City Manager Says Income Tax Revenue Is “On Track.” But Is It?

Thursday, July 18, 2019, 8:00 am
By: 
Alice Dreger

East Lansing City Manager George Lahanas announced this week, “Our income tax revenue to date indicates that we are on track to collect what we estimated we would in the first year, which is great news.”

But the new East Lansing income tax is actually projected to bring in about $1.4 million less than had been estimated before voters passed the tax.

That means potentially less money than had been hoped for East Lansing’s struggling pension system, police and fire services, Parks & Rec, and local infrastructure repairs.

Here’s how the numbers differ from the pre-vote prediction to what we’re seeing now:

Numbers are playing out differently than had been predicted before the vote

Well before East Lansing voters approved the income tax in August 2018, the City hired Plante Moran to try to figure out what an income tax could bring in. Plante Moran’s October 2016 study estimated that an income tax would generate $10.4 million gross. The study also estimated the income tax would cost $400,000 to administer.

Now it appears the tax is bringing in something more like $9 million, and administrative costs are estimated at $425,000.

What about the property tax reduction? East Lansing voters approved a Charter amendment in November 2017 that said that if and when an income tax went into effect, the property tax rate in East Lansing would be reduced. (The idea was to give East Lansing homeowners a break.) The income tax would be used in part to pay back the City’s general fund for that property tax reduction.

When Lahanas and City Council were presenting the income tax idea to the voters in 2018, they were using the figures from the Plante Moran study and an assumption that the property tax reduction would come to $5 million. The property tax reduction is now more like $5.1 million.

That means less money coming in from the income tax than had been hoped, particularly for the three areas targeted for the funds in the ballot proposal. (According to the measure passed by voters, of the net income tax revenue, 60 percent is earmarked for the pensions, 20 percent for police and fire services, and 20 percent for Parks & Rec and infrastructure repairs.)

As the chart above shows, if the current predictions play out, the pension system will see about a million dollars less per year from the income tax than had been predicted pre-vote.

So why is Lahanas saying the revenue is “on track”?

In his statement this week, Lahanas correctly noted that the figure of $9 million is what the City recently budgeted for Fiscal Year 2020. In that particular sense, the revenue is “on track.”

But that’s because, as ELi reported, a few months ago City financial staff could start to see that the total revenue from the tax was looking closer to $9 million than the $10.4 million predicted before the vote. That’s why they went with the more conservative number for the 2020 budget.

In short, the revenue prediction is not on track with what voters were shown in terms of predictions for what the income tax could do. It's on track with recent, lower estimates by City staff.

What does all this mean for East Lansing’s pension problem?

We asked Lahanas yesterday, “How does this change the outlook on the funded ratio of the retiree-related debt” in the City, and “Is there a plan to try to make up the annual difference between what had been estimated for the income tax net and what’s actually coming in?”

Lahanas responded, “Until we have a full year, including returns, this is as precise as we can be at this time. Supplemental pension payments will be adjusted, as needed, based on our ability to pay.”

If East Lansing is really looking at having $1 million less per year for the pension obligation than had been predicted for the income tax, that could leave the City in a more difficult position than had been anticipated when the income tax was approved by voters.

But it’s important to understand that the numbers for gross revenue from the income tax are still just estimates. Until returns are filed in April 2020, City staff won’t know for sure what the gross revenue will be.

As ELi reported, the City is hoping for some extra revenue this year from other sources, to help with the ongoing budget problems. And adoption of the new income tax has been noted at the state level as a positive financial move for East Lansing, which has a pension debt large enough to have triggered state review.

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