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Original article URL: http://bridgemi.com/2013/11/youre-the-mayor/

Economy & competitive position

You’re the Mayor

Tell us how cities can reduce worker retirement costs

So you’ve read Bridge’s fairly terrifying report about how Michigan cities and towns have failed to fund employees’ pension and health-care plans, sometimes ignoring the problem for decades.

The result: billions of dollars in unfunded retirement obligations across the state. Add to that crumbling infrastructure, dwindling property tax revenue, and less money coming from the state, and it’s easy to see why cities are caught between raising taxes and cutting back basic services.

Retired city workers are worried their promised benefits will be taken away. Residents are furious about paying higher taxes. And with much of the budget going to pay for these “legacy” costs, cities are laying off police and closing parks and community centers.

What’s a mayor to do? Seriously, what would you do?

Bridge has listed some ideas, below, mentioned as ways that cities can reduce retirement costs while trying to do right by their workers (We designate below where Bridge readers have also weighed in).

But we’d like to hear your thoughts, too. Well, Mayor McGenius, what’s your plan?

Goodbye pension, hello 401(k) – A popular choice, first adopted by the private sector and now widely copied by government employers. The traditional pension, known as a defined benefit plan, is a good deal for workers because the employer pays a set monthly retirement amount, usually based on a worker’s salary and years of service. Today, more employers are using a defined contribution plan, where much or all of workers’ retirement funds come from workers’ own paycheck. The money is typically diverted to a 401(k) or 403(b) account while the worker is still active and it’s up to the employee to properly invest that money for retirement.

Reduce health care – You’d be hard-pressed to find a private company that doesn’t require its workers to contribute something to their health insurance premiums and/or co-pays. Government employers are increasingly asking their workers to contribute, too. Reader Brad adds: “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.”

Reduce health care (Part II) – Instead of covering health insurance when workers retire, more cities are offering health savings accounts, which allow active workers to set aside money tax free to pay for medical expenses. Unlike a flexible spending account, money in a health savings account can be rolled over if not used during the year it is set aside.

Rethinking early retirement – Reader City Commissioner writes: “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.”

Limited pension “extras” – Reader Rich notes approvingly that his private-sector pension was less than 50 percent of his final pay when he retired, and did not kick in until he was 55 even though he worked at the company for 35 years. He said public pensions can save money by limiting other perks as well, such as: computing unused sick/vacation time into final pay, and annual cost-of-living increases.

Yet more pension limits – Reader W. Dave writes: “Anyone who gets over $50,000 pension gets benefit lowered to $50,000.”

A little of this, a little of that – Reader dlb writes: “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.”

Boost revenue sharing – Reader Jon Blakey writes: “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.”

23 comments from Bridge readers.Add mine!

  1. Kim Hunter

    My solution is not to reduce what is paid to people who serve for decades. Take from the wealthy.

  2. Matt Messer

    1.)Closing loopholes that allow the collection of more than 1 pension. If you retire early from 1 city post it should exclude you from returning to work in a different department and earning a 2nd pension. This being said, if you do retire early and go back to work for the city you should either work as an independent contractor (wages only) if you are collecting a pension or.. wages + normal health benefits (less retirement) if you delay your pension.
    2.) pensions based on final years pay set at base pay, excluding overtime. To often those close to retirement pile on the overtime, and pensions are higher than base wages.

  3. Jim Cupper

    This is another example of Americans’ lack of foresight. Quality people choose to work in the public sector even though the compensation is often lower than what they can earn in the private sector. One of the reasons they make that choice is because of the security and benefits that public sector employment used to provide. Now that public sector employees have become whipping boys and benefits have eroded to nothing, quality people will go elsewhere, and the public sector will face a downward spiral — fewer services, lower quality, and degradation of education, fire and police protection, and the overall quality of life in our communities. When people don’t want to step up and pay their fair share, this is the result they should expect. The solution? Higher taxes — especially for the wealthy individuals and corporations, who often have the resources and political power to pay little or nothing.

  4. Barry Visel

    1. Eliminate the Michigan Business Tax to stimulate the economy and create jobs. 2. Replace the MBT lost revenue, restore revenue sharing, and cover unfunded liabilities by eliminating the $30 plus Billion of tax credits, deductions and incentives.

    1. Pete

      What a GREAT bunch of suggestions.

      1. Duane

        Bill,

        He is of the old school of the politicians that got us here, don;t care about the problem just spend more of other people’s money and make the problem worse.

  5. Rob Sisson

    I’ve served on the Sturgis City Commission for nearly ten years, with two terms as Mayor beginning in 2005. At that time, we began to shift our benefit programs from defined benefit to defined contribution. We also began requiring, and gradually increasing, employee contributions toward healthcare. Since municipalities work with several different unions, it takes a long time to move those contracts to the same structure as non-union employee benefits.

