EL Budget Talks Remain Stressful; Income Tax Revenue Uncertain

Tuesday, April 16, 2019, 6:55 am
By: 
Alice Dreger

As spring budget talks in East Lansing are underway and scheduled to continue this evening, the City Manager told City Council last week that things are looking better for the City’s bottom line.

Still, the City’s Finance Director had some rough news – namely that the new income tax could yield $1-2 million dollars less annually than external consultants and staff had estimated.

What is steadily helping the City’s bottom line in a substantive way? The BWL franchise fee approved by City Council in 2017. That fee adds about 5% to the bills of BWL electric utility customers in East Lansing.

While BWL collects the fees and channels them to East Lansing, the funds are actually coming from East Lansing residents. The City of East Lansing will obtain about $1.45 million that way for Fiscal Year (FY) 2020 according to the City’s draft budget.

What about the income tax?

East Lansing voters approved a property tax reduction to run concurrently with the income tax, to try to ease the total tax liability on homeowners in East Lansing and to shift the burden to East Lansing’s non-resident workers, most of whom are employed at MSU.

Back in 2016, consultants from Plante Moran were hired by the City to try to figure out how much a tax scheme of this type might bring in. That company’s study estimated new income tax revenue of about $10 million gross. The City estimated the property tax reduction would cost about $5 million annually, leaving a net revenue of about $5 million.

East Lansing Finance Director Jill Feldpausch told Council last week that the required property tax reduction is now calculated to be about $5.8 million annually – lopping off $800,000 more from the gross revenue than had been estimated before the vote.

The first set of income tax returns are not due until April 30, 2020, and only a few months’ worth of estimated payments have come in, so it’s hard to say what the income tax will yield. But based on what she’s seen so far, Feldpausch is using a figure of $9 million gross revenue for the income tax.

That drops the income tax net revenue from the pre-vote estimate of $5 million annually to $3.2 million.

Feldpausch (above) notes she is being conservative on the income tax revenue estimate, and things may turn out better. She and newly-hired tax administrator DaMar Boyd told Council that no other Michigan municipality has experience with the kind of $5,000 exemption East Lansing set up for its income tax. That constitutes a big unknown.

Even with the lowered net revenue estimate, Feldpausch described the benefit of the income tax as “a huge deal for us” because it is helping the City to keep pushing supplemental payments into the pension obligation.

She told Council last week that it was critical that the City “contribute as much as we can as early as we can” to the pension debt to try to avoid having the City’s funding ratio slip further.

The funding ratio is a calculation of what is owed to retirees versus what the City has “in the bank” in the retirement system. East Lansing is one of the cities the State is keeping an eye on, under Public Act (PA) 202, because of a worrisome funding ratio.

East Lansing voters specifically approved an income tax that mandated the City send 60% of the net income tax revenue to the pensions, with 20% going to police and fire, and the remaining 20% to infrastructure, including roads, parks, and City-owned facilities.

In November, the State approved East Lansing’s financial plan for managing its pension obligations. That plan has as a major feature the new income tax.

 

 

There’s hope that the State’s passage of a new law called PA 239 will substantially help the City’s bottom line. Under that law, passed in December 2018’s lame duck session, the City would finally see full reimbursement by the State for the City’s cost or providing fire and EMT services to MSU.

In theory, that could mean $1.6 million more annually in State funding for East Lansing.

But, warned Feldpausch in her presentation and draft budget, the reality of what the State will do has yet to play out, and the net gain may come to only about 50% of that figure. (That’s still a significant sum for East Lansing.)

The stress surrounding the budget became evident last week as sharp disagreement broke out between Council members Mark Meadows and Shanna Draheim, both up for re-election in November.

Draheim said she wanted voters to be able to see improvements in local “quality of life” sooner rather than later. She suggested that discretionary funding should lean toward providing visible improvements in things like roads, parks, and the Hannah Community Center – things “that our residents can feel and touch and see.”

Draheim suggested the “return on investment” in these infrastructure areas could be seen as just as important for people of the City as the return on investment in the pensions.

City Manager George Lahanas (above) responded that when he talked to the community about the City’s financial problems, he heard citizens say “we should put as much as possible into the pensions.”

Meadows agreed with Lahanas, saying that the “pledge to the people who voted for the income tax was to use as much as possible to pay down the unfunded [pension] liability.”

Draheim countered that yes, “the pension was up there” in voters’ priorities, “but so was Parks” and Recreation.

The four Council members (Ruth Beier was absent) and City staff participating in the April 9 budget discussion all understood that the net revenue from the income tax is mandated under the 60-20-20 split. But the question was what to do with the budget overall in terms of pushing funds one way or another, particularly as the income tax revenue is only just starting, and the property tax reduction will take effect with this year’s Summer tax bill.

Feldpausch noted some other new sources of revenue are expected in the next year, including the $200,000 annual rent payment from the Center City developers for use of public land for that project. (As we reported last week, that will start in July 2019 rather than the originally-expected start of March 2019.)

The City also anticipates $20,000 in scooter licensing fees and $20,000 in marijuana-related income for the next fiscal year.

The City is also expecting to earn $1,000,900 from the sale of land on Merritt Road following the controversial auction of that land on eBay. And the City hopes to sell additional property on West Road, although that would first require approval of voters.

Draheim said she wants “to look at all of our real estate holdings” in terms of possible revenue generation.

The City’s budget work sessions are open to the public, and public comment is invited at the end. This evening’s session will start at 5 p.m. in Conference Room A of City Hall, on the second floor near the City Manager’s office. (See the agenda here.) Email can be sent to Council at council@cityofeastlansing.com.

 

 

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