Council Member Says City Headed for Bankruptcy Without New Revenue

Thursday, April 12, 2018, 7:46 am
By: 
Chris Root

Above: Council Member Ruth Beier (left) and Finance Director Jill Feldpausch

Speaking in no uncertain terms, East Lansing Council Member Ruth Beier said at Tuesday evening’s meeting that the City is headed for bankruptcy if new sources of revenue are not secured soon. Beier’s remarks followed and were supported by a presentation of next year’s budget by Finance Director Jill Feldpausch.

Feldpausch’s presentation included a slide that began with this bullet point about the budget and financial status: “Not a sustainable plan.”

Beier broke in to interrupt Feldpausch at this point. Beier said that, of all the budgets she has ever seen – and she reviews budgets every day in her job as an economist for the Michigan Education Association – she has never seen those words: not a sustainable plan.

Beier added, "I just want to point out to anybody who is looking at this, what we have so succinctly and perfectly stated: this is not a sustainable plan. This budget is not a plan that will work. It won't be too many years [before] we have so few police that we can't police. And then we aren't a city anymore."

Feldpausch went on to summarize three factors that make the City of East Lansing’s budget unsustainable:

  1. Departments, such as police, are already operating at and below minimum needs, and “additional service reductions will have to be made.”
  2. There is funding only for very limited capital outlay and preventative maintenance, putting the City in a reactive rather than proactive situation.
  3. Costs are increasing much faster than revenues, especially for healthcare and pensions. The required pension payment for FY 2019 will be $7,584,444, according to Feldpausch. This is an increase of 8.3% from FY 2018, and an increase of another 10.6% is expected in FY 2020, according to a projection from the Municipal Employees’ Retirement System (MERS), which manages the City’s pensions.

The FY 2019 budget projects that there will be a general fund balance at the end of the year of 15.8% as a percentage of operative expenditures. That equates to a cushion of only two months of current operations.

While this particular budget can get the City through this year, Beier pointed out that it is not a plan that can continue into the future.

These comments by Feldpausch and Beier occurred in a special budget work session that began at 5:30 p.m. on Tuesday. When the Council later began its regularly-scheduled 7:00 p.m. meeting, the five Council Members dedicated fifteen minutes to speak to the City’s dire financial situation and their desire to continue to hear from the public about how to address this problem.

Beier began with an overview of where the City’s financial status could lead without an infusion of new revenue: “When we say that a budget is not sustainable . . . what we mean is that, within ten years, the City will be in a bankrupt position by any judgement of any balance sheet, because we will have to spend more than half of our general fund revenue on an obligation that has nothing to do with what we are doing. So we are not going to be able to use our annual operating revenue to operate.”

She explained that, in this situation, “We will have to use our annual operating revenue to pay for a liability that was generated 50, 40, and 30 and 20 years ago. So that is not a tenable financial position.”

“That is when a business closes and goes bankrupt,” she said emphatically. “The State won’t actually let us go bankrupt. They will take over. . . . There will be drastic solutions that we won’t have any input in because the State will [send in] a financial manager [or emergency manager] and they will tell us what we have to do.”

She continued, “Those are the stakes. It isn’t about whether we will have a community center or the pool can be open eight more hours. We will do those cuts anyway, because I think the only way to get taxpayers to agree to pay more is to also make cuts. It’s not a threat. It’s not saying, ‘If you don’t pay more, we’re going to cut.’ It’s: ‘We’re going to cut, and you need to pay more, or we are not going to be able to operate.’ I hope everyone will take this seriously.”

Council Member Shanna Draheim expressed her appreciation for Beier’s “eloquent” statement about the City’s financial situation. Draheim went on to say that the cuts the Council is considering make sense right now.

Draheim said input from residents about budget cuts have made a difference: “We got a lot of good ideas for people at these community engagement sessions. . . . I know on my list of cuts and my list of potential revenue reallocations, a lot of those came out of those meetings and some individual discussions.” She said she would “encourage people to stay engaged and take Ruth’s words and all of ours very seriously . . . and be part of that ‘solution thinking’ with us.”

Mayor Pro Tem Erik Altmann explained that the Council was focused on recurring costs that could be cut in order to make the required payments year after year to pay down the pension liability. For example, a $100,000 cut in the budget adds up to a savings of $2.5 million over 25 years, he said.