    The magnitude of legacy healthcare costs across the nation (Michigan is not in as bad shape as Illinois, California, and others) is what will finally drive Congress to create a single payer, federal government healthcare program. If it does not, we will have an enormous healthcare crisis with retirees bearing the brunt, and taxpayers bailing out state and local bankruptcies.

    One major structural issue that our state must address is this (using Sturgis as an example): In our zip code, about half the residents live in the city, the rest in townships. Generally speaking, city taxpayers pay for things that everyone enjoys and uses everyday–streets, water, sewer, police, fire, economic development, recreation. Even if non-city residents do not live within the city, they work, go to school, the doctor, the hospital, the nursing home, the recreation facilities, church, and shopping in the city. City taxpayers pay for the whole shebang…including the retirement benefits of the employees who make it all possible. These costs need to be spread more equitably across the service region.

    One fundamental change that must be made is retirement age. Early retirement, where a government employee can retire in his or her mid-50′s (40′s for some public safety employees) and begin receiving full retirement benefits is fiscally foolish. It’s a problem in government and schools. It is patently unfair for taxpayers to pay for benefits for someone under the age of 65, especially when those taxpayers are working well past that age to make ends meet these days. I can cite examples of grandfathers working in grimy, greasy, noisy shops, standing at a press 8 hours a day for 40 years with a half hour for lunch…they can only dream they’d chosen ‘public service’ as their career choice. One unsavory choice facing municipalities is to tell employees contemplating early retirement, “It is your choice, but you cannot begin drawing retiree benefits until you turn 65.”

    I’m not knocking public employees–I’m so proud to live in a community like Sturgis where our city and school employees give their all every day. This is simply a matter of fiscal sanity and fairness to taxpayers. Even small rural cities like ours face affluent flight as successful middle aged families move to lakes or the country…often to much bigger, nicer and more valuable homes and end up paying far less in property taxes, avoiding completing taxes for city services they enjoy.

    In the end, I don’t have an answer. That’s why we send folks to Lansing.

  6. JR

    Health care costs are the biggest part of this problem. The ACA flat out doesn’t work for many reasons. Scrap it and open Medicare to all retirees, regardless of age. Ask those retirees to pay higher premiums to Medicare until they reach 65 and ask the cities to drop their own retiree insurance plans and increase pensions by some defined amount to help subsidize retiree Medicare premiums. That would be much more economical than paying for their own plans. The last statistics I saw indicated that the administrative costs to run Medicare comprise 17% of every health care dollar, but are 42% of each private insurance dollar.

    A side note: I am a retired public employee. I sat on bargaining teams for years. I cannot even begin to tell you how we agonized over the insurance issue. Year after year we agreed to minimal or no raises and even took pay cuts to keep our insurance. Even with 2 Masters’ degrees, great operational responsibility, and 32 years of experience, I retired at lesser salary level than a beginning employee at a local big business. Public employees have to love what they do, because the financial rewards just aren’t there for them. To cut their modest benefits that they sacrificed for for many years when they are too old to easily work to make up the difference just doesn’t seem ethical.

  7. Dan

    1. Stop calling them “Legacy Costs”. This implies were purchasing something on an on-going basis. We’re not. These are contractual obligations. We made promises to employees for which they provided labor in good faith. We have an obligation to meet our commitments
    2. Reinstate defined benefit retirement plans. The reason private sector employers favor 401K plans is because it shifts all the investment risk and expense of management to the employee. It may cost more but it’s fair and good for working families.
    3. Every elected official and every citizen should be demanding a single payer healthcare system with sensible cost controls. We are paying twice as much for healthcare than citizens of other developed nations and it’s bankrupting the middle class. The only interests served by the current system are the healthcare and insurance industries.
    4. Michigan should adopt a graduated income tax. It would produce significantly more revenue and result in no increase in taxes for 80% of the population. Good government costs money and we need to start acting like responsible adults and appropriately finance our services. We need to invest in infrastructure, education, and job training if we hope to provide a reasonable future for our children and grandchildren.

  8. JB

    The pension money belongs to the retirees and should be left alone. Jail time or stiif fines to public officials who use this fund for other than it’s intended purpose.

