Lansing, other cities saving money to help weather another recession

LANSING — Cities in the Lansing area are padding their savings to prepare for another recession. 

That money could help take the edge off an economic slump, although reserves won't inoculate cities against making painful cutbacks, local government leaders say.

"Having that quote-unquote cushion allows us some time to react and restructure," Lansing Finance Director Angela Bennett said. "It's similar to a savings account at home."

Lansing has been re-building its rainy day funds after dipping deep into its reserves during the aftermath of the Great Recession. The recession lasted from 2007 to 2009, but Michigan municipalities felt financial strain several years before and continued to face shortfalls for years after.

At the end of the fiscal year, Lansing had about $17.4 million set aside in reserves, an amount equal to 13.3% of general fund spending.

The city's aim is to sock away between 12 and 15% of general fund expenditures, but Lansing went fourteen years — between 2003 and 2017 — without ever reaching that level.

Lansing had $10.6 million in reserves at the start of the Great Recession, but that number plunged to $4.8 million (only 4.5% of general fund expenditures) as the city struggled to recover in 2011.

Since then, Lansing has been climbing its way back to where officials want the city to be.

How much is enough?

A 2015 policy requires City Council to send at least $500,000 annually to reserves until Lansing can reach its 12% savings goal. Lansing finally hit that benchmark about two years ago when it stockpiled $15.8 million. Lansing is the largest city in the tri-county area with nearly 117,000 people.

Once reserves exceed 15% of general fund spending, the policy requires the city to put the extra money toward pre-funding pensions and retiree healthcare.

The Government Finance Officers Association recommends cities have enough stashed away to cover at least two months of general fund spending.

That means reserves should make up more than 16% of a city's annual general fund budget, although the association acknowledges that ideal amounts "vary widely" based on the needs of particular cities.

Smaller cities need to save more as a percentage compared to larger cities and disaster-prone areas may need to save more to prepare for events like hurricanes, the GFOA suggests.

"The unexpected and unfortunate does happen so budgeting conservatively does help prepare for that," said Bennett, Lansing's finance director..

Economic slumps are inevitable, although there's uncertainty among experts about when the next recession will hit or how severe it will be.

Economists surveyed by the Wall Street Journal last month put the risk of a recession by the end of 2019 at an average of 25%.

The 73 economists were more pessimistic about the outlook over the next two years, putting the risk of a downturn at nearly 57%, or more likely than not, by the end of 2020.

No such thing as 'recession-proof'

Although reserves can be a hedge against emergencies like the ice storm that hit the region in 2013, East Lansing City Manager George Lahanas cautioned against the notion that reserves could "recession-proof" a city.

East Lansing ended the last fiscal year with a $6.2 million general fund balance, enough to cover about two months of operations.

During a recession, it's likely revenue to the city will decline for years.

That means cities will have to make cuts, East Lansing City Council Member Ruth Beier noted.

"You can't really save enough to prevent pain during the next recession," Beier said.

An economist who formerly worked for the state treasurer's office, Beier said cities can be reluctant to draw upon reserves during a recession.

That's because credit agencies may downgrade a city's bond rating if reserves drop too low. Bond ratings help determine interest rates and affect a city's ability to borrow money.

"When cities say they are putting away money in reserves for a recession, what does that mean?" Beier said. "The money doesn't help you cover operations if it's just sitting there."

East Lansing's policy is to set aside general fund reserves equal to between 10 and 15% of spending. If not for the risk to East Lansing's bond rating, Beier suggests an appropriate reserve level may be closer to 5%.

"Cities are about providing services, so I'd rather we go down to zero if we need to," Beier said. "That's a minority view. I don't think you'd get that from anyone else on council."

Reserve levels are not the most important indicator of recession preparedness, Beier said. Other factors, such as keeping debt in check, are more important, she said.

Reserves do not totally shield a city from a recession, but fund balance is one barometer of a city's overall financial health, East Lansing's city manager said.

"Every year you're not controlling costs, you're losing fund balance," Lahanas said. "It's a sign of how efficient you're being."

Property tax collections have been slow to rebound

Although the Great Recession officially ended in June 2009, it's going to take Michigan cities more than a decade to recover, said Mary Schulz, associate director of the Michigan State University Extension Center for Local Government Finance and Policy.

