As unfunded costs for pensions and retirement benefits continue to rise, Lansing’s Financial Health Team is warning city officials to stockpile cash into its reserve funds and prepare for difficult financial days ahead.
“Lansing continues to grapple with a variety of challenges that will require both one-time and structural changes — ‘business as usual’ simply is not an option,” according to a letter sent on Monday from the Financial Health Team to Mayor Andy Schor, other top city officials and every member of the Lansing City Council.
“Reducing unfunded liabilities will be neither quick nor easy, and will require changes to health care and labor contracts. This is a long-term effort which must begin now. And in the short-term, it is essential the city take immediate steps to ensure the finance department is adequately staffed and to rebuild general fund reserves.”
The FHT — an 18-member body initially appointed by former Mayor Virg Bernero in 2012 — set a threshold to keep the city’s general fund balance above 12% of annual expenditures. That safety net ensures the city of Lansing can maintain a balanced budget and essentially serves as a rainy-day fund for unexpected expenses.
In 2018, that fund balance rested at about $17.3 million, records showed. Unexpected costs and revenue shortfalls forced those reserves to dip to about $10 million over the last year. A recent budget amendment further trims those rainy-day funds to $6.82 million — or only about 4.9% of annual expenditures — this year.
And as unfunded pension liabilities surpass $736 million, officials are voicing cautious optimism as the next budget cycle approaches in March. FHT Chairman Ben Bakken said many positive structural changes have been made under Schor’s administration, but he still called for “immediate corrective action” to keep up the pace.
“There have been some significant changes under this administration,” Bakken explained to City Pulse. “Problems have been identified and dealt with. But sometimes things have to get worse before they can improve. However, we have a tremendously high level of confidence in this administration to keep things on track.”
The latest budget amendment still needs to be approved by the Lansing City Council, but was triggered, in part, by the city receiving about $2.4 million less in income taxes than initially anticipated as the budget passed last year. Ultimately, the amendment calls for a $2 million revenue shortfall as expenses also continue to rise.
Schor plans to shift an additional $560,000 to the city’s police and fire departments to account for rising retirement contribution costs, among other additional appropriations in the amendment. If it’s approved by the City Council, the maneuver would chip away another $3.15 million out of the city’s remaining fund balance.
“We’ve had several one-time expenses to deal with,” Schor explained. “With accounting, you can either push them down the field or tackle them head on. This year, we’re not kicking the can down the road. We sort of dumped everything into this amendment to make sure our budget is structurally sound for the long-term.”
Schor’s next budget proposal will aim to ramp up the fund balance to bring it closer to the 12% mark, he said. But he knows that bolstering those reserves will come at a price. Residents shouldn’t expect any shiny new programs or costly initiatives in the near future as the city tightens its purse strings, Schor added.
“We want to be stable while ensuring we have a structurally sound budget,” Schor said. “People can expect that we won’t be announcing any big new programs or other costly ventures. We’ll continue to serve the public while recognizing our financial constraints. We’ll be leaning on using a lot of our existing resources to get that done.”
The FHT noted the city’s finances remain “under considerable stress” but emphasized that Schor and the City Council have showcased a growing understanding of the enormity of the issues faced and the need for fundamental structural changes. Bakken said those changes will likely continue to impact retiree health benefits.
In 2006, the cost of unfunded pension and other post-employment benefits represented about 13.5% or $25 million of the city’s $184 million revenue. In the city’s last budget cycle, that figure climbed to about 22% or about $49.5 million of the city’s $226.4 million in annual revenue. Bakken said this year, it’s closer to 30%.
“Reducing unfunded liabilities will be neither quick nor easy, and will require changes to health care and labor contracts,” according to the recent letter from the Financial Health Team. “This is a long-term effort which must begin now. And in the short-term, it is essential that the city take immediate steps to ensure the finance department is adequately staffed and to rebuild general fund reserves.”
Bakken also noted the hiring of Chief Strategy Officer Shelbi Frayer — which was initially suggested by the FHT last year — has already paid its dividends to the city. The letter notes that she has focused on a series of short-term reforms designed to realize immediate savings but also recognized that “much remains to be done.”
“I appreciate the Financial Health Team for staying involved and committed to their mission of ensuring the financial health of the city,” added Council President Peter Spadafore. “Problems must be identified before they can be fixed, and I think that’s exactly what we’re doing. This has certainly been a major priority at City Hall.”
The Financial Health Team has requested to give a brief presentation to the City Council, possibly at a meeting of the Committee of the Whole next week. Visit lansingcitypulse.com for continued coverage from Lansing City Hall.