Michigan cities and counties haunted by retiree liabilities

Legacy costs for public employee retiree pensions and health-care costs have long been a multi-billion dollar headache for the Michigan municipalities and school districts that pay them.

For decades, governments and school boards bargained contracts that became the gold standard for union employees, administrators and often the elected officials who signed off on the agreements. The problem: Many communities didn’t put away nearly enough money to pay for the future retiree obligations.

Local leaders are quick to point out that not all factors that stress their budgets have been within their control; most notably, steep cuts to state revenue sharing to local governments over the years. So too, many older, industrial cities in Michigan have a diminished tax base, with few options to increase revenue.

MORE COVERAGE:

• Chaos in Traverse City, as county government wrestles with pension debt
• In Michigan, more than 150 communities are financially distressed
• Retirees sweat as courts weigh cuts to pension and health care

Attempts to address the issues often have led to a collision of politics and policy, finger-pointing and mea culpas, lawsuits and lingering resentments.

While the political chaos that has played out in Grand Traverse County government the past three years is bizarre on its face, it’s only a snapshot of the bigger picture in Michigan, where some communities have even deeper pension holes while other communities (think Kent and Kalamazoo counties) have pension surpluses.

In July, a state task force issued a report to Gov. Rick Snyder identifying $17.6 billion in pension and retiree health care liabilities for about 600 Michigan counties, cities, townships and villages. That same month, Snyder signed legislation aimed at putting a leash on the $29.1 billion in unfunded pension liabilities for Michigan’s 895 public school districts.

For new employees, most municipal governments years ago switched from defined benefit plans, which guaranteed retirees monthly checks based on their final years’ salaries and total years of service, to defined contribution plans in which the employee (and sometimes the employer) contribute to employee accounts similar to 401(k)s. At retirement, they can draw from those accounts.

The legislation Snyder signed last summer put public school employees, starting this Feb. 1, into 401(k)-style plans, similar to what has been embraced – at least by employers – almost universally in the private sector. Since 2010, new public school employees have been in a hybrid plan that combined elements of defined benefit and defined contribution pensions.

Comments by two legislators in a Detroit News article when the legislation passed last summer illustrate the tension inherent in finding solutions to difficult legacy funding issues.

Sen. Curtis Hertel, a Meridian Township Democrat, said: “For everything our teachers do for our state, they deserve at least a secure retirement. This legislation steals that from them.”

Rep. Chris Afendoulis, a Grand Rapids Republican, said: “These long-term liabilities in Michigan and across the country ... they hang like the sword of Damocles over our heads.”

Both may be correct.

James Hohman, director of fiscal policy for the Mackinac Center, a Midland-based free-market think tank, said “pension underfunding is not a partisan issue. Almost every government is dealing with this. There were insufficient political incentives to properly fund and lots of incentives to underfund.”

One of the biggest keys to getting ahead of governmental financial problems, pension or otherwise, is long-range planning, said Bob Daddow, longtime deputy executive in Oakland County. Too many governments too often find themselves in crisis mode, he said.

“We’re working on our 2020 budget now. Look at Washington, if you want to see how well month-to-month budgeting works,” he said. “It doesn’t.”

But getting ahead of problems also takes commitment of elected officials who ultimately say yes or no to the best laid planning.

Some Republicans in the Legislature late last year sought stronger tools for the state to intervene if local governments failed to address severe pension underfunding, but there was strong resistance from police and firefighter unions, as well as some Republicans. A compromise eventually passed with changes that instead aimed to prod, not force, local governments to properly fund pensions.

More coverage: Fending off state, cities vow to rein in retiree benefits costs

The changes left one of the bill package’s original sponsors, Rep. James Lower, a Cedar Lake Republican, disappointed.

“We need to get corrective action plans in place now,” Lower said. “The sooner these communities do it, the easier this burden will be to get out from under.” He said he likely will revisit the issue later this year with legislation giving the state authority to step in when grave circumstances warrant.

One positive that emerged from what the Legislature and state Department of Treasury negotiated last fall are new fiscal transparency requirements for local governments. Treasury unveiled the online MI Community Financial  Dashboard, requiring reporting of audited budget and liability status.

The website allows anyone with Internet access to examine key financial data for any county, city, township or village from 2010 through 2016 with current year information added as it becomes available.