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Original article URL: http://bridgemi.com/2013/11/detroit-coming-to-a-city-near-you/

Economy & competitive position

Detroit – coming to a city near you

Grand Rapids resident Cathy Mulder: “If it keeps going that way, we're going to have less and less.”

Grand Rapids resident Cathy Mulder: “If it keeps going that way, we’re going to have less and less.” (photo by Ted Roelofs)

As headlines mount for the largest U.S. city to file for bankruptcy, Detroit is now the undisputed punching bag for all that can go wrong in a community.

But just how immune is the rest of Michigan to Detroit’s biggest liability – the pressing weight of unfunded pension and retiree health care debt?

In a sobering analysis, a Michigan State University study finds that cities across Michigan face a mountain of so-called legacy debt that will burden them for years.

The MSU report, co-authored by Eric Scorsone, an expert on state and local government and former chief economist for the state Senate Fiscal Agency, found for example that legacy debt is equal to 30 percent of the general revenue brought in each year by the city of Ann Arbor. It’s equal to 25 percent of revenue in Grand Rapids, 38 percent in Lansing and a staggering 85 percent in Saginaw.

“It’s not just Detroit,” Scorsone said of the findings, based largely on municipal fiscal data from 2011. “You will find this structural problem in a lot of cities in Michigan.”

Excluding Detroit, unfunded legacy debt in Michigan municipalities exceeded $10 billion in 2011, with nearly 80 percent of this debt tied to retiree health care.

As in Detroit, where unfunded health-care, pension and other legacy costs are pegged at nearly $10 billion, rising debt means less money to spend on everything that makes a place livable: police and fire protection, upkeep on streets, lighting, parks and recreation, or even to cut weeds in vacant lots. Compounding the pain, communities have faced drops in property tax revenue, manufacturing jobs and population along with a $5 billion plunge in state revenue sharing over the past decade.

Which may mean that cities across Michigan could soon face the same heartbreaking choice confronting Detroit: whether to sharply reduce benefits to retired municipal employees earned from a lifetime of labor, or continue to stick residents and businesses with the bill.

Searchable database: See how much you might owe for legacy costs

In cities like Flint and Detroit, these decisions pitting retirees against taxpayers are no longer being made (or ignored) by elected representatives; emergency managers or bankruptcy officials are calling the shots.

In the absence of bold action, the greatest cost may be to the future of these hardest-hit communities. As cities and towns cut services and raise taxes to pay down this debt and offset falling revenues, they end up driving away the very residents and businesses vital to their recovery.

Who wants to pay more and get fewer services in return?

Consider: The owner of a $200,000 home in Ann Arbor would have to pay $491 a year to fund that city’s annual pension, retiree health care and other legacy costs. It would take $540 in Grand Rapids and $1,731 in Lansing. In Saginaw, where the median household income is about $28,000, that homeowner would pay $4,693 a year.

At the high end of Grand Rapids’ pension scale, retired Fire Chief Robert VanSolkema collected an annual pension of $97,125 in 2011, according to data obtained under the Freedom of Information Act by Taxpayers United of America, a Chicago-based anti-tax group. More than 50 Grand Rapids retirees received pensions of more than $60,000 a year. Average pensions were more modest, $30,000 or below, according to a 2009 report by the Grand Rapids Press.

All the same, longtime Grand Rapids residents like Cathy Mulder note the burden the city’s finances have taken on their neighborhoods.

Mulder, 63, and her husband, Ray, have lived in the same West Side house for 37 years. They have seen the city close a nearby pool where their children used to swim and watched maintenance dwindle at a city park a few blocks away. Streets deteriorated. The city closed the last five of its wading pools this year.

A 2011 audit found that Grand Rapids spends less than $20 per resident on parks and recreation (compared with $49 nationally), and called for $30 million in new funding. Another report found that 60 percent of the city’s roads have fallen into poor condition.

And so city officials asked voters to pay more in taxes to make up some of the difference. On Nov. 5, voters approved a .98-mill tax to pay for park maintenance.

“If you don’t maintain a city, it will look like trash,” Mulder said. “If it keeps going that way, we’re going to have less and less.”

Largest legacy costs per person

Ten Michigan cities with the largest legacy costs per city resident. This is each individual’s share of the currently unfunded bill for pensions and health care and other benefits for retired city workers.

