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