‘More chaos’: Lansing’s reserve funds to dip to seven-year low

After $2.5 million in federal fines were assessed against the city of Lansing for botched financial filings to the IRS, officials are bracing for financial turmoil as the city’s “rainy day” reserve funds dip to their lowest point in several years to keep the budget balanced amid recent missteps.

Lansing Mayor Andy Schor attributed portions of the funding decline to about $2.5 million in federal penalties from 2016, 2017 and 2018 that were assessed against the city. Those fines were triggered, in part, by the failure of the Finance Department under former director Angie Bennett to file timely paperwork required by the Affordable Care Act.

Officials also said Bennett’s office had also failed to submit timely W2 and W3 tax paperwork with the federal government.

Deputy Mayor Samantha Harkins said Bennett, who was appointed by former Mayor Virg Bernero, offered her resignation shortly after those financial issues were uncovered late last year. “Our financial team looks a lot different now,” Harkins explained to the City Council.

That’s just one factor that has led to increasing concern about the dwindling amount of cash remaining in city coffers.

“We had a shortfall at the close of books. We couldn’t raise money. We couldn’t reduce services. The only option was to take from the fund balance,” Schor explained. “It is a priority of this administration to have a balanced budget. We believe this is the low point. We have identified the problems and are fixing them.”

Over the last 18 months, the city’s general fund reserves were drained by about $7 million — representing the largest one-time, fund balance drop since at least 2007. Older records were not made available to City Pulse.

Additionally, the city paid about $1.2 million last year to settle a 7-year-old lawsuit related to several southside homeowners that had their basements flooded with sewage because of alleged improper maintenance. Income taxes, possibly due to East Lansing’s new income tax, were also about $2.5 million short of projections.

“Angie is a very nice woman but clearly she was in over her head,” said Councilwoman Patricia Spitzley at Monday night’s Council meeting. “The stuff that happened, to me, is actionable in my mind. I’m concerned that she was allowed to retire when these serious, serious funding mishaps and deficiencies were discovered.”

Chief Strategy Officer Shelbi Frayer has been serving as well as acting finance director following Bennett’s resignation. City officials said they have no immediate plans to hire a permanent replacement. The City Attorney’s Office is also negotiating with the IRS in hopes of having those federal fines waived or reduced.

Schor also attributed the budget shortfall to an additional $1 million that was allocated to help fund health savings accounts while the city continues to grapple with $736 million in unfunded liabilities for employee pensions and post-employment benefits. His latest amendment chips away another $3.15 million from the fund balance.

Council President Peter Spadafore said most problems began under Bernero, who served for 12 years. Schor succeeded him two years ago.

“For years, the previous administration ignored or was not aware of problems in the Finance Department,” Spadafore explained. “Unfortunately, we’ve discovered there was a lot more chaos than previously thought. Council is taking this very seriously, as I know the Schor administration is, and I hope that together we can put the right controls in place to ensure stable financial footing for Lansing.”

Bernero established the city’s 18-member Financial Health Team in 2012 and set a threshold to keep the city’s general fund balance over 12% of annual expenditures. That safety net ensures the city can maintain a balanced budget and serves as a “rainy day” fund for unexpected expenses. Records show he left the city with more than $13 million in the bank.

By 2018, after Schor took office, that fund balance rested at a comfortable $17.3 million, records showed. But as revenues decreased and unexpected costs continued to pile up over the last 18 months, those reserves dipped to about $10 million last year. And a recent amendment aims to drop those reserves to about $6.82 million — 4.9% of expenditures — this year.

“This mayor has been there for more than two years,” Bernero responded by phone to Spadafore’s assessment. “I’m pretty sure this he was in charge from day one. If he wants to blame me for everything that happened over the last two years, let’s make sure I get credit too. The cranes in the air? The development downtown? Let’s just make sure I get credit too. At what point does he own his own problems?”

Later, Bernero issued this statement:

“While it is unfortunate that mistakes were apparently made by the Finance Department in prior years, this type of unexpected expense could easily be absorbed by the city’s reserve fund, except that this administration has blown through more than $11 million of the $18 million in that fund in just two years.”

“How they have managed to spend most of the rainy day fund when the economy is relatively strong is something that warrants closer inspection. It also raises significant concerns about what will happen to city finances if and when the economy starts to decline.”

Schor issued another statement in response: “We proposed a financial solution to help fix the recently discovered structural deficit and one-time costs that were inherited from the previous administration. These challenges are real, it is unfortunate that these were left for us to deal with, but we are addressing them. We look forward to continuing to work with the City Council and Financial Health Team to deliver for Lansing residents.”

The City Council is expected to vote on the budget amendment later next month. And if it passes, those funds will have dipped to their lowest point since at least 2014 when unrestricted reserves tallied only $5.81 million and before Bernero was able to drive them higher.

“It’s clear that the city has lacked fiscal and financial systems that have led us down this path,” Spadafore added. “When we proposed hiring the chief strategy officer, the aim was to set the city on the right financial path and design systems to that end. But first, the problems must be identified. It appears that we have identified several problems and can now work to implement systems and accountability to ensure the city’s financial future.”

A motion to table Schor’s latest budget amendment failed 4-4 at this week’s Committee of the Whole meeting. It was later referred to the full City Council, but Spadafore pulled it from consideration at the last minute. He plans to bring the resolution back to the floor when his colleagues have more time to research the issue.

“I’d really like to better know how we got into this position,” Spitzley explained before voting to table the issue.

The Financial Health Team sent a letter last week to Schor, other top city officials and every member of the City Council urging them to stockpile more cash into its reserve funds and prepare for difficult financial days ahead. “Business as usual” simply is not an option, they said, requesting “immediate corrective action.”

“This is a long-term effort which must begin now. 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 letter states.

As part of the proposed amendment, Schor also plans to shift an additional $560,000 to the city’s Police and Fire departments to account for rising retirement contribution costs, among other unexpected appropriations. His next budget proposal will aim to ramp up the fund balance closer to the 12% mark, he said. It’s due next month.

Michigan doesn’t set limitations on municipal fund balances, but a spokesman for the Michigan Department of Treasury said his office recommends that cities like Lansing set and maintain a specific fund balance policy. His office will only intervene if and when overall expenditures exceed revenues for three or more years, he explained.

However, any efforts to bolster those rainy day fund reserves will come at a price. Schor warned that residents shouldn’t expect any shiny new programs or costly initiatives in the near future as he tightens the financial belt.

“The financial house was a mess,” Spadafore added. “We’ve only just been able to uncover these issues, and it’s a systematic problem that dates back years. These problems weren’t created in the last 18 months. It’ll take time to pull them apart and get them corrected. And I’d rather take from the fund balance than cut from city services.”

Lansing’s Reserve Funds:

FISCAL YEAR TOTAL RESERVES

FY2007: $11.17M (10.2%)

FY2008: $12.61M (11.3%)

FY2009: $12.96M (11.4%)

FY2010: $10.80M (9.2%)

FY2011: $6.22M (5.7%)

FY2012: $5.33M (5.1%)

FY2013: $5.37M (4.8%)

FY2014: $5.81M (5.0%)

FY2015: $7.58M (6.5%)

FY2016: $10.28M (8.5%)

FY2017: $12.91M (10.5%)

FY2018: $15.78M (12.3%)

FY2019: $17.33M (12.6%)

FY2020: $6.82M (4.9%)*

*Proposed