City’s Debt Load Nears $200 Million

Wednesday, January 4, 2017, 5:00 am
By: 
Alice Dreger

As the City of East Lansing’s specially-convened Financial Health Team prepares to present its recommendations to City Council, the City’s total debt load is now approaching $200 million. We asked East Lansing’s long-time Finance Director, Mary Haskell, to help us explain to our readers the component parts of that debt.

By way of background, two years ago, in response to a controversial political mailer that claimed the City’s debt had reached $185 million, we asked Haskell to help us unpack the components of the City’s total debt so that we could explain it to ELi’s readers. Here we present the material in a similar format to that report to make comparison of then-to-now easier for readers.

When we asked Haskell for help two years ago, the latest Comprehensive Annual Financial Report was for the fiscal year ending June 30, 2013. Today the latest available report is for the fiscal year ending June 30, 2016. This chart therefore compares those numbers from three years apart.

 

Type of debt:

Fiscal Year 2013:

Fiscal Year 2016:

Business type (principal and interest)

$43,984,101

$42,664,756

Government type (principal and interest)

$30,319,272

$19,575,172

Downtown Development Authority (DDA; principal and interest)

$6,202,926

$6,594,440

Unfunded pension liability (as of 12/31/13 and 12/31/16)

$62,517,257

$88,175,168

Unfunded OPEB (other post-employment benefits, as of 12/31/13 and 12/31/16)

$43,100,821

$40,388,688

Total:

$186,124,377

$197,398,224

 

Here’s an explanation of where that debt comes from and how it will be paid off (if we know how it will be paid off):

Some of the debt comes from voters’ and City Council’s approvals of big projects: The first two items shown above (business type and government type) include debt for City Council-approved and taxpayer-approved projects including (but not limited to) the Hannah Community Center, the Family Aquatic Center, local street projects, parking structures, and government facilities capital improvements.

Haskell explains, “The voter-approved debt millage [property tax] for the Hannah Community Center and the Family Aquatic Center provide the funds to pay the debt service on the bonds that were sold specifically for those facilities construction and reconstruction.” Otherwise, “The funds to pay debt service for Council-approved bonds is budgeted out of the revenues in the appropriate fund.”

The Downtown Development Authority’s debt on the Park District is our debt. The debt you see attributed to the DDA happened in conjunction with the City Center II redevelopment plan, which has more recently been called the Park District redevelopment plan. The DDA bought up a number of private properties along Evergreen Avenue in order to roll those properties into the City Center II project. That project was expected to happen not long afterwards, so the DDA never intended to have this debt go on this long.

Legally, the debt taken on by our DDA is the City taxpayers’ problem, so that’s why it is included in this table as part of the City’s total debt. A special challenge here is that the properties are now worth only about half of what the DDA paid for them. This means the DDA can’t simply sell them off and relieve us of the debt.

The current Park District plans call for constructing a new parking garage for the west side of downtown on these properties. (Indeed, all the proposed projects for this area planned a parking structure on these properties.) Because the City would ultimately operate and pay for the parking garage, the project will mean taking on more debt related to these properties, not less. The idea is that eventually the parking fees generated by the new garage plus the new property taxes generated by the redevelopment will mitigate that debt.

The reason the amount owed on that debt is going up is that the interest on the debt is determined by a variable rate. Haskell explains, “The DDA debt shown in FY2013 was bond anticipation notes. We issued two series of bond anticipation notes to finance the purchases and only interest was due on the outstanding notes (no principal was due until the notes expired).” All this happened assuming the project would go forward soon and that the debt on those properties would then be paid off.

Haskell explains that, “Since the project did not proceed as planned, the bond anticipation notes were paid off with a long-term debt issue. The first three years (FY2016 – FY2018) of the long-term debt called for interest and principal payments of only $25,000. Full principal payments begin in FY2019.” At that point, the annual payments start to present more of a fiscal challenge in the immediate sense. This is one reason why some City officials want to get the Park District redevelopment moving faster.

Retiree-related expenses are still ballooning on us. As you can see from the chart, our unfunded liabilities related to City retirees now stand at well over $100 million. Haskell explained for our readers in 2014 that these amounts “are prepared by actuaries to estimate the amount of money the City owes in promised pension and retiree health care costs for those employees who get the benefits. Both of the numbers are based on many factors, such as actuary tables (mortality) and assumptions (wage increases, medical cost increases inflation, etc.) and are subject to change based on changes in these assumptions.”

Back in 2014, Haskell helped explain how we got here: “The market crash in 2008, retirees living longer, and other factors have led to the growth of plan assets not keeping pace with the outstanding liability (hence the declining funding ratio).” For many years, City employees enjoyed retirement packages that the City was not “funding.” (This means we were not putting enough money away to pay for these expenses later.)

East Lansing is hardly alone in having this unfunded legacy cost problem, but we are in a worse position than many Michigan cities. This is one major reason the current Council decided to convene the volunteer Financial Health Team—to try to figure out how we are going to manage this debt.

In 2014, City Manager George Lahanas explained for our readers what efforts the City had made to try to manage the growing debt: “The City of East Lansing recognized that retiree health care had the potential to threaten the City’s financial future and began making changes in 1993. That year, the City stopped providing the promise of retiree health for new hires. This decision covered about one-third of the full time workforce. While this decision greatly limited future liabilities, the duration that these benefits are conferred over, mean that changes take many years to be fully implemented.”

Budgetary pressures have also led to a significant reduction in the number of people who work for the City. Lahanas told us that, “In 2002 the City had over 400 full time employees. As of June 30, 2014 we had under 300. These reductions have been felt across all areas.”

City Council has recently elected to make a large lump-sum payment in the amount of $2.0 million to the police and fire groups in our retirement fund. Haskell explains this has been done “in an attempt to slow the growth of the unfunded liability.”

The State and the economy are hurting us less lately. For several years in a row, under Republican control, the State of Michigan reduced its support to cities, including East Lansing, forcing cities to make up for what the State used to provide in revenue-sharing from things like the state sales tax. Now that has leveled off, but the State doesn’t give us nearly the level of direct financial assistance as it used to.

Meanwhile, the real estate crash that occurred starting around 2007 brought about a significant decline in property values. Haskell explains this “reduced or erased the difference between assessed and taxable value for many property taxpayers. Taxable value cannot exceed the assessed value so taxable values were reduced to the assessed value in those cases, causing a decrease in tax revenue levied and collected.” She notes that “Taxable value is slowily rebounding; in the FY2017 budget the City Assessor is projecting a growth of about 1.1% more than prior fiscal year.” Basically what this means is that the City is still pulling out from under the real estate crash in terms of revenues from property taxes.

One of the challenges noted by the Financial Health Team is that measures taken to deal with our debt—like instituting a City income tax or further reducing City services—could make East Lansing a less attractive place to buy a home. That in turn would again reduce property values and harm the City’s revenues.

Have a follow-up question to all of this? Please contact us and we’ll do our best to get it answered.