Michigan Municipalities Face a Retirement Benefit Crisis

Commentary

Michigan Municipalities Face a Retirement Benefit Crisis

There is a serious need for Michigan to address its local OPEB and pension debt

This past summer, the citizens of Port Huron faced a choice: increase taxes or face the closure of city pools, parks and recreation centers. Why? The growing cost of retiree healthcare benefits and unfunded pension promises for city workers. Unfortunately, the increased revenue that Port Huron approved will only be a short-term Band-Aid on its growing costs of meeting the benefits promised to active and retired city workers.

But this not only a problem for Port Huron, Grand Rapids, or Lansing. Communities in every corner of the state facing the same crisis.

Of Michigan’s 83 counties, 81 have at least one local retiree benefit system less than 60% funded. Though some localities are deeper in retirement debt than others, few Michiganders are unaffected. Cumulatively, local governments face more than $18.6 billion in unfunded healthcare and pension benefits and have only 60 cents saved for every dollar in benefits promised to government retirees.

A full list of state Treasury department data on unfunded liabilities by county, city, and special district can be found at unfundedmichigan.org.

The central problem is that the cost of providing previously promised benefits has grown larger than anticipated. More than $18.6 billion more than anticipated in fact. The additional required contributions to fund this municipal debt have begun eating away at other programs.

Promising guaranteed pensions and retiree healthcare benefits are perfectly acceptable forms of deferred compensation — but if their cost has been underestimated, it is future generations that ultimately wind up getting stuck with the bill.

That larger than expected bill is the number one fiscal challenge for Michigan’s local governments today, where nearly 430 local pension systems have saved less than 70 cents for each dollar in benefit checks promised to police officers, firefighters, and other municipal servants. Another 75 pension systems are less than 50% funded.

Even worse off is the $9.5 billion in unfunded retiree healthcare benefits for former government employees. Almost 250 local governments have virtually nothing set aside to cover retiree insurance premiums or prescription drug programs. In fact, the majority of county governments have less than 10% of the assets required to fully fund them, while cities and townships have collectively funded just 20% of their retiree healthcare benefit.

As the costs continue to grow beyond previous projections, there is only going to be so much that the occasional millage increase will be able to provide towards covering the payments. Every tax dollar needed to cover public employee retirement benefits is another dollar that doesn’t go to infrastructure, public safety, parks, libraries—or that doesn’t stay in the taxpayers’ wallets.

The unfunded liabilities that localities face not only threaten their residents, but they also threaten the retirement security of their employees.

Pensions and retiree healthcare benefits are deferred compensation—payments for services previously rendered. These benefits are supposed to be financed as they are earned, and to not fully fund benefits is the same as not paying employees in the first place.

So what should be done? There are no cookie-cutter solutions. In any jurisdiction, reform should be a collaborative effort between elected officials, labor, and taxpayers to reach a compromise that sustains public services while ensuring that retiree benefits are paid.

In some cases, spending more out of the existing budget—and cutting elsewhere—to properly pay for benefits may ultimately be sufficient. In other cases, benefits for new employees may need to be changed. In others, some combination of solutions will be needed.

Any discussion about what changes need to be made in any given community is, at this point, purely speculative. Improved reporting and introducing funding standards policies are a necessary first step—any informed discussion of what retiree benefits should look like (and how much they should cost) is impossible if the information isn’t available.

The only unacceptable response to this crisis is inaction. At some point, the music will stop and localities will be unable to afford retiree benefits, basic government services for their residents, or both.

Reform is difficult and the corrections necessary to finance benefits will be painful, but this crisis will get worse before it gets better. Like the mythical Sword of Damocles, fiscal insolvency looms over all governments with unfunded retiree obligations. It is far better to forge a path out now rather than wait for it to fall and bring governments’ finances down with it.

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.

Daniel Takash is a policy analyst for Reason Foundation's Pension Reform Project.

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.