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Original article URL: http://bridgemi.com/2013/11/legacy-costs-how-we-got-here/

Economy & competitive position

How retirement debt swallowed our towns

Back in the 1950s, when Detroit’s automobile industry ruled, few gave much thought to the long-term price of fringe benefits like pensions or retiree health care.

The post-World War II auto boom was a model of modern manufacturing, creating jobs from Detroit and its suburbs to cities like Flint and Saginaw. Factories hummed around the clock. Workers straight out of high school earned enough to pay a mortgage, support a family and, if they put in 30 years, enjoy a nice pension and health-care benefits when they retired. Some saved enough to buy a cottage up north.

But even during this celebrated era, there were hints that the prosperity would not last. General Motor’s share of the U.S. market stood at about 50 percent in 1960 – dominating, but down from 54 percent in 1954. Detroit’s population rose to more than 1.8 million in 1950, but had lost nearly 200,000 a decade later.

Yet such harbingers were easy in miss in a state that had personified swaggering upward mobility ever since Henry Ford promised $5 a day to factory workers.

The auto industry had set the bar for employment benefits that helped build the American middle class – and government followed.

“Government was competing for that talent,” said Anthony Mingine, chief operations officer for the Michigan Municipal League. “They had to match or provide similar benefits. They never competed on the pay side. They had to compete on the benefit side.”

Hundreds of communities across Michigan agreed to pay public workers traditional pensions when they retired, based on their salary and years of service. And, following the auto industry, cities committed to generously funding workers’ health-care costs after they retired.

Minghine said it was all but inconceivable at the time that the industry that spawned long-term employment benefits would be brought to its knees a few decades later.

In cities that followed the auto industry blueprint and failed to foresee the spiraling cost of health care, the consequences are being felt today across wide swaths of Michigan.

Alarm bells could have gone off in 1984.

That’s when private employers were first required to begin monitoring the cost of retiree health-care benefits, and how they would be funded. As a result, businesses that offered generous retirement packages began to cap their contribution to retiree health care.

But the vast majority of municipal governments were either unaware of, or ignored, the warnings.

In 1988, the Government Accounting Standards Board, the body that sets guidelines for government, put the matter on its agenda because of rising concern over retiree health-care debt. Board spokesman John Pappas said the agency saw a need for “clear accounting” standards governing the benefits.

But it wasn’t until 2007 that governments joined their private sector brethren in being required to account for the future cost of health care. Until then, these liabilities were essentially off the books.

Kathy Roy, a municipal fiscal consultant and former finance director for the city of Novi, likened the response of many cities to this debt to the nation’s failure to address the projected long-term funding shortage for Social Security.

At Roy’s urging, Novi began funding retiree health care in the late 1990s. It is now about 70 percent funded.

“We all have known for 30 years there is an issue with Social Security. What have we done about it?” she asked. “There is plenty of blame to go around on this.”

Portage was one early responder, making changes in the 1980s to its pension and retiree health care benefits to trim costs. As a result, it is one of the few cities in Michigan with no legacy debt.

A Michigan State University study released earlier this year found that unfunded retiree health care debt in 311 Michigan municipalities, including Detroit, totaled nearly $13 billion, based largely on 2011 numbers.

These liabilities were compounded in Michigan by a decade-long recession, the most severe in the nation. The very industry that had powered Michigan’s economic might was itself on life support. The result:

  • General Motors and Chrysler fell into bankruptcy in 2009, nearly sunk by dwindling sales and billions of dollars in pension and retiree health-care debt they could no longer afford.
  • Roughly 800,000 jobs disappeared in Michigan between 2000 and 2010.
  • Flint went from 80,000 auto workers in 1980 to perhaps 8,000 today.
  • Saginaw from about 15,000 in 1970 to 2,000 today.
  • By 2010, Detroit had barely a third of its peak, 1950 population.
  • The value of Michigan homes and business declined by $180 billion from 2007 to 2011.
  • The state cut $5 billion in revenue sharing to cities from 2002 to 2012.

And the cost of retiree health care costs continued to rise faster than most cities anticipated when contract deals were struck. Adjusted for inflation, the yearly cost of U.S. per-person health care soared from just over $1,000 in 1960 to more than $8,000 by 2010.

All of which left many cities with fewer taxpayers paying less in property tax, with diminished help from the state – leaving legacy debt obligations that cannot be easily undone.

Minghine, of the municipal league, said Detroit is merely an extreme example of what communities are facing across the state.

Detroit, with its 700,000 residents, is left to pay a bill rung up by a city of 2 million, he said.

