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Original article URL: http://bridgemi.com/2013/11/cities-must-face-legacy-debts-or-risk-survival/

Phil's column

Phil Power is founder and chairman
of the Center for Michigan.

Cities must face legacy debts, or risk survival

I think it was around six years ago when I first heard faint rumblings about a coming financial tidal wave that was going to break over our cities, townships and villages, bringing with it the risk of a new civil war between retirees and taxpayers.

The phrases were dire – “Enormous unfunded liabilities.” “Retiree pensions threatened.” “Retiree health care in doubt.”

Still, Armageddon still looked a long way off.

Then came the Great Recession. Soon, with the revelations about Detroit’s disastrous financial condition, the rumblings roosted onto one city. Decades of mismanagement had led to close to $20 billion in unfunded pension and health care obligations.

Before long, all this had spawned the Motor City’s petitioning to be allowed to go through what looks certain to be the biggest municipal bankruptcy in American history.

Today, there are those who likely still feel as if Detroit were the only place in Michigan where unfunded retiree debt represented a problem. But sadly, that’s not so … not by a long shot.

Bridge Magazine, an online publication of the non-profit, non-partisan Center for Michigan, broke in last Thursday’s edition a report triggered by MSU economics professor Eric Scorsone’s study of municipal legacy debt in 311 Michigan cities, townships and villages.

The result is sobering. Scorsone, a former chief economist for the state senate fiscal agency, found that total municipal debt in Michigan in places outside Detroit adds up to $13.5 billion.

How much of that is fully funded? Only six percent!

That leaves a mind-numbing total of $12.7 unfunded municipal legacy debt, nearly 80 percent of which is tied to health care.

That’s substantially more than Detroit’s total unfunded debt. And it represents nothing less than a crisis in (temporarily) slow motion for many Michigan communities: For Ann Arbor, unfunded debt equals 30 percent of total annual general revenue. For Grand Rapids, it’s 25 percent. In Saginaw, it’s an eye-popping 85 percent.

What does this all mean? Simple: Cities all across Michigan could face a jagged no-win choice between sharply reducing benefits earned by retired municipal employees after a lifetime of labor — or stick current residents and businesses with the bill.

The choices appear terrible. If municipal employers do try to reduce long-promised benefits, retirees who counted on that money will be furious … to put it mildly.

On the other hand, cities that slash services and increase taxes to pay down all this debt may wind up driving away the residents and businesses that make their communities thrive.

Here’s how this ghastly choice plays out. The owner of a $200,000 home in Ann Arbor would have to pay $491 added taxes a year to adequately fund the city’s annual pension, retiree health care and other legacy debts. In Grand Rapids, it would take $1,731.

And in Saginaw, where the median household income is around $28,000, the homeowner would pay $4,693 per year.

These are impossible figures. Today, if you are a mayor or city council member in one of these cities, and you are not lying awake fretting about what to do about unfunded legacy costs, you’re close to being guilty of dereliction of duty. Those elected before you, who created this system and did nothing, are guilty, beyond doubt.

When Monday night council meetings roll around in hundreds of communities all across Michigan, legacy costs should be the No. 1 item on the agenda. If they aren‘t, it is easy to make the case that your elected officials are just fiddling while their towns burn.

You don’t have to be a CPA to see that local officials simply cannot manage a city, represent its citizens, provide any mix of services, protect homeowner value or plan for the future … without dealing with these gaping holes in the balance sheet.

There are bright spots: The community of Portage have essentially no unfunded debt, while neighboring Kalamazoo has no underfunded pension liabilities, though the city does have $263 million in unfunded retiree health care obligations.

Action taken early can resolve these tough problems. But local officials cannot avoid making the tough choices now. If they don’t, their communities and their quality of life, may well not survive.

Bridge’s ground-breaking coverage of the crisis continues in a two-part installment on Tuesday and Thursday of this week. I urge every concerned citizen to read it and ponder.

Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and economics. He is also the founder and chairman of the Center for Michigan, a nonprofit, bipartisan centrist think–and–do tank, designed to cure Michigan’s dysfunctional political culture; the Center publishes Bridge Magazine. The opinions expressed here are Power’s own and do not represent the official views of the Center. He welcomes your comments at ppower@thecenterformichigan.net.

