News Story

With Income Tax Rejected By Voters, East Lansing Looks at Spending Cuts

A common story: Residents will pay for years of pension underfunding by elected officials

Editor’s note: The amount of East Lansing's pension liability in 2016 has been corrected.  

The city of East Lansing will likely have to cut spending after voters said “no” this week to a ballot proposal that would have imposed a 1 percent income tax on residents and a 0.5 percent tax on nonresidents who work in the city.

Mayor Pro Tem Ruth Beier said East Lansing will need to find $3 million in extra revenue or spending cuts due to expected increases in the amount the city must contribute to its underfunded employee pension fund.

Beier said these retirement costs will increase dramatically because the entity that administers pension systems for East Lansing and hundreds of other Michigan municipalities has changed its assumptions on how well pension fund investments will do. It also changed its assumptions about how long former employees live in retirement.

At the end of the city’s last fiscal year, East Lansing’s pension fund was $88.2 million short of the amount actuaries say it should have to meet future benefit promises, according to the Michigan Department of Treasury.

James Hohman, a fiscal policy analyst at the Mackinac Center for Public Policy, said that cities like East Lansing should not regard the cost of catching up on past pension underfunding solely as a matter of collecting more from taxpayers.

“East Lansing city administrators need to look for savings in their budget to pay for their pension problems, and should take a hard look at retiree health care benefits,” Hohman said.

Hohman also said that while pension benefits are constitutionally protected, promises to provide city retirees with lifetime health insurance benefits are not.

In June, the East Lansing city council voted to put the income tax proposal on the Nov. 7 ballot, arguing that the extra revenue could be used to pay down ballooning retiree benefit costs. At the same time, it also placed a 4.5 mill property tax cut on the ballot, which would only go into effect if the income tax were adopted.

The net effect, if voters had approved both measures, would have been an annual revenue increase to the city of around $5 million. Council members said money left over after contributing more toward retirement benefits could also be used for infrastructure improvements.

Opposition to the income tax measure was led by the Lansing Regional Chamber of Commerce and by Michigan State University President Lou Anna Simon. MSU is East Lansing’s largest employer, and the income tax would have hit highly compensated university professors and administrators especially hard.

The income tax measure failed with 53 percent of voters casting “no” votes, while 64 percent of voters said “yes” to the property tax cut. Because the property tax cut was contingent on the income tax gaining a majority, neither proposal will go into effect.

Beier said she believes the city can find $3 million in cuts but thinks they will be difficult and reduce spending on popular amenities.

East Lansing operates an aquatic center, a children’s theater, a community center, and multiple sports programs in addition to fire and police services.

“What [the vote] is telling me is that a majority of people don’t want taxes to be raised, any taxes, and they want services to be cut,” Beier said. “I was thinking it was going to pass, but then again, I thought Hillary was going to win as well.”

East Lansing’s general fund revenue grew from $33.0 million in 2013 to $33.5 million in 2016, according to East Lansing's audited financial reports. Total funding for all funds rose from $45.1 million to $46.9 million over those three years.

Voters in one other Michigan city were also asked to approve a city income tax on Tuesday, and they said “yes.” A slight majority of Benton Harbor voters — 51 percent — approved imposing a 1 percent income tax on city residents and a 0.5 percent on nonresidents working in the city.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.