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Original article URL: http://bridgemi.com/2013/11/as-kalamazoo-stalled-its-neighbor-curbed-retiree-health-care-costs/

Economy & competitive position

Michigan's broken legacy:

As Kalamazoo stalled, its neighbor curbed retiree health-care costs

City Manager Maurice Evans: “In hindsight, I would say city officials were looking at long-term expenses.”

City Manager Maurice Evans: “In hindsight, I would say city officials were looking at long-term expenses.” (photo by Ted Roelofs)

KALAMAZOO/PORTAGE – A quick drive through Kalamazoo and its bordering neighbor to the south, Portage, reveals some obvious differences. Others are less so.

Kalamazoo, older and more ethnically diverse, has its share of historic downtown buildings, a mix of vintage and blue-collar neighborhoods and the campus of Western Michigan University.

Portage is smaller, and still roughly 87 percent white. It has the Crossroads Mall, clusters of new housing and miles of popular paved trails that meander through woods and along streams.

Portage is also one of the few cities in Michigan with no unfunded pension or retiree health care debt. By contrast, Kalamazoo had a $263 million shortfall in 2011 for retiree health care (though its pension was fully funded), according to a 2011 analysis by Michigan State University.

Portage City Manager Maurice Evans credits officials before his tenure for looking ahead.

“In hindsight, I would say city officials were looking at long-term expenses,” Evans said from his desk at City Hall. “We are in very good shape as a result.”

In the mid-1980s, Portage negotiated a change from a defined pension benefit – in which the city promised to pay workers’ pensions once they retired – to a more cost effective defined contribution plan – in which part of union and non-union workers’ own salaries are diverted to a retirement savings account while they are still employed.

Portage took similar steps to limit what it would owe employees for health care when they retired – again, obligating itself to pay specific contributions each year, rather than committing the city to cover the future (and, as it turns out, skyrocketing) cost of retiree health care.

The city established a retiree health savings plan for non-union and department head employees hired after July of 2007. Employees get a percentage of their salary applied to an individual retiree health savings account. They are responsible for their own health care costs upon retirement.

Patti Thompson, director of benefit services for the city, believes the results speak for themselves. “I think it’s prudent planning,” she said. “We had some people looking ahead of the situation.”

It has been a different story in Kalamazoo, one of numerous cities in Michigan grappling with so-called legacy debt.

In 2007, the city considered diverting money from a surplus in its pension fund to help pay down long-term liability for retiree health care. But that discussion ended with the market plunge of 2008, as the fund lost 27 percent of its value.

In 2010, responding to the rising cost of retiree health care, the Kalamazoo City Commission opted to create a trust fund to help pay for future benefits. By the end of 2009, its unfunded liability for retiree health care had topped $200 million.

Kalamazoo resident Dwight Phillips: “We are stuck with it now. It's going to take years to clean it up.”

Kalamazoo resident Dwight Phillips: “We are stuck with it now. It’s going to take years to clean it up.” (photo by Ted Roelofs)

The city spent more than $6 million that year to pay down its bill for retiree health care, money that might otherwise have gone to saving the jobs of 60 public safety employees who took early retirement in 2012 as a cost-cutting measure.

Kalamazoo still faces a $2.5 million structural deficit for fiscal 2014 and falling property tax revenues.

Finding a way to pay for retiree health care could complicate the city’s road to fiscal stability.

But Thomas Skrobola, Kalamazoo’s director of management services, believes the city has a good start on managing those costs.

“We have been taking serious steps every single round at the bargaining table,” he said of changes to municipal union contracts that began in 2005.

In addition to establishing the health saving account for new workers, Skrobola said that retired union workers, who contributed only 5 percent to their health care costs as recently as 2005, now pitch in at least 20 percent.

As a result of these changes, an outside audit found that Kalamazoo has pared its projected retiree health care liability from $263 million to $191 million.

As to why Kalamazoo didn’t impose these changes earlier, Skrobola, who has been with the city since 2007, said: “I don’t know. That’s a good question.”

Lifelong Kalamazoo resident and homeowner Dwight Phillips, 68, is philosophical about how city government has managed with dwindling resources. “It’s still a livable city,” he said.

For the past 41 years, Phillips has worked for a Kalamazoo paper products firm. He plans to retire in a year or so with a modest pension.

But he wonders how the city will pay for the legacy debt bill it racked up over the years.

“For the old-timers, it was ‘Let the good times roll,’” he said.

“They all took care of each other. We are stuck with it now. It’s going to take years to clean it up.”

Ted Roelofs worked for the Grand Rapids Press for 30 years, where he covered everything from politics to social services to military affairs. He has earned numerous awards, including for work in Albania during the 1999 Kosovo refugee crisis.

7 comments from Bridge readers.Add mine!

  1. Kimberly Johnson

    This article does not delineate between all union members and the special situation of police and firefighters. Did Portage enter into a Federal-State Section 218 Agreement with Social Security? In Detroit and Pontiac (and probably many other municipalities) police and firefighters are not eligible for social security or medicare. They are 100% dependent on the city they were employed by to fund their retirement and provide health care coverage in lieu of social security and medicare. It might be interesting to see how many communities and the actual number of retired city employees fall into the category of not being eligible for any federal social security or medicare. Didn’t these employees pay into their retirement even if it was a pension fund rather than a defined benefit plan? Why percentage (or “skin-in-the-game”) do these former employees have?

    1. Jon Blakey

      Excellent point! Thanks for mentioning it. We often only get part of the story, typically that which vilifies workers and their unbridled greed. Lets not forget the loss of revenue sharing that has occurred over the last several years and the financial melt-down that was not caused by the retirees. I know money does not grow on trees, but sometimes we need government to step up and provide some help during the hard times.

  2. Neil J. Lehto

    40 years ago, Wally Nikkel, who was financial vice president of Oakland Community College began setting aside money for retiree health care. It was controversial at the time. It was said that he was hiding money from the employee unions. He was way ahead of his time.

    1. David Olmstead

      Neil,

      Thanks for, after all these years, your memory and recognition of Wally Nikkel. Wally was a truly gifted public education administrator.

      Perhaps the greatest express tribute to him is that there are some like you who do the remembering for us. For the general community, it is simply the realization that Oakland Community College is a terrific educational institution, while taking for granted how it achieved its success. Your comment ties nicely into Phil Powers’ column, “Let us now praise (some) public servants.”

      Wally Nikkel deserves special praise from the residents of Oakland County, and from all the others for whom OCC is a “lighthouse” public institution.

      David Olmstead

  3. Wilma Kahn

    Thanks for NOT calling Portage Kalamazoo’s “tiny neighbor” as the Kalamazoo Gazette did in their reprint of your article. Portage is 10 square miles larger than Kalamazoo.

  4. Kirk Steudle

    It might be interesting to see how county governments and Road Commissions are doing as well. They have similar health and pension benefits. The State of Michigan changed in 1997 under Governor Engler. Now 2/3 of all employees are under the defined contribution system.

  5. **

    You should do an article about the unfunded legacy costs in Lansing which are only getting worse while the mayor and city council
    are afraid to make tough choices in dealing with the situation.

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