Altmann is less concerned, he said, about nonrecurring costs. For example, Altmann said the one-time cost of hiring a consultant to organize the public input sessions and online surveys about budget cuts and new revenues was a good investment: “We have spent money investing in things like community engagement. We have to figure out what people are willing to do. We have to do that, and I don’t think we are done yet.”

Draheim also called attention to the significant personnel cuts of 14 positions (12 full-time and 2 part-time) in the FY 2019 budget, achieved by not filling vacancies or eliminating positions. City Manager George Lahanas had said at a community engagement session in January that the City has been cutting about nine positions each year, and that this trajectory can be expected to continue. That level of cuts is, indeed, continuing in the FY 2019 budget.

Draheim also pointed out that eliminating full-time positions sometimes leads to using short, one-time contracts “to pay for services that we only need occasionally, including things like communications and community engagement.” Such contracts are reasonable costs, she said, when staff positions have been cut.

Council Member Aaron Stephens agreed with several points made by Altmann and Draheim and emphasized the importance of community engagement. “If we come out with a solution that makes residents happy and make the city happy, that’s the most beneficial thing. I am always a proponent of community engagement and of going out into the community.”

Mayor Mark Meadows also called attention to the history of deep personnel cuts, saying “to make the type of costs that have been made in this City with over 130 people reduced from our payroll is a hugely significant attempt by this organization to deal with the downturn in revenue sources that have been made available to us.”

Meadows also tried to focus the community conversation on looking for solutions: “We have a problem, and we have to fix it, and the blame is irrelevant. We have to get this taken care of, if you want your city to continue to be one of the best places to live, because it still is.”

Said Meadows, “If you don’t notice there has been a reduction of services in this community, it’s because of the incredible employees that the City still has on the payroll – and their ability to shoulder even more and more burden every year.”

Meadows pointed out that the City faces unfunded liability not only for pensions but also for retiree health care: “We have a $120 million problem, because it isn’t just pensions, it’s also OPEB [Other Post-Employment Benefits]. And we have to not forget about that, although we are better funded at the OPEB end.” (In her presentation, Feldpausch estimated the pension liability to stand at about $90 million and OPEB at about $40 million, coming to $130 million at the present time.)

Meadows concluded, “We are going to fix this problem. We need everyone in the community to be part of the resolution of this. We welcome everybody’s comments and suggestions.”

Beier promised to bring a chart to the next Council meeting showing how future pension payments will affect the City’s financial situation.

In February, Beier provided to ELi one projection of how pension payments could escalate because the City is required to reach fully funded status by 2040. (This projection, prepared by MERS in early 2016, was linked to our report of the February 27 Council meeting.)

The budget for FY 2019 (for the year beginning on July 1, 2018) that Council is currently considering contains a $1 million supplemental pension payment to MERS for the pensions, an amount that Lahanas told Council on February 27 was “the maximum we could actually tolerate” without new income.

Feldpausch suggested on Tuesday that this supplemental pension payment can be looked at as coming from the $1.1 million in annual new revenue that the City is now receiving via the new Board of Water and Light (BWL) franchise fee.

If the City could make larger supplemental payments – of perhaps $3 million or $5 million each year – on top of the annual minimum required contribution, it would reduce the rate of increase of required payments in later years. This would mean payments in later years would consume less drastic amounts of the General Fund, leaving more to spend on services and capital improvements.

Having the funds to make larger, regular pension payments each year is the purpose of several of the new tax options that Council is considering. Lahanas has requested new projections from MERS to show how the trajectory of future required payments would be impacted by $3 million or $5 million added payments each year. This projection is expected in April or May.

The Council is considering some form of new tax – following defeat of the income tax proposal in November 2017 – in order to find a way both to meet the requirement to fully funding employee pension liability by 2040 and to avoid drastic cuts in services and possible bankruptcy in about a decade from now, as Council Member Beier warned.

Council work sessions on the budget will continue through April and into May.

The 256-page budget presented to Council on Tuesday is available here. Other financial documents are available from a new Financial Information page on the City website.

You can view the Council Members’ comments at their April 10 meeting via the City’s recording of the meeting by clicking on agenda item #6.