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 director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

Follow Anthony Randazzo on Twitter @anthonyrandazzo

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

Takash graduated from Johns Hopkins University with a BS in Applied Mathematics and Statistics and Political Science.

He previously worked at the Cato Institute, focused on issues related to budget, tax, and regulatory policy. He also worked at the Marijuana Policy Project, researching state medical marijuana policies and the effects of marijuana legalization in Colorado and Washington.

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.

The project aims to promote solvent, sustainable retirement systems that provide retirement security for government workers while reducing taxpayer and pension system exposure to financial risk and reducing long-term costs for employers/taxpayers and employees. The project team provides education, reform policy options, and actuarial analysis for policymakers and stakeholders to help them design reform proposals that are practical and viable.

In 2016 and 2017, Reason's Pension Integrity Project helped design, negotiate and draft pension reforms for the state of Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement Plan, which both passed with overwhelming bipartisan support in the state legislature and were signed into law by Gov. Doug Ducey.

Gilroy is also the Director of Government Reform at Reason Foundation, researching privatization, public-private partnerships, infrastructure and urban policy issues.

Gilroy has a diversified background in policy research and implementation, with particular emphases on competition, government efficiency, transparency, accountability, and government performance. Gilroy has worked closely with legislators and elected officials in Texas, Arizona, Louisiana, New Jersey, Utah, Virginia, California and several other states and local governments in efforts to design and implement market-based policy approaches, improve government performance, enhance accountability in government programs, and reduce government spending.

In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.

Gilroy is the editor of the widely-read Annual Privatization Report, which examines trends and chronicles the experiences of local, state, and federal governments in bringing competition to public services. Gilroy also edits Reason's Innovators in Action interview series, which profiles public sector innovators in their own words, including former U.S. Transportation Secretary Mary Peters, former Florida Gov. Jeb Bush, former Indiana Gov. Mitch Daniels, former New York City Mayor Rudy Guiliani and more.

Gilroy's articles have been featured in such leading publications as The Wall Street Journal, Los Angeles Times, New York Post, The Weekly Standard, Washington Times, Houston Chronicle, Atlanta Journal-Constitution, Arizona Republic, San Francisco Examiner, San Diego Union-Tribune, Philadelphia Inquirer, Sacramento Bee and The Salt Lake Tribune. He has also appeared on CNN, Fox News Channel, Fox Business, CNBC, National Public Radio and other media outlets.

Prior to joining Reason, Gilroy was a senior planner at a Louisiana-based urban planning consulting firm. He also worked as a research assistant at the Virginia Center for Coal and Energy Research at Virginia Tech. Gilroy earned a B.A. and M.A. in Urban and Regional Planning from Virginia Tech.