents wouldn’t have to be asked to consider an income tax?

In the correspondence between East Lansing Mayor Mark Meadows and MSU President Lou Anna Simon, Simon never indicated that she had the full approval of the Board of Trustees. The Trustees, not Simon, would have had to make the ultimate decision, just as a majority of City Council, not Meadows alone, would have had to make the decision for East Lansing.

Meadows said he and Simon were able to reach an eleventh-hour agreement whereby the University would pay a sum total of $20 million to the City over the course of eight years, and during that time the City would not pursue implementing an income tax ordinance. But Meadows says that MSU told him that when that option was put to the Board of Trustees, there was not enough support among the Trustees for it to pass. ELi reached out to the Trustees for a statement, and the only Trustee who responded was Diane Byrum, who indicated that she was in favor of the deal.

So, the short answer is that there was never really $20 million on the table to take, because Simon could not get a majority of Trustees to say they would vote for it when they were canvassed. It’s also worth noting that the income tax, if it passes, is estimated to net $5 million a year for East Lansing, which means that in eight years, it would raise about twice what the $20 million deal would have provided.

How else could East Lansing raise money?

East Lansing could increase fees on City services, such as sewer and garbage collection. Parking rates could be increased, and in fact in the downtown ramps have recently been increased from 75 cents per hour to $1. The City could sell City-owned real estate. (Some land sales would require only a vote of Council, others approval of voters.) The City could try to bond to cover liabilities, as Meridian Township did earlier this year with a special Police and Fire millage.

The City could also apply for a Headlee override and raise property taxes to 20 mills, but that would require voter approval. This was a secondary recommendation by the Financial Health Team, their first recommendation being the income tax. They suggested that, if City Council were to seek a property tax override, that the money be earmarked for public infrastructure.

With a limited number of new revenue sources available, even if the income tax passes, the City Council is looking at making additional cuts in the form of eliminating more employees and cutting City services.

In the last decade, East Lansing has eliminated 130 public employee positions from a highpoint of over 400. Because Police and Fire costs make up majority of costs in East Lansing, City Council has said that dramatic cuts in emergency services personnel will have to occur if the income tax does not pass.

 

We’ll be bringing more answers to your questions about the income tax and property tax reduction proposals in the coming days. In the meantime, you may be interested in this ELi reporting:

 

 

Note: This article was amended after publication to remove the statement that police and firefighter pensions are regulated by federal law.