Macomb County Executive Mark Hackel and his team look to take a page out of Oakland County's book and make its retiree obligations more manageable. (Todd McInturf / The Detroit News)
Macomb County wants to eliminate a shortfall in funding its retiree health benefits, and officials are looking to Oakland County’s playbook. But before Macomb starts borrowing millions of dollars to close the gap, health care costs should be cut as much as possible.
Officials need only look at Detroit to see the result of borrowing to pay for benefits the government can’t afford.
Macomb officials want to borrow $270 million as well as take $40 million from the general fund and $30 million from the delinquent tax fund to create an investment trust of $340 million.
This would ideally eliminate a shortfall and also fund retiree health care for years come.
The idea is simple — secure the funds at an interest rate of about 4 percent and invest them at 7.5 percