Analysis

Spending And Tax Collections Up, But East Lansing Still Asks For Local Income Tax

Value of real estate in the city — its related tax collections — are higher now than before the housing bubble

Lansing State Journal columnist Judy Putnam recently wrote that she is willing to pay more if East Lansing voters approve an income tax that appears on next Tuesday’s city ballot. Putnam pointed to the city’s property tax revenue as one reason.

“On top of that property values plummeted — along with property taxes — during the Great Recession, a downturn so devastating to Michigan that it was called our Hurricane Katrina,” Putnam wrote.

Hurricane Katrina was a natural disaster that killed more than 1,800 people and literally put a major American city underwater. Comparing it to a falloff in local property tax revenue deserves a closer look.

 

The taxable value of property in East Lansing is the basis on which city property taxes are levied. It totaled $627.4 million in 2000. If it had grown each year by the rate of inflation, East Lansing’s taxable value would have been $874.5 million by 2016. That’s an increase of $247.1 million over those 16 years if measured in 2016 dollars.

But by 2016, the taxable value of East Lansing real estate grew even more, even after inflation. It was actually $82.8 million more than in 2000, measured in 2016 dollars. Property tax collections have grown proportionately, and after inflation, were still about 10 percent higher in 2016 than in 2000. Property taxes account for about 40 percent of East Lansing city revenue.

This landscape is complicated by something else that happened during the same period, a U.S. real estate bubble from 2000 to 2007. Among other things, the bubble triggered a spike in local property values – and the local government property tax collections based on them.

During housing bubble, municipalities found ways to spend that extra money as it came in. When the bubble burst, they had to scale back their spending. The city of East Lansing was no exception.

In 2004, the city spent a total of $39.1 million, of which $15.6 million came from city property taxes.

By 2009, East Lansing was spending $46.3 million, up $7.2 million from just five years earlier. This was largely supported by a $4.0 million increase in city property tax collections, which were in turn boosted by the housing bubble. At the bubble’s peak, the taxable value of East Lansing property rose to an astounding $1.0 billion.

But when the bubble burst so did taxable values - and the property tax collections based on them. By 2013 East Lansing was levying taxes on property valued at $900.3 million, not $1.0 billion. Nevertheless, this was still $51 million higher than the city’s 2000 taxable value amount, which would have been $848.8 million if measured in 2013 dollars.

The rebound has continued, and East Lansing taxable values totaled $957.4 million in 2016. And once again, after adjusting for inflation, this comes to $28.1 million more than in 2013 (as measured in 2016 dollars).

So the “Hurricane Katrina” impact that Putnam mentioned was really just a partial reversion to what tax collections would now be had there been no housing bubble. It’s a partial reversion only, because the city still came out ahead of where it would be if property values had risen at just the rate of inflation.

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In response to an email from Michigan Capitol Confidential Judy Putnam sent the following comment:

“The problem that East Lansing faces is underfunded pensions eating up a greater and greater share of revenue, which has remained fairly flat. That was the main takeaway from a budget session I attended. Regarding property values, I was referring to general trends facing cities as the reason why so many eyes are on East Lansing. Those are legacy costs, reduced revenue sharing and property values that fell during the Great Recession.”

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.

Commentary

Local Governments Are Not in Debt Because of Less Revenue Sharing

It's time to address unfunded liabilities

The largest problem facing local governments is the amount of debt they have for workers in retirement. The debt comes in two forms: pension liabilities and government-funded medical insurance. The political debate is how to solve the debt problem.

Local governments can stop racking up pension debt by shifting their employees to 401(k) retirement plans as soon as possible. Doing so would stop them from passing along the costs for their current workers onto tomorrow’s taxpayers. Oakland County, and many other municipalities, have gone this route and are more solvent and able to pay for other government services because of it.

Paying retired employees’ health insurance is a looming problem. According to a recent analysis from the state Treasury Department, 175 out of the 367 public entities offering retiree health care have not set aside any money to pay for it. If government managers are not careful, the costs for both pensions and retiree health insurance can crowd out the resources they can devote to current services.

Legislators recently took testimony about this issue. While everyone agrees that it is a problem, some politicians and union officials are blaming it on the state for being stingy in its payments to local governments. Gongwer News Service recently covered a hearing in the House Local Government Committee, where Rep. Jeremy Moss, D-Southfield, put the blame mostly on the state.

Port Huron City Manager James Freed testified about his city’s problems with spiking liabilities. When asked about revenue sharing, he said it doesn’t explain much of the problem. However, he said, “It has had a significant impact.”

Contrary to assertions from legislators and unions, the evidence shows that state revenue sharing has little to do with the financial problems in Port Huron.

Revenue sharing was near its peak in Port Huron in 2003 when the city received $7.2 million from the state. This year, the city receives $3.4 million in revenue sharing. If the state had increased revenue sharing since 2003 in an amount that would cover inflation — and ignoring city’s population loss — it would give Port Huron $9.4 million today. That’s a difference of $6 million, which city officials would like to have.

But Port Huron’s debt skyrocketed much more than that. In 2003, the city had $8.7 million in pension debt. (It was not required to report retiree health care liabilities until 2009). Today, the city has $72.6 million in pension debt and another $37 million of debt for retiree health care.

In other words, the city has gained more than $100 million in debt since the high point of revenue sharing. So that “missing” $6 million in revenue sharing would take care of a very small part of the problem. (The city of Lansing provides a similar lesson.)

Local governments would always like to have more money from the state. But that’s not the real problem. The problem is that municipalities have made promises they are pushing off onto future taxpayers. These problems are self-inflicted and, because there is no right to retiree health care, local managers already have the tools necessary to fix them.

The state can help local governments, taxpayers and city workers in one way that doesn’t require any extra revenue sharing: Require local governments to pay what they promise. Legislators should require salary freezes at the local level until pension and retiree health insurance is fully funded. That’s the best way to ensure benefits for public workers are protected.

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.