City Credit Rating at Risk, Layoffs Possible

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Wednesday, January 28, 2015, 10:13 am
By: 
Alice Dreger

Image: City Manager George Lahanas, Councilmember Ruth Beier, and Mayor Pro Tem Diane Goddeeris at Council last night

At 12:30 this morning, at the very end of a five-and-a-half-hour City Council work session, City Manager George Lahanas told Council he had “bad news” to deliver.  He told Council that the City’s credit rating is at risk due to our sizable and fast-growing debt, and that something serious will need to be done to try to manage the City’s finances.

Lahanas told Council that the situation may “warrant downsizing operations,” i.e., laying-off City employees, which he said he did not want to do.

Bond raters are about to take another look at the City’s credit standing because (as we reported last week) the City is looking to refinance and renew several bonds. If the credit rating of the City falls, that will mean the City ultimately has to pay more to borrow money. That ultimately means increased costs to the City’s taxpayers (i.e., property owners in East Lansing), who are collectively the chief source of income for the City and who are ultimately on the hook for the City’s debt.

Earlier in the meeting, Director of Parks and Recreation Tim McCaffrey told Council that the East Lansing parks and recreation system needs serious infrastructural repair and upgrading, and may need $8-10 million for that in the next few years. He named coming infrastructural needs at every major venue, including Hannah Community Center, the soccer complex, and Patriarche Park.

The City is also facing big debt in terms of street and sewer repairs. Lahanas told Council that the City has had “significant use of [general] fund balance this year.”

But much more significant are the rising “legacy costs,” which are what we owe retirees in terms of promised pensions and health benefits. As we reported in our article on the City’s $186 million debt, over half of our debt (at least $105 million) is due to “legacy costs.”

Lahanas told Council last night that, due to measures taken so far to try to manage debt, he and his staff “had hoped [that debt] would level off”—that there would be a “calming effect.” But, he said, he received an email from City Finance Director Mary Haskell on Sunday informing him that an actuary report is showing an increase in legacy costs of 6-8% per year for the next five years.

That could mean our debt will be rising quickly, year after year.

All in all, Lahanas told Council, this is “bad news for us.” But, he said, he wanted to tell Council at that meeting, to “give you a quick glimpse of the bad news.”

Councilwoman Ruth Beier, a labor economist, was the only Councilmember with questions about this at the meeting. She noted that in the past there was an error in this calculation and asked if it could be an error. Lahanas said these numbers were real.

Asked to comment this morning, Beier told me, “this is just a projection that could change depending on interest rates and market returns. But it is serious. Most of our legacy costs are for benefits already accrued, so there is nothing we can do about them even if we wanted to.”

There will be a special meeting of Council called a “financial retreat” on Saturday, February 7, from 8:30-10:30 am. (This was planned even before this news.) This meeting is open to the public and will be held at Hannah Community Center.

 

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