City 2010 Pop. Total unfunded legacy costs (2011) Unfunded legacy costs for each resident
River Rouge 7,903 $88,923,694 $11,252
Flint 102,434 $1,112,098,934 $10,857
Detroit 713,777 $5,586,937,313 $7,827
Melvindale 10,715 $79,462,584 $7,416
Center Line 8,257 $54,045,925 $6,545
Ecorse 9,512 $60,794,028 $6,391
Saginaw 51,508 $311,646,267 $6,050
Bloomfield Hills 3,869 $23,301,774 $6,023
Fraser 14,480 $78,449,068 $5,418
Allen Park 28,210 $144,225,807 $5,113

Source: Eric Scorsone / MSU Extension.

To be fair, with the possible exception of Flint, Detroit’s precipitous fall has few parallels in Michigan. Its population today, at about 700,000, is barely a third what it was in the late 1950s. The median value of a home earlier this year was $11,000. In Flint, population dropped from nearly 200,000 in 1960 to about 100,000 today. Both cities face an enormous debt burden – more than 50 mills per taxpayer – with far fewer residents to pay for it.

Anthony Minghine, chief operations officer for the Michigan Municipal League, warns that many other Michigan communities may see a sharp reduction in city services.

“It’s a simple math problem,” Minghine said. “If you play the numbers out far enough, you will have certain communities where all they will do is hold elections and pay pensions.”

The true dimension of municipal retiree health care costs was not apparent in the United States until 2007, when new government accounting standards required communities to calculate this cost in their annual budgets. The U.S. economic crash that followed – marked by plunging home values and declining property tax revenues – deepened the debt hole.

But the bill for retiree health care was accumulating long before that, as many communities in Michigan and across the nation applied a “pay-as-you-go” formula to fund it. That was sufficient in many cases, before health care costs began to spiral upward. Adjusted for inflation, the yearly cost of U.S. per-person health care skyrocketed from just over $1,000 in 1960 to more than $8,000 in 2010.

Scorsone’s analysis cites 311 cities, villages and townships in Michigan that provided some kind of retirement health care benefits at the end of fiscal 2011, with a total liability of $13.5 billion. Just 6 percent of that was funded, leaving a net unfunded liability of $12.7 billion.

According to his report, Grand Rapids had not funded any of its 2011 retiree health-care debt of more than $223 million. Kalamazoo had a debt of $263 million, none of it funded. Bay City had funded 4 percent of its $105 million debt and Lansing just 10 percent of a debt of more than $376 million.

Cities like Kentwood and Portage in Kalamazoo County were notable exceptions, with their retiree health care debt fully funded.

Communities with large, unfunded health-care or pension commitments have generally turned to three options: raising taxes, cutting benefits or slashing spending. Each has its limitations.

After a decade of job losses and stagnant wages, Michigan taxpayers are understandably reluctant to fork over more money to government – especially when they suspect the money has been misspent.

That is especially true in place like Wayne County’s Allen Park, where voters rejected millages three times in the past two years to recoup $31 million in bond debt tied to a failed movie studio venture; millages city officials said were critical to balancing city finances. In October 2012, Gov. Rick Snyder announced appointment of an emergency financial manager, noting that Allen Park’s fund balance had dropped by more than 90 percent in two years.

In a letter to the city, Snyder wrote that Allen Park had unfunded retiree health-care liabilities of $120 million and $24 million in unfunded pension liabilities. In August, voters finally approved a 3.25-mill millage to maintain police and fire services.

Voters in Benton Harbor on Nov. 5 turned down an income tax hike its emergency manager said should be used to pay down legacy costs that consume nearly one fourth of revenues.

Michigan’s Constitution says state and local government pensions “shall not be diminished or impaired,” so clawing back those benefits from existing retirees seems unlikely outside of bankruptcy. Short of bankruptcy or emergency management, cities have generally been constrained from breaking contracted retiree health care benefits as well.

Detroit emergency manager Kevyn Orr moved in October to strip health-care benefits for nearly 20,000 retired workers effective Jan. 1. The matter is being fought in federal bankruptcy court.

In Pontiac, Emergency Manager Lou Schimmel seeks to cut health care benefits for some 1,200 retirees, a move calculated to save the city $6 million year. That issue remains tied up in court as well.

Stripping retirees of health care – or, at the least, forcing them to contribute to their coverage –could be a template for other financially strapped communities, said Mitch Bean, former director of the state House Fiscal Agency. Bean said cities could move to curtail existing retiree health care benefits through contract negotiations.

“Retiree health care could be eliminated, quite frankly. But politically, I don’t know how you do it. It would take a great deal of political will.”