"The last recession was kind of unique because it was a housing crisis," said Eric Scorsone, director of the center and an associate professor of state and local government policy at MSU. "I can't say the next recession is going to be exactly the same."

From 2007 to 2014, statewide property values fell 31.2%, according to the Citizens Research Council.

Property values have started to bounce back, but taxable values have recovered at a much slower rate.

A constitutional amendment called Proposal A, approved by state voters in 1994, capped the growth of a parcel's taxable property value at 5% or the rate of inflation, whichever is less. The change added to the effects of the Headlee Amendment, which protected property owners from rapid tax increases by requiring local governments to roll back millage rates to offset growth in property values. A vote from the local electorate is necessary to restore a municipality's pre-Headlee tax rate.

From 2013 to 2016, statewide property values increased by 10.6%, while taxable values only grew by 1.6%, according to the CRC, a non-partisan think tank.

Property taxes are the primary revenue source for most Michigan cities. Cities in Michigan can't impose a local sales tax and fewer than Michigan 30 cities, including Lansing and East Lansing, have an income tax.

Since people take home smaller paychecks during a recession, an income tax is a somewhat volatile revenue source, Schulz noted. Income tax revenue will decline during a recession, but earnings can recover fairly quickly once the economy rebounds.

Can cities ease the pain?

Additionally, it's a good idea for cities to diversify their revenue sources as a hedge against an economic slide, Schulz said. 

That's what East Lansing did last year when voters approved an income tax that was paired with a property tax cut, Beier noted. The new tax rate, expected to net $5 million annually for the city, takes effect this year. More than 48,800 people live in East Lansing, which is less than half of the size of Lansing.

Lansing has had an income tax since 1964. The city brought in about $36.4 from the tax in 2017.

"That's the smartest thing a city can do — pass an income tax," Beier said, in reference to mitigating the fallout from a recession. "There are risks but you're spreading those risks out across different sources."

Local officials say they want to be prepared for those risks, although they are hoping the next recession will be less acute than the 2007 housing crisis.

The Great Recession lasted 18 months and was the most prolonged economic downtown since the 1930s, according to the National Bureau of Economic Research.

St. Johns City Manager Jon Stoppels acknowledges it's "only a matter of time" before Michigan's economy experiences a decline.

"It's not something I welcome, but I'd say we're pretty prepared," Stoppels said.

St Johns, the largest city in Clinton County with just under 8,000 people, has set aside more than $2 million in reserves.

That's 44% of general fund expenditures, well above the city's goal to sock away between 15% and 20%.

"I think it's just a conservative way of spending," Stoppels said.

If St. Johns reaches reserves greater than 50% of general funding spending, it's likely city commissioners would put that extra money toward capital improvements, like road and park projects, Stoppels said.

"You'd like to have money to live off of when something goes wrong without going overboard," Stoppels said. "People don't necessarily want to feel like their tax dollars are going to just sit in a bank account."

More:

2017: It's been 10 years since the Great Recession: Is Lansing housing market back to normal?

In Greater Lansing, housing subdivisions make a comeback 10 years after crash

Charlotte does not have a formal policy governing its reserves, but the practice in Eaton County's largest city has been to set aside at least 20% of general fund expenditures, said Gregg Guetschow, who has been Charlotte's city manager since 2008. More than 9,000 people live in Charlotte.

The city's general fund ended the last fiscal year with a $2.3 million unassigned balance — more than 48% of expenditures.

In the event of a recession, it's likely Charlotte officials would choose to defer capital projects, like paving a parking lot, before dipping into reserves.

Nonetheless, those savings could prove necessary to offset cuts to state revenue-sharing, Guetschow said.

Since 2008, state revenue sharing to Charlotte has been reduced by $3.9 million, according to the Michigan Municipal League, an organization that lobbies for the interests of local governments.

That compares to about $74 million in "lost" state revenue sharing to the city of Lansing over that same time period, according to the league.

If the economy tanks again, it's probable the state will further cut money to local governments, Scorsone warned.

And Michigan cities shouldn't hold their breath for aid from the federal government, he said, especially if the effects of a recession reverberate across the nation, hurting federal coffers.

"(Cities are) not going to see much out of Washington," Scorsone said. "They can barely pass a budget right now."

Contact Sarah Lehr at (517) 377-1056 or slehr@lsj.com. Follow her on Twitter @SarahGLehr.