“Some of us walked out on the check.”

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.

11 comments from Bridge readers.Add mine!

  1. Roger Martin

    Yes, this is a massive problem for local governments. And it’s also a massive problem for State Government. According to the Sept. 25, 2013 “State Budget Overview” published by the nonpartisan State Senate Fiscal Agency, the state’s pension funds are underfunded by $28.6 billion (yes, with a “b”) and the state’s healthcare benefits are underfunded by $41.3 billion (yes, with a “b”). Those two numbers total $69.9 billion. So, what is the state going to do? A question that deserves to be answered, yes?

  2. JAMES DANIELSKI

    Sad isn’t it? It’s not that we haven’t been warned. Folks like John Boyle have been trying for years to tell us that this was coming – only to be considered a crackpot. Why not consider a guest article from him?

  3. Rich

    All contracts for legacy costs that are not supported by sound actuarial data, and sound projections for future support, should be declared null and void until such time as they are supported. The private sector has basically done this to employees with changes such as no medical insurance once you are 65, buying out pensions, and bankruptcy actions transferring pension costs to the PBGC.

    1. Charles Richards

      Pensions are guaranteed by the state constitution and it is not a simple matter to shed the retiree health costs. Municipalities cannot shift pension costs to the PBGC because they never paid the insurance premiums for their plans.

    2. John

      Yeah your “rich” as only the rich think contracts are fudge-able & should be discarded when they become troublesome, its interesting that you point out the private side of bleeding pensions for CEO bonuses & dumping them through an abusive use of the bankruptcy courts as a positive that public entities should emulate. De-funding pensions & transferring health care costs on already financially strained work force is the conservatives idea of good businesses practice & is rarely justified by anything other than pure greed & an I’ve got mine mentality.

  4. Ed Haynor

    Well, as W. Edward Deming, the guru of total quality management used to say in response to questions about failing organizations, it’s the leadership’s failure always the leadership.

  5. Robert T

    We all need to pay more of our fair share in taxes to help fund these public employee benefit shortfalls. After all a $40,000 per year pension plus retiree health benefits for life equates to over a million dollar benefit per employee. If higher taxes don’t pay for this what will? Public Unions are our friends.

  6. Todd

    “Some of us walked out on the check.” Who does Mr. Minghine include in the “us?” I wasn’t even born in the 50’s. I was only 8 years old in 1970. Am I part of that us? Am I to feel any responsibility for corrupt decisions made by union backed politicians? I didn’t walk away from anything. People of my generation and the generations that are coming after me, are being stuck with the the check.

    Public pensions represent one of the biggest inter-generational money grabs ever. Everyone who was part of the decision to create this generational liability pit should be ashamed, however, I don’t think any of them have the moral composition to feel shame.

    1. John

      So you are only libel for your generations commitments eh? Please return the moneys spent on your education as they where funded in part by people who now get those so called money grabs. There was nothing corrupt about the pensions or medical benefits, they were negotiated in good faith often in place of wages. I left ford in 74 to work public sector & took a $5 per hour pay cut. The job security and pension were the balance for the reduces wages & I spent 32 years earning them. Neither pensioners or social security recipients are participating in inter-generational money grab except in some neo-con fox propaganda fantasy world.

  7. Steve

    It’s deferred compensation of any kind that is the problem, because accountability evaporates. The only virtuous cycle is to compensate people properly when the money is flush, provide a very basic safety net, and let everyone reap the consequences of their own decisions. We can’t rely on growth any more, nor inflation, to get out of such a monstrous debt. Maybe the State of Michigan can lead the way by changing the rules to promote such a virtuous cycle, assuming the debts of municipalities, raising a long-term bond fund financed by taxes over a 20 to 50-year period? This is how the USA got its Constitution, by assuming the Revolutionary War debts of the states.

  8. Bernadine Bennett

    The blame for the legacy problem lies with the previous governors and mayors who decided that they would pay as you go instead of buying a private plan or setting aside enough money to fund the future retirees. Instead they cut taxes and neglected the infrastructure of this state to make themselves look good for the next election. By the time Granholm took over the state was in a shambles because of the recession and our lack of the cushion we could have had in the Clinton years but lost by Engler and his crowd’s bad judgment. Our Social Security fund has been robbed (borrowed from) repeatedly and now it seems to be the fault of the greedy retirees. It’s time to get the greedies, (bankers, lobbyists, corporation ceos, you name them) of this state to kick in and help out. We retirees and minimum wage people are not the answer.

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