State legislation passed in 2012 allows municipalities to issue bonds to pay for legacy debt, but thus far just two entities – Oakland County and Bloomfield Township – have taken that step.

That leaves spending cuts, a strategy all too familiar in Detroit.

Minghine of the Municipal League said that spending cuts – if they are severe enough – can lead to a municipal “death spiral” in which basic services are so reduced that property values decline and residents begin to leave.

“To the extent that the fixes to balance the books diminish the things that make a community a great place to live, everyone leaves,” he said.

Saginaw resident Christina Jones: “I'm staying here, if I have to build a moat and put alligators in it.”

Saginaw resident Christina Jones: “I’m staying here, if I have to build a moat and put alligators in it.” (photo by Ted Roelofs)

“It’s akin to a turnaround expert saying ‘I balanced the books on your business. I did it by closing all your factories.’”

In Saginaw, officials announced earlier this year they would no longer mow most of the city’s estimated 5,000 vacant lots. The city already made deep cuts to its police and fire department.

South of downtown, lifetime Saginaw resident Christina Jones, 78, owns a nicely-kept two-story, 1,400-square-foot home, fronted by an immaculately maintained yard. She can look down the street and see overgrown empty lots in either direction. An abandoned home sits across the street.

Her home has a market value of $20,000 – on paper. But property records indicate nearby homes are selling for closer to $6,000. For this, Jones paid $466 in property taxes last year.

She isn’t about to budge. She can’t afford to.

“I could think about selling my house, but what would I get for it?” she asks. “I’m staying here, if I have to build a moat and put alligators in it.”

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.

12 comments from Bridge readers.Add mine!

  1. EB

    The database doesn’t show legacy retirement and health care costs for most townships, school districts, counties nor the state. As taxpayers, all these costs impact us and we’re only seeing some of the impact if we happen to live in a city or an incorporated township and it’s listed here. Some cities and incorporated townships are not listed: e.g. Grayling.

    Obamacare may be a mitigating factor here if it lowers or slows the growth of health care costs. If the country opted for a Canadian style single payer system, all these legacy health care costs go away and not just for government entities, but also for every business.

    There are solutions and it’s not all gloom and doom.

  2. City Commissioner

    The other side of legacy costs is permitting government employees to retire in their late 40’s or early 50’s. The legacy costs for some school districts is now approaching the amount paid out for current teaching staff. This is one of the primary drivers for single payer healthcare…moving that liability off the balance sheets of local and state governments.

  3. Rich

    It is not so much the basic pension that is causing the undue burden, but rather, all the extras that are attached to the pension that cause the cost to inflate to unsustainable levels. When I retired, my pension was less than 50% of my final pay, and that was with me contributing to the fund for 35 years. Also, my pension could not start being paid until I reached 55 years, and had I chosen to start at 55 years, the payment would have been severely reduced. But in the public sector, there are many add-ons that inflate the cost.

    1) Computation of final pay sometimes includes unused sick leave and/or vacation time. This does not happen in most private pensions and causes huge jumps in the cost if allowed.
    2) Annual cost of living increases are given. Again, not so much in the private sector but very often in public pensions is this an unknown factor that causes huge costs in later years (think compound interest).
    3) The start age for payment of the pension. In most private pensions, there is no 25 and out at full pension benefit. Full benefits are reduced if you start drawing the pension at less than SS retirement age, which is tending toward 67 years old. The reduction can be 5% per year early that you draw. In most public pensions, the full pension is payable upon retirement, whether you are 45 or 65.
    4) Terms in the pension plan allowing one to buy years. This is often used in the public plans, with the most notorious case being the 41 1/2 year old with 8 1/2 years of service who was allowed to collect a full pension from the Wayne County plan. Buying years does not let the plan reap the benefits of compound interest over the time of employment.
    5) The very fact that most public plans are defined benefit, where the private sector is rapidly tending toward a defined contribution type plan.

    I didn’t even touch on medical benefits, but it’s pretty obvious that these costs are way above the pension costs. One of the biggest culprits is early retirement that causes medical costs to be picked up by a government entity. It’s also pretty obvious, that most promises made in public plans can not be kept and must be eliminated or reduced.

  4. Jon Blakey

    The loss of revenue sharing funds is a huge contributor to these problems. The politicians failure to maintain these payments in the name of lower taxes has put many places on a death spiral that that people who hate pensions and retiree healthcare programs, state can only be stopped by taking away earned benefits. We should all be helping to ammeliorate this problem instead of sitting back and washing our hands of it. If our citites and other municipalities fail, so will the State.

