The COVID-19 pandemic sent municipal budgets across the country into a tailspin.
In an effort to help local governments contend with the revenue shortfalls, last year, the federal government passed a one-time, $1.9 trillion COVID-19 relief bill known as the American Rescue Plan Act (ARPA).
In total, Lansing will receive $49 million in federal relief money, but as the city contends with ongoing financial challenges and revenue loss, it remains unclear if this unprecedented federal bailout will be enough to rescue the city’s finances.
“We have to look at every possible outcome and come up with solutions for the ways that it could go,” said Emily Linden, a budget analyst for the city of Lansing. “We really just don’t know what the future holds.”
How is Lansing spending federal funds?
The federal government has created strict guidelines for how ARPA money can be spent.
Funds must be allocated by the end of fiscal year 2024 and can only be used in one of four ways:
- Replace lost public sector revenue
- Respond to public health and negative economic impacts of the pandemic
- Provide premium pay for essential workers
- Invest in water, sewer, and broadband infrastructure
Although the city has earmarked money for various projects and in support of community organizations, the lion’s share of the federal funding, $26.5 million, is being used to replace lost public sector revenue over the next two years.
Of the $26.5 million, $9.5 million has been allocated to the general fund to support government services during fiscal year 2023 and $11 million for the same purpose during fiscal year 2024. For fiscal year 2023, which begins on July 1, the city also allocated $5 million to cover parking fund revenue loss and $1 million to cover revenue loss for general ledger software in the finance department.
The city’s proposed general fund budget for fiscal year 2023 is $154.8 million.
During the last two fiscal years, Lansing lost a total of $29 million in revenue.
“In all different buckets, but probably the bulk of it was parking and income tax,” said Desiree Kirkland, Lansing’s finance director and treasurer.
Income tax revenue has changed significantly because many people, including state employees, are working from home at least part-time, severely cutting into parking fees and income tax revenue from the 0.5% paid by people who work in the city but don’t live in the city.
In the proposed budget for 2023, 26% of city revenue is expected to come from income tax. Although income tax revenue is expected to bring in $37.5 million during the 2023 fiscal year, a 27.7% increase from last year, that still falls about $2 million below the levels of income tax revenue in 2019, according to city budgets.
Parking revenue also decreased by more than 70% between fiscal year 2021 and 2022, bringing the budgeted revenue down from just more than $6.5 million to just under $2 million.
Property taxes may also take a hit as businesses have the taxable value of their property reassessed following the hardships of the last two years, Kirkland said.
Despite the uncertainties, the revenue losses for fiscal year 2022 were lower than the losses for fiscal 2021, which is a sign of recovery, Linden said.
“It is getting a little better, and we are monitoring it closely,” she said. “I think the most important thing is that we’re flexible and able to pivot, which is something we learned during the pandemic.”
Lansing had budget woes before the pandemic
Lansing was contending with unfunded costs for pensions and other retirement benefits long before the pandemic hit.
In February 2020, Lansing’s Financial Health Team — an 18-member body initially appointed by former Mayor Virg Bernero in 201 2— recommended that the city rebuild its general fund and ensure that the finance department was adequately staffed.
“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,” said a letter sent at the time from the Financial Health Team to city officials.
The amount of revenue the city was bringing in through income tax also was being evaluated prior to the pandemic, Kirkland said.
“We probably projected our income taxes to be at a higher place than they were before the pandemic, so we may have had some concerns, and we were just sort of looking at things,” she said.
When the pandemic hit, it resulted in “unprecedented impacts on operations and planning…impacting the fundamental assumptions used to develop the annual budget,” according to the language used in a recent draft budget amendment.
“The pandemic just stopped everything and caused us to pivot, or change our mindset on how things were being done,” Kirkland said.
The budget problems that existed before the pandemic didn’t go away, though. Funding them has just become more complicated.
This year, $54.6 million is budgeted to cover unfunded pension and retiree health care costs, and the city still has a total net liability of $219 million in post-employment benefits.
And although the city’s spending plan has increased by 1.2% for fiscal year 2023, the additional dollars come primarily from federal relief money, including ARPA and the CARES Act, according to the city’s budget documents.
“The federal funds definitely helped to stabilize the city, but we have plans going forward when those run out to be stable on our own,” Linden said.
Still no definite plan for the budget after 2024
Plans to stabilize the city’s finances are still very much up in the air, though.
