Chair of Financial Advice Team Explains Findings, Plan

Friday, July 22, 2016, 5:26 pm
By: 
Alice Dreger

Photo courtesy of City of East Lansing

Earlier today, I spoke with Mike Moquin, Chair of the City’s Financial Health Review Team, about the group’s recent recommendations regarding the City’s pension debt and about next steps for the Team. Moquin has about 25 years’ experience working in pension systems in Michigan, including working until 2012 with MERS, the Municipal Employees’ Retirement System, which is the system East Lansing uses for its pensions.

What follows is an edited version of our conversation, which I asked Moquin to review for accuracy and clarity.

One idea being batted around is using bonds to help pay what we owe in terms of pensions and OPEB—other post-employment benefits. How much is the City limited in terms of using bonds to try to address this debt?

State law sets a bonding limit based on the total value of property in the community. I believe it is 10%. At the present time, the City has about $30 million of bonds outstanding, but those bonds are getting retired [being paid off soon]. What that leaves under the bonding limit is about $58 million maximum bonding authority. On the pension side, there’s about $80 million in unfunded liability as of the end of 2015. So that’s obviously more than $58 million.

In addition, any of the bonding capacity that would be used towards pension debt would then not be available for, for example, infrastructure or for OPEB or retiree healthcare costs. So there’s only so much of the pie that remains that can be parceled out.

We’ve advised the City in our report that there will be, in the next couple of months, an OPEB report, and also recommendations concerning infrastructure that will be later in coming. The City is being advised to retain municipal finance experts that can help the City review not only your bonding capacity issues, but what are other potential revenue sources that may be able to be used so you don’t have to exhaust the City’s bonding authority.

You always want to have a cushion available in bonding capacity. You never know what is going to come up. I’m sure the City will decide they need to have some amount of cushion left in the bonding authority and not exhaust it all.

We have the pension recommendations for now, but not yet the OPEB recommendations?

The Council asked us to make pension recommendations by July 31, so we met that goal because we had all of the most-recent information available. That’s not the case with OPEB at this time. We are waiting for an actuarial report which will be updated soon and will give most current information. That’s supposed to be available in mid-August. Once we get that information, the Legacy workgroup of the Financial Health Team will begin focusing on OPEB specifically.

We were asked by City Council to complete all of our reviews by December 15. I think at that point, City Council and staff can begin to make decisions on where you go next.

So State law would allow us theoretically to bond for pension and OPEB debt?

State law requires in order to bond for this that you have to close your defined benefit plan (or Hybrid plan; the City has both) to new hires and adopt defined contribution for new hires. (See the recommendations.)

My understanding is that any potential income tax in the City of East Lansing would be limited by State law to at most 1% for residents and 0.5% for nonresidents.

Yes. That’s correct. That’s the maximum for each group. Nonresidents can only be charged half of what you’re charging residents. The statute gives these percentages as a maximum but it doesn’t say you can’t provide for a lower income tax percentage. So one possibility would be an income tax at a lower amount. The Revenue Options workgroup does not yet have back the study they need to develop recommendations on income tax.

The financial projections with regard to our retiree-related debt seem to show that we’re going to have to be making ever larger annual payments just to keep up with what we already owe or may owe for future service of current employees and new hires. Is that correct?

Yes. There are several different scenarios that are presented in our report. We focused on things the City could do that would slow the rate of increase in pension contributions. It’s going to require more City contributions to the system. There are things that can be done to mitigate the problem of losing ground, and pension bonding is one example that could have a significant impact on future City contributions to retiree-related expenses. Of course, once you have a bond, you have to repay the bond over time. And that’s a cost that has to be taken into consideration, along with what the projected pension contributions are. In addition to pension contributions, retiree health care obligations also must be factored in.

You mean that we have to think about how bonds cost us extra, because we pay interest on what we borrow?

Yes, you repay principal and interest according to a predetermined repayment schedule over a period of up to 30 years. You can set up a bonding schedule that is flexible in terms of period of years but also specifying the amount of principal and interest you’re paying each year. You can have a “laddered” repayment schedule, which has lower payments at the outset, increasing each year, for example. That again is something that municipal finance experts and bond counsel are best equipped to address in the context of all the other competing needs that the City might have.

A concern that has been raised is the potential for a spiraling problem: We put in place an income tax and more property taxes to try to deal with our debt, but that makes living here less desirable, so property values fall, which leads to less revenue, which leads to more debt problems.

That is a concern. It’s a concern we have actually heard expressed, I think at our last citizen engagement panel at Hannah on June 29. There’s an awareness that that is an issue that would need to be addressed.

Until the income tax report comes out and we can say “here is the likely range of money that would come in through an income tax based on how many residents and non-resident workers there are in the City,” we won’t know what an income tax would generate. It is a point of significance because “some things are not worth the squeeze.” If it’s like an orange that is only going to give a little juice; it’s not a worthwhile exercise to spend your time trying to get something that won’t get you where you want to go.

So that will be an element of the study as well. Obviously we are concerned about people wanting to continue to buy houses in the City and not having homeowners presently in the City say, “Look, we think it’s too much total tax load so we’re going to look at living elsewhere.” That’s a legitimate concern.

In one respect, we have the initial task of making the recommendations and we’re going to look at all areas and do that. But the actual discussion and the decision as to what options are enacted is going to take place at the City Council level with all the public input that would be expected. And only when that process is done will you be able to say “here is a package that can be put together.”  And voter approval may well be necessary. There is no magic bullet or magic pill that is going to resolve things. It’s really saying “these are the revenues we have, these are our obligations, and these are the things we can do that can affect our revenues and also work on reducing or limiting expenditures to less than was anticipated,” or in other ways by setting up different mechanisms for how you fund police and fire. There’s a lot of pieces that are there.

This is like having a 500-piece puzzle. You can’t just put things in any order or think one piece is more important than any other. You have to make it a holistic thing. What you’re trying to create requires all these pieces. Our task is to make recommendations. When that is completed, then it goes to the entire next level for Council’s consideration and debate.

It’s a fortunate thing that the City is not actually in the middle of a financial crisis before taking steps to do this. This is really a pro-active effort.

What are the next steps for the FHT?

We’ll be working on OPEB – that’s next in the sequence of recommendations. But we won’t make recommendations on OPEB until we have the most updated actuarial information. We think we might have some recommendations on OPEB in September.

Then, from the other five groups, which have different charges, there will be reports coming. [The other groups are the Real Property Group, the Development Incentives Group, the Infrastructure Renewal Group, the Citizens Communication and Services Group, and the Revenue Options Group.]  The FHT will review the recommendations from each Group, and must itself approve all final recommendations.

Some of the groups do overlap in certain areas, and some simply don’t have all the information they need yet. The Revenue Options group, for example, will probably not have the income tax study until later in August.

The anticipation is that beginning in September, there will be reports from the groups and those will be put into recommendations similar to the pension recommendations.

Just to confirm, on the Financial Health Team, you are all working as unpaid volunteers, and there are no known financial conflicts of interest in terms of selling the City professional services you each might recommend?

That’s right, we are working as volunteers. Nobody is paid. This is all pro bono and we are functioning as public servants to that extent. There are no conflicts of interest with regard to purchasing of services. That is something we are sensitive to; we would seek to avoid any conflicts because we are really making recommendations we want to have stand on their own. There can be nothing built into them that is intended to benefit to anyone except the taxpayers and residents of the City.

 

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