  5. Bob

    Some of the comments mention taking the legacy costs off the local, county and state balance sheets through methods like Obamacare or a single payer system. However this method would appear to shift the burden to different entities such as the federal government and/or the individual taxpayer. Any way you look at it if things need to dramatically change, as some of the comments alluded to, by curtailing benefits to later years, later retirement age, more systems like 401(k)s, etc. Otherwise we are just “kicking the can down the road”. Or a parallel axiom could be “kicking the can to the other side of the road” or in other words transferring the burden to someone else. But if the transfer is to another government agency or the individual, you have not eliminated the burden, but merely shifted it sideways.

  6. Brad

    I will be honest. I’m a public employee and I am half way through my career. I will be 47 when I am eligible to collect my full pension, with medical benefits. I read this article and it is concerning. I cannot speak to other communities, but we have adjusted things in our contract to help offset these “legacy costs”. We now contribute to a health savings account. New hires have a reduced FAC multiplier. We never have been able to role our sick or vacation time into our FAC. The amount of overtime we can roll into our FAC has been reduced.

    We don’t get social security, our pensions are taxed (state and federal). The one big thing this article did not mention. Governor Snyder made a law last year requiring public employees to pay 20% of their health care premiums or a hard cap. Most contracts are set to expire next year and this will go into effect.

    My community is in the black and our pension fund is fully funded. If my community can do it, so can these others. It seems a lot of these legacy costs were brought on by the cities over years of mismanagement, not union employees.

  7. John S.

    Underfunded public pensions and health care benefits have been “hidden” problems for decades. Elected public officials have routinely kicked the can down the road, I suppose because they figure it’s a problem that can be put off and in any case they won’t be in public office when the benefits finally have to be paid. There are opportunities for significant abuses in public pension plans, and municipalities need to address these during contract negotiations. Elected public officials may even need to touch the third rail of local politics–public safety–and consider how much public safety their communities need and can afford.

  8. dale westrick

    I am including an article I had posted in the State Journal opinion section on 11-6-2013. The article is in regards to the health care offers to elected board members in 2008.

    Watertown Township Health Care Insurance Offers:
    After reading many articles about health care being offered to elected officials, I would like to provide these facts about our Township health care offers to board members.
    October 2008: I was elected as a Trustee in Watertown Township and received the Preliminary 2009 draft budget. On account item 101721 for Trustee Health Benefit reimbursements three Trustees were listed with medical reimbursement of $13,500. One Trustee’s health benefit was $12,500. I spoke at public comment and declined the health insurance. The manager stated that I was not offered it since I was not yet in office. November 2008: The manager’s recommendation was in the form of a motion to provide health care to all members of the Township Board and their families and all Township employees who are employed for 40 hours a week on a regular basis.
    For the complete details on the subject go to my website http://www.wacousta.org and read my consent agenda no vote and other items and surveys of interest on my home page!!!
    To receive a monthly BOT meeting summary sign up for my email alerts!!!
    Dale Westrick
    Still working to keep the residents informed!!!

  9. Matt

    The question that I don’t see being asked, is given that these employees were in most cases represented by unions and very powerful unions with time and money to do everything else, why did the unions sit back and allow these pensions to go unfunded for that long? Maybe this should be considered when paying your union dues?

  10. W. Dave

    Here are some simple fixes to get the unfunded cost down:
    – Anyone who is now retired with less than 10 years employment gets no pension or medical benefits. Sorry you did not work long enough.
    – Anyone with less than 25 years employment gets reduced pension and medical. Sill did not work long enough for a full ride.
    – Anyone who gets over $50,000 pension gets benefit lowered to $50,000
    – All future employees including elected officials, and employees with less than 10 years seniority get defined compensation payment and medical under affordable care act
    – All future employees including elected officials, and employees with less than 10 years seniority do not get post retirement medical

    Run the numbers and the ability will go WAY DOWN. Who will complain – the people who are over paid!

  11. John Q.

    Sorry but most of these numbers fall into the category of junk statistics. What use it it to show the total cost per resident for the total liability when these numbers never come due in one year and are often amortized over decades? Also, many of the benefits and practices posted as examples no longer exist in most communities. In many communities, retiree health care hasn’t been offered to newly hired in employees in years.

  12. ghostrider55

    After watching that show hard core pawn i don’t want anything to do with that uncivilized heathen city around me ! Folks can’t even complete a grammatically correct sentence there !

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