  9. Rebecca

    I’d like to see business and industry held accountable for the promises they make to people. Bottom line is business only cares about the bottom line, and executives are absolutely getting their share. They find they can easily exploit people in another country and leave behind folks that helped build their business and then break their promises to them because “legacy costs are too high.” People don’t seem to understand that employees working in the public sector have agreed to lower salaries, because of a compensation package that would provide a modest retirement and health care in the long run. Had we have know 25 or 30 years ago that our agreed to plans would be washed away in one fell swoop with this Governor we may have chosen another path. Apparently, when the market crashed and housing bubble left business without a revenue stream, which apparently Wall Street and Banks are not responsible for, the working man was tied to the whipping post. We heard its the Unions fault, its public employees fault, its the legacy costs that are killing us…no people its greed and bad business decisions, mismanagement and favoritism. I would say that most people don’t go into education to make money. I can tell you as a public employee within education that my salary over these past 25 years has not increased more that $10,000. Had I retired five years ago I would have earned about $6,000 more in retirement income. I am now just barely over the poverty line. And when you are faced with illness and have to pay out of pocket expenses to the tune of $2,500 that puts a crimp in spending. I do not buy new clothes, I grow my own food and I haven’t traveled on a vacation in almost 20 years. To lay the ills of the economy on public employees as the ones dragging down the economy is unfair. To try to put all the ills of society on their backs is not fair. When and if I can retire, I would be well below the poverty line. This is crazy people…all public employees are not earning high salaries or receiving lavish benefits. Across the board moves like this governor has made have hurt many people. There are some folks who are above the threshold…that’s what really needs to be looked at. There is a salary gap and politicians themselves are reaping greater benefits than most public employees. Know the facts, stop beating up middle and lower income Americans. We really can’t take or give anymore… Its madness that has to stop.

    1. Duane

      Rebecca,

      25, 30 years ago businesses were telling everyone that the change was coming when they were changing their benefits plans so they could honor their committments. They were we changing medical care placing more of the cost on the employees, increasing emphasis on healthy livestyles, and including more preventive care in the programs. The creation of the 401k and the companies contributing to them in addition to the retirement plans and the shifting to the defined contribution were all messages from privat companies that were working hard at being able to meet thier commitments.

      If the individuals and they government organizations chose to ignore those messages then that was their choice not the compnaies.

  10. Roger Martin

    To all who have commented/offered suggestions:
    I would like to thank and congratulate all (at least up to now) who have offered comments and suggestions. I read literally dozens of newspaper stories every day as part of my profession, and this is one of the most thoughtful, civil and constructive “reader comments” threads I’ve seen, possibly EVER. Keep it going!

    1. Duane

      Roger,

      I agree.

      Wouldn’t it be great to have such an opprotunity on other issues periodically/

      Would it be beneficial to have Bridge staff ask some informed questions of those who offer ideas? Could we learn a lot from hearing the why’s and how’s people came up with their ideas?

    2. John Q. Public

      OK, Roger, but let’s not overdo it.

      “I do not believe that one should fight over things that don’t really matter. But what about those things that do matter? It is not comforting to think that the natural tendency inside us is to settle for the bottom, or even the middle of the stream.

      This tendency, in large part, results from an overemphasis on civility. None of us should be uncivil in our manner as we debate issues of consequence. No matter how difficult it is, good manners should be routine. However, in the effort to be civil in conduct, many who know better actually dilute firmly held views to avoid appearing “judgmental.” They curb their tongues not only in form but also in substance. The insistence on civility in the form of our debates has the perverse effect of cannibalizing our principles, the very essence of a civil society. . . .

      Again, by yielding to a false form of “civility,” we sometimes allow our critics to intimidate us. As I have said, active citizens are often subjected to truly vile attacks; they are branded as mean-spirited, racist, Uncle Tom, homophobic, sexist, etc. To this we often respond (if not succumb), so as not to be constantly fighting, by trying to be tolerant and nonjudgmental-i.e., we censor ourselves. This is not civility. It is cowardice, or well-intentioned self-deception at best.”

      Clarence Thomas

    3. david zeman

      agreed, roger.

  11. Steve Harry

    The state needs to help out local governments that have severely underfunded pension systems. Why? One reason is that in former industrial strongholds like Flint, Saginaw and Detroit, the populations that benefited from good times have moved out. The burden of paying those legacy costs should not fall solely on those who remain. Another reason is that the state forced collective bargaining on local governments in 1965, and collective bargaining has contributed heavily to the generous retirement plans that are costing so much.

    The state can help by agreeing to pay some portion – maybe half – of a local government’s unfunded pension liability if it takes specified measures to stop its growth. The state could also help by eliminating or modifying the City Income Tax Act, which denies some localities the right to impose an income tax and denies others the right to set the rate they choose (it also prohibits taxing pensions).

    My email address is stevenrharry@gmail.com.

