Over the last 10 years, the city of Hamtramck, Michigan, has sharply reduced its unfunded other post-employment benefits (OPEB) liability. The 22,000-resident municipality is mostly surrounded by the city of Detroit and like its larger sibling, faced a financial crisis that necessitated difficult decisions in the past few decades.
In Hamtramck’s case, those decisions included steep reductions in retiree health benefit payments to both current and future retirees. Hamtramck’s experience serves as a cautionary tale to other state and local governments that are offering other post-employment benefits (OPEB) plans that they have not prefunded and may not be able to afford.
A 2011 actuarial study determined that the city had unfunded OPEB liabilities of $47.3 million, or by over $2,000 per city resident. High OPEB debt was among the reasons the state of Michigan cited for appointing an emergency manager to take over Hamtramck’s finances in 2013. Other issues included exhaustion of the city’s general fund and large variances between budgeted and actual revenues and expenditures.
Under the emergency financial manager, Hamtramck closed its OPEB plan to employees hired after November 2013. More controversially, the manager reduced the value of benefits for retirees and active employees who had vested or were vesting in the benefit. Although the city continued paying the full insurance premium, it switched to a high deductible plan thereby shifting some medical costs onto beneficiaries.
Retirees filed suit against Hamtramck to restore their benefits, but the U.S. Sixth Circuit Court of Appeals ruled against them. In the case of Serafino v. City of Hamtramck, the court found that collective bargaining agreements (CBAs) “do not create a vested right to lifetime healthcare benefits.” The Circuit Court cited an earlier Supreme Court decision in the case of M&G Polymers USA, LLC v. Tackett in which the high court ruled that a union contract did not oblige a private employer to continue providing retiree health benefits past the expiration date of their union’s contract. Subsequently, the Michigan Supreme Court came to a similar conclusion in the case of Kendzierski v Macomb County, holding that contractual benefits including retiree healthcare expire when the relevant collective bargaining agreement expires.
As a partial replacement for discontinued and reduced benefits, the city began offering employees a retiree health savings plan created by the Municipal Employers’ Retirement System of Michigan. Although the city does not contribute to the plan, employees can contribute on a pre-tax basis (meaning that their contributions are deducted from their taxable income) and distributions from the account to retirees are tax-free.
After the state released Hamtramck from emergency financial management, the city made further reductions to its retiree healthcare benefits. According to a report in The Hamtramck Review, in January 2020 retirees began receiving a fixed insurance subsidy of $134 per month and benefits would no longer be provided to those retirees who have health coverage from another employer.
These retiree healthcare benefit changes and other reforms have improved the city’s financial condition. The city’s 2020 audited financial statements show Hamtramck’s net OPEB liability declining from $27.8 million in 2019 to $6.1 million in 2020, or less than $300 per resident. Although the city now has a stronger general fund balance, it continues to have a negative net position due to a $59.8 million net pension liability.
Due to these fiscal challenges, union contracts no longer protect retiree health benefits in the city. As stated in its agreement with the American Federation of State, County and Municipal Employees (AFSCME) Local 666, “the city will determine on an annual basis its ability to offer health care benefits to retirees.”
Hamtramck City Manager Kathy Angerer told Reason Foundation that the city further reduced its retiree health benefits in July 2020. Health care subsidies are now only being provided to two former safety employees receiving disability pensions. Angerer said that cutting retiree health subsidies was a very difficult choice because public employees had the expectation that they would have secure retirement benefits. She noted that the blow was somewhat blunted by the fact that relatively low-cost Affordable Care Act and Medicare Advantage policies are available to retired employees. Retirees can also continue to participate in Hamtramck’s benefit plans (as long as they pay the full premium) and are welcome to attend annual benefit workshops.
In Hamtramck, emergency financial managers and the city manager made difficult decisions to lower a benefit that was neither funded nor affordable under the city’s tight economic conditions and declining population.
Neighboring Michigan cities that still have other post-employment benefit plans may face similar choices in the future. As alternatives to cutting off retiree health benefits, these cities should consider making actuarially determined OPEB contributions or transitioning to retirement health savings accounts to which they could make defined contributions when budget circumstances allow.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.