18 comments from Bridge readers.Add mine!

  1. ***

    Recent years in Lansing the big issue has been…. getting residents to shovel
    their sidewalks or face a fine, all while the unfunded legacy issue is something they would rather not deal with. There are no good choices with this issue and someone is going to get hurt badly which is why they would just rather pretend there is not a problem.

  2. Dennis West

    Thanks for elevating this issue and giving it such a clear explanation. I echo the no good choices, but nonetheless choices need to be made. I hope that you will track “best practices” as communities make those choices.

  3. dlb

    In towns like Ann Arbor, the solution seems simple. A compromise. Increase the property tax the $40/month it would take to fix the city’s current legacy costs then tackle the issue going forward with taking a new look at pension and health care plans.
    However, how to tackle this issue in places like Saginaw and Flint where the legacy costs are crushing their budgets and where the citizens don’t have the income to pay the extra tax needed to dig themselves out, seems overwhelming.

    1. Todd

      Dlb,

      How is that a compromise? Where is the retirees contribution to the solution? Why is always the young that pay the cost for the legacy problem. Once again it is a generational money grab.

  4. David Waymire

    Worth noting the huge revenue sharing cuts that have taken place over the last decade, a direct result of state income and business tax cuts our political leadership encouraged. As a result, local governments have been denied billions of dollars that could have been used to make these payments. That means wealthy suburban residents have been allowed to use the services of their nearby city, where they work, shop and play, without paying taxes to support the services that make those cities work. Laying this burden only on the property owners in a community is poor public policy. We need to address the free-rider issue, and return to a rational level of revenue sharing.

    1. Matt

      Only one problem with the constant blaming cuts in revenue sharing, the cities weren’t funding the pensions/retiree health care when they were getting the full shot! It’s just not in them to worry about something over the horizon when there are interest groups out there to placate. And again why did the public employee unions allow this? Oh wait, they were one of the groups being placated!

    2. Charles Richards

      Mr. Waymires’ analysis only applies, as far as I know, to Detroit; most other Michigan cities are not large enough for this to be a significant problem. And I don’t think it holds for Detroit. The only service Detroit’s suburbs used was the water department, and they paid the full cost for the water they received. And I think suburbanites compensated cities for “the services of their nearby city, where they work, shop and play,” Their patronage generated wealth and income in the cities which generated tax revenues. Besides, how would a city calculate the value of the services provided to suburbanites? Wouldn’t that create an opportunity for a city to have more services than they were willing to pay for?

      In any event, revenue sharing was cut proportionately for all communities, and yet there is a large variance in the severity of the legacy cost problem for different communities. That suggests there isn’t a connection. His main complaint seems to be the disparity between the “wealthy” and everyone else. That is, for some people, the root of all problems.

    3. John Q. Public

      Rare is the suburbanite who “work(s), shop(s) and play(s)” in a city who does not pay taxes in that city. Nearly all central cities of SMSAs in Michigan have an income tax which non-resident workers pay. They pay sales tax if they shop there. If they play there, they pay many hidden taxes added to the ticket prices of sporting events, concerts and museums. They pay resort and hotel taxes when they spend the night. Just because they don’t pay property taxes to the cities doesn’t mean they aren’t helping to pay for the services they use.

      I get $200 worth of parking tickets a year from the city (when my car is surrounded by vacant spaces, so it isn’t a matter of allocation of scarce resources–merely punishment for punishment’s sake), but not a one in fifteen years from my suburban police force. You can make a case that the theft and vandalism of their property suffered in the city is a price suburbanites pay, too, even if not to the government coffers. The validity of your revenue-sharing argument notwithstanding, suburbanites aren’t “free-riders” to the degree you like to paint them.

  5. Mike Allemang

    Unfunded pension and medical liabilities are considerably worse than published figures. The calculation of these liabilities typically assumes the assets will earn around 7.5%, an unreasonably optimistic assumption.

  6. Rich

    And Social Security and Medicare is saved only by the Federal Governments ability to print money. Take the time to read your annual social security statement and compare how much you will get vs. how much you and your employer have contributed. A surprising number is that today’s average retiree will collect $300,000 more in benefits than what they contributed with compound interest. The figure for the next generation will be $400,000. Medicare is in even worse shape because it wasn’t started until 1965, and the contributions are unreasonably low.