“We’re not in a position just yet to give any definite answers to what the plan is because we’re still developing it,” Kirkland said. “What if, by chance, all the state workers come back downtown and we see businesses take off? Wouldn’t that be great? Or if property values go up, and we don’t see Board of Review [appeals]. We still have to monitor and see how things are going to play out.”
Although state workers are scheduled to return downtown beginning next month, it’s still unclear how many will come back to in-person work full-time.
About 49% of Michigan’s 47,000 state employees have been working remotely during the past 12 months, according to Caleb Buhs, spokesperson for the Michigan Department of Technology, Management and Budget. With many departments allowing fully remote work or hybrid schedules, there’s no easy way to determine how many more workers will return to offices.
So far, the plan has been to spread the federal funding out over the next two years so that residents don’t feel the economic effects of the city’s revenue losses.
“We do have a plan to really spread this money out over those years and not use it all at once to make sure that the residents of the city don’t feel the economic impact of the revenue loss even more than they already are in their daily lives,” Linden said. “We’ve made it work up until this without federal funding.”
Will revenue recover by 2024?
City officials are hopeful that in the next two years, Lansing will be able to revolutionize some of its revenue sources to get the city back to where it was prior to 2020, but that depends on getting people back downtown.
“The world is never going to look quite the same as it did before 2020, but I think we can see this new vision of Lansing that’s not solely dependent on the state workers,” Linden said. “We’re optimistic that we’ll see that revenue back to what it was but for different reasons.”
What those new sources of revenue will be is still hard to predict, Linden said, though it will likely be a mixture of old and new, such as bringing in new businesses or revitalizing the parking fund.
“These are conversations we’re continuously having, and I think we have a lot of different versions of the future that could come true and that we’re planning for,” Linden said. “That’s really the key to long-term financial planning is to be ready for any of the possible outcomes.”
Parking will continue to be a source of revenue, but that will likely change in scope, Linden said.
As things stand, some city-owned parking structures and lots downtown might be rented out for different purposes or reallocated.
“We might never see parking look exactly the same way in downtown Lansing,” she said. “But hopefully, along with economic development, people will continue to want to park downtown and we can figure out a future avenue that works really well for the city and business owners.”
Relying more on grant funding also is a possibility for maintaining the current level of city revenues.
“We are applying for every federal dollar that we qualify for to cover some of those projects, and then we won’t have to take it out of another fund,” Kirkland said. “The federal government has done a lot of grants, so we are talking to our departments— with capital improvement plans, with things that we need done within the city— let’s go after the federal funding that is made available to the cities.”
The city is also hiring more accounting staff to carefully manage revenues.
In addition to hiring a new grant administrator and an accountant to handle accounts receivable, bank reconciliations, and the collection of dollars owed to the city, the city plans to hire two contract workers to renew and update personal property records.
The city also is updating the property record in the hopes of bringing in additional dollars in property tax revenue.
What happens if revenue doesn’t rebound?
The city is anticipating a slow recovery, and federal funding has been crucial for stabilizing the city’s finances up to this point.
“The federal support allowed the city to preserve jobs. It allowed us to keep these daily services that people rely on running,” Linden said.
So far, Lansing has subsidized existing city services with ARPA funds rather than using the general fund balance.
“Before we knew about the federal money, the city was looking at a lot of plans that would have to cut a lot of different city services, and because of the federal money, we don’t have to do that,” Linden said. “Without it, we would have had to cut a lot.”
The city has proposed a budget amendment for fiscal year 2022 that would move $11 million from the general fund to cover revenue losses. The amendment, if passed, will bring the general fund balance down to $18.6 million and leave 12% of the city’s funds unassigned.
“That’s still within the city’s target threshold of that 12 to 15%, even if it is at the lower end,” Linden said. “That still puts us in good financial health that we’re happy with.”
The budget amendment was possible because the money brought in $7.8 million from city income taxes, which was higher than expected. The amendment was suggested so that the city could further spread out the federal money over the next two fiscal years.
When the federal money runs out, though, some city services may end up on the chopping block.
“Though it may not be the same, some different ways of looking at how Lansing operates in the things that we can provide to the residents of the city,” Kirkland said. “We still don’t know.”
The desire is to preserve city operations and services as much as possible, and it’s still too early to predict what may happen, Kirkland said.
“We’re taking this time to have some hard conversations,” she said. “We’ve got a little time, but we’re not wasting it.”
Contact reporter Elena Durnbaugh at (517) 231-9501 or [email protected] Follow her on Twitter at @Elena Durnbaugh.