    1. Charles Richards

      Mr. Harry has a point about depopulated cities no longer having the tax base to pay the same benefits costs as it did previously. But if those pension and retiree health care costs had been adequately funded when they were incurred, those cities would not be facing large unfunded liabilities. And cities could have avoided the other part of their unfunded liabilities by reducing their work forces in proportion to their loss of population and wealth.

      Cities are in their horrendous situation because of a lack of foresight and good judgment on th part of their citizens.

  12. Andy Trestrail

    Most large cities have operated the same for decades now. City managed retirement funds, that then are miss managed, leveraged for other dept. or stolen. Stop the madness, most US corporations have and follow the path that put the control is with the retiree, 401K only. No extra company contributions, government cannot afford, we the people cannot afford any more taken from our shrinking wallets!

    Consolidate all health plans, do not make them a legacy right. The cost to cities and government to manage the hundred of plans that have accumulated over the decades is significant and burdensome. Most of America has to pay somethings for their healthcare; city, state, federal employee’s should have to as well.

    Lets just be fair to everyone.

  13. J Strate

    Nobody wants to talk about public safety, the third rail of local politics. A sizable percentage of legacy costs are attributable to retired fire fighters and police officers retiring at a young age at 50% of final average salary and with health benefits. After retirement, most go on to other jobs in the private and/or public sector. Municipalities need to ask the following questions: How much public safety is needed? How much public safety can we afford? Is there another way, apart from a pension and health care benefits, to give public safety workers a way to transition to other careers? Perhaps retiring public safety workers can be given two years of salary and health benefits to permit them time to transition to another career. They can draw their pension and retiree health care benefits when they reach the early and/or normal retirement age under SS.

  14. John Hazewinkel

    1. Eliminate health insurance for retirees under 65 years old, move the rest who are eligible to Medicare. Create health savings accounts if possible to help fund those purchasing on the health insurance exchange.

    2. Amend the state constitution to allow state and local government more leeway in adjusting pension benefits.

    3. Create the state equivalent of the federal Pension Benefit Guarantee Corporation. Acting like a re-insurer, pensoin funds would need to pay a percentaged-based fee to belong, and the corp would serve as a back-stop when pensions are unable to pay benefits. This would probably need to be pre-funded through state appropriations.

  15. John Cartwright

    The first step that mayors should take is to present the problem to the community in a very understandble format. Present alternative solutions or combination of solutions. The mayor and council should involve community leaders in preparing this report. The mayor could consider presentations in a series of neighborhood meetings. The mayor and council must build community understanding and support for a plan to solve the financial issues.

  16. Duane

    There are some good ideas included in the article, shift to 401k type retirement (defined contribution) building on that remove the cap indviduals can contribute to the program and cap the amount government entities (they will ultimately do what they did in the past and encourage election day loyalty by being excessively generous with other people’s money).

    With regard to the health care expand the employees/beneficiary’s role in the process of selecting and paying for care. Create a competitive index for help medical care providers, listing the cost paid by the insurance coverage to the respective provider so employees/beneficiaries can shop providers (by increasing their portion of the cost and letting them see what that cost will be). Also make them a more informed purchaser by providing guidelines/checklist of items/issues they should be including in their decisions. Provide the employee/beneficiary a reporting/feedback mechanism so they can give the providers another aspect for the competitive index for members to review. Employee/beneficiaries need to understand that medical care providers are highly educated and most probably highly skill service provides. The key is service providers, and they should be chosen like other service provides,based on the service and results they deliver. (We all die,but what rate of infection does a particular provider have compared to others.)

    Another inclusion on the medical care should be pricing based on lifestyle choices, if lung cancer is more likely in those who are heavy smokers then they coverage for that care should be raised based on that personal choice. This would apply to other lifestyle choices

    The age of the parental employer is over, individual have more authority and responsibility in their jobs, in their everyday lives, why aren’t they allow/expected to have more that in their retirement and medical care decisions.

    There are other places to impact, state run medical schools should include more training in being a service provider than the mindset of the ‘God’ syndrome. Similarly the legal process has to be changed so those/the lawyer (mills) suing for malpractice have some financial risk if the case is lost. Currently if you listen to the adds the only risk is to the medical providers, why they individual bring the suit may only be out their time and the lawyer risk missing a percentage of the settlement.

    Thank you for asking, this is a way to engage the reader and open them up to thinking more about the issues at hand. It would be nice if this did trigger some discussion between readers and Bridge staff talked (in this type of chat) a bit to question and explore ideas generated here. Non of them are in a final form so they could benefit from thoughtful interchange. As an example, where I mention a compatitive index there needs to be more detail befor eit would be ready for discussion.

    Thank you Bridge staff for opening this up, it would be interesting to hear your comments based on your extensive reseach.

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