    How many people realize this? My guess is that 95% don’t.

  7. John S.

    I’ve really no idea how citizen pressure by itself will be sufficient to get council members to pay serious attention to the problem. They will continue to kick the can down the road. Only actuaries get excited about the topic. Council members are not eager to pay now for a benefit that will be received only far into the future. Then there’s the issue of public safety, where most of the legacy costs are buried. What candidate for council wants to run on a platform of cutting the number of police officers and fire fighters and cutting back on their pension and retiree health care benefits? It’s the third rail of local politics. Touch it and you are dead.

  8. Gerard Spencer

    Phil and Bridge: Thank you for elevating these issues.

  9. Karl

    There once was an engineer, who conducted a test evaluating frogs. With all four legs, frogs were noted able to jump rather well. As each test continued, one leg was removed from the frog, and repeated an order to jump. Each time, the frog would try, and each time, the attempts diminished results. Finally, the frog’s legs had all been removed, and the frog could not accomplish jumping. The engineer then determined, as each of a frogs legs are detached, the frog tends to become significantly less obedient!

    I think blaming the situation Detroit (and any others) are in today on former leaders mismanagement is like the disobedient frog, and invites support for the greatest affront to democracy we have ever seen, “Emergency Managers”.

    For the last several decades, it appears that Wall Street, and the U.S. Chamber of Commerce have been working with their PHD friends in the think tanks to render America Union Free. With just their own interests in mind, some unintended (or flat out lack of concern) has resulted in a depleation of new workers feeding in behind those gaining seniority and ultimately, retirement. That has created the phenomena they have named “Legacy Costs”.

    Through outsourcing, right-sizing, or “going in a different direction” has been an effort to reduce the number of unions in America, doing it patiently, just one job at a time. Doing this without an intension to back-fill those who worked to earn the benefits promised with new, younger workers has depleated equity in American industries. Trying to blame this on bureucrats, bad elected officials, devalued apraised value of every home and business in the country, reduced State Shared Revenue I believe is just blaming the frogs for not jumping without legs when ordered to do so.

  10. marcia robovitsky

    Bloomfield Township took advantage of the state and Gov. Snyder’s recent law that permits AA or higher rated municipalities to solve the underfunded pension debt with new bonds. With no vote from the citizens, the 7 Board of Trustees authorized a $85 million bond sale..which recently was completed. The township has placed the $80 million from the bond sale into an EQUITY TRUST fund….and all $80 million is to be immediately put into the stock market and other investments facilitated by Gregory Schwartz and Co…. none of it in cash. The new found $80 million money represents about 38% of the pension obligation that was the underfunded part … added to the $130 million representing the other 62 % that is already deposited (in past years) with Prudential … the company that will actually pay the pension benefits. The way I look at this is: the company that needs the money in their account to pay the pensions…Prudential…. does not have the money in their account. The township is GAMBLING and RISKING the entire $80 million…..in the stock market and other investments presumably over the next 20 plus years. What if we have another 2000 or 2008 economy? So at this moment, the township taxpayers owe the bond holders $80 + million and we still owe Prudential $80 + million. Did we really pay the debt to the underfunded pension? No. Just hoping to. My opinion.

    1. John Q. Public

      NOT merely “(your) opinion” but an astute analysis, Marcia. It’s just a ploy to mask the balance sheet deficiencies. Generally accepted governmental accounting principles allow local government to “borrow their way out of debt”.

  11. Trevor

    Recently I heard a story about Groundwater in Michigan. I find myself with a free moment to search for that story, only to find that there is no way to search back stories on the mobile version of the Bridge site… Am I just not seeing it? A search option should definitely be a part of this site…

    1. Marcia Robovitsky

      Stay on this page. Scroll up. Just under the Bridge banner heading and Phil Power’s picture…. a row of choices… with SEARCH being the last one before the facebook and tweet symbols. Read to the bottom of that page and just under these words: “Just a few ideas! Enjoy your explorations.” is where you enter your words to search. or: http://bridgemi.com/search/

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