ASK ELi: Are We Really $185 Million in Debt?

Friday, October 24, 2014, 12:17 am
By: 
Alice Dreger

Our Friday feature here at ELi is called “Ask ELi to Investigate.” We take a question from a reader and assign a citizen-reporter to investigate the answer, and then we bring you the results. If you’d like to submit a question for “Ask ELi to investigate,” use our contact form.

A reader asks: Is East Lansing really $185 million in debt? How did it get so large?

Background: The Political Action Committee (PAC) “Neighborhoods 1st,” which is opposing the ballot measure about the sale of city parking lots, says in its mailer that a “yes” vote will cause “further demands for more tax revenue or public debt financing with enormous financial risk to the City’s current debt of $185,000,000.” Hence our reader’s question about whether the number is accurate, and our reader’s secondary question about how the number grew so large.

Is the $185 million figure correct? I asked Mary Haskell, CPA, Finance Director of the City of East Lansing, whether the number provided by Neighborhoods 1st, is accurate, and also asked her how it breaks down.

Haskell referred to the City’s FY2013 (fiscal year 2013) audit report and provided these figures, along with the associated page and note numbers in the report:

type of debt

amount

page/note reference

business type (principal and interest)

$43,984,101

p. 54, n. 7

government type (principal and interest)

$30,319,272

p. 54, n. 7

Downtown Development Authority (DDA; principal and interest)

$6,202,926

p. 54, n. 7

unfunded pension liability, as of Dec. 31

$62,517,257

p. 57, n. 9

unfunded OPEB (other post-employment benefits), as of Dec. 31

$43,100,821

p. 60, n. 11

Total

$186,124,377

 

 

So the answer to the question is that the correct figure for East Lansing’s total debt would be closer to $186,000,000.

How did the figure get to be so large? To answer that, we have to explain the various components listed above.

If you want to skim this, read the boldfaced lines, and then read more in depth where you want more detail.

Some of the debt comes from voters’ and from our City Councils’ approvals of big projects. Haskell explains that the first three lines (business type, government type, and DDA) include “bonds, refunded bonds and bond anticipation notes, either voter approved and/or approved by past and present city councils.” So that includes, for example, the debt incurred for taxpayer-approved projects like the Hannah Community Center and the Family Aquatic Center.

Voter-approved debt is being paid off relatively quickly. As a consequence, we will be relieved of this section of debt relatively quickly. According to Haskell, in FY2013, voter-approved debt (bonds that were approved by voters at the ballot box) came to $5,465,000 in principal and $570,350 in interest for a total of $6,035,350. In FY2014, voter-approved debt comes to $4,445,000 in principal and $391,141 in interest for a total of $4,836,141.

What happens with the DDA debt depends on what really ends up happening with the properties in the Park District area that the DDA purchased for City Center II. By way of background, the DDA debt occurred because of the properties the DDA bought in the Park District area in anticipation of the City Center II project. The DDA expected to sell off those properties relatively quickly to the City Center II developer. (City Council decided to take the risk of buying and selling these properties, rather than letting the developer take the risk.) But that project fell apart. Since City Council had backed the DDA in the decision to buy these properties for about $6 million, that debt became the taxpayers’ problem.

That debt will not be relieved until the properties are sold, and even then, we may be stuck with a significant loss because the DDA paid more than the properties are now believed to be worth. The DDA has held onto the properties in anticipation of selling them to another developer for redevelopment. Some citizens have argued the properties should be split up and each sold now to the highest bidder, rather than selling them as a group to a single developer chosen by Council.

The Park District Project will reduce some immediate debt, but may lead to more debt overall: Proponents of the parking lot sale ballot proposal argue a “yes” vote will move us out of the DDA debt sooner, because the properties are likely to be sold to the developer (DTN), although most likely for less than we owe on them. Proponents of a "no” vote say that committing to the Park District project as it has been proposed by DTN is set to saddle the City with yet more debt commitments for things like a major new parking garage. “No” proponents also worry the Park District Project could lead to another City Center II-type failure, prolonging and exacerbating debt, because they say the project as it has been proposed is financially unrealistic.

Then there is the cost associated with having so many TIF plans in play, financial arrangements which can strain the City’s budget. Tax increment financing (TIF) allows a developer to be reimbursed for eligible development expenses from taxes on the redeveloped properties. Under a Council-approved TIF plan, tax revenues that would otherwise go directly to the City’s general fund (or other public treasuries) end up going to the developer. East Lansing City Councils have been approving TIF plans that last 20 to 25 years, putting off full City tax revenue from new projects for decades.

That’s an active problem financially for the City, because any project that gets built results in a need for City services, but if there is a significant TIF, the project may not be paying for the City services it gets, because tax revenues are going back to the developer instead of to the City.

A concrete example: A developer builds a big apartment building holding 200 people, and instead of the real estate tax revenue generated coming back to the City, because of TIF, it goes back to the developer. The 200 people and the building itself still need City services, even though the project isn’t paying for those services via real estate taxes. The rest of us end up paying for those City services—for firefighters and police, and for the strain the building and its occupants put on the City’s grid.

City Manager George Lahanas recently strongly opposed the change in the TIF plan in the Trowbridge Plaza redevelopment out of the recognition of the way TIF is not “free money” but can actually strain the City’s budget for many years to come. (Read about the vote to amend the plan here.)

A very large portion of the debt (over $100 million) comes from City employee retirement benefits. The unfunded pension liability and OPEB (other post-employment benefits) figures represent what we owe to past and present city employees. Haskell says 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.”

Haskell further explains that “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.) Now we are stuck with that huge debt. Many cities find themselves in the same position, with some facing bankruptcy and shirking their promises to employees as a result.

Lahanas says, “legacy cost increases have added significantly to budgetary pressures. 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.”

Although Lahanas notes that ,“for non-public safety positions we have also significantly reduced the retiree benefit,” and although City employees have taken significant reductions in their packages to help with the debt, because of the financial arrangements we have inherited, we will owe a very large amount of money to our retirees for decades to come.

Incidentally, budgetary pressures have also led to a significant reduction in the number of people who work for the City. Lahanas says 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.”

The State is providing less financial support to East Lansing and other cities. Lahanas explains that a significant drop-off in the channeling of state sales tax to cities has hit East Lansing and other Michigan cities hard. Lahanas says, “In actual dollars, the City currently receives approximately $2 million less per year, which in aggregate, equals to approximately $19 million less during the period from 2002 through 2014, without assuming any inflationary increases from 2001. This drastic reduction in funds from the State was due to both a reduction in collected sales tax, due in part to the state economy AND the policy decisions of State government to retain more revenue to solve state budget challenges.”

Real estate tax revenues are also down. Says Lahanas, “Property taxes are the City’s largest source of revenue,” but the City “experienced challenges from the housing collapse that occurred in 2008. While it took several years for East Lansing to feel the impact, this resulted in the flattening and then slight lowering of property tax revenue.”

Are we a high debt City for a city our size? I asked Lahanas this question, and he responded that, “the amount of debt the City has is an issue that must be considered in a proper context. For instance, for what purpose was debt incurred? Does the debt have a reliable revenue stream? Does the debt have the current beneficiaries of a service paying for the use? How do we stand in relation to our legal debt limit?”

He points out that the City benefits from “the rapid amortization of debt in a number of areas including voter approved debt for facility upgrades (Hannah [Community Center], Aquatic Center, etc.) as well as our very significant Combined Sewer Overflow (CSO) projects in the early 1990’s. Several years out I believe the City could fairly be considered as having low debt. Though we would also need to consider what borrowing we may need over the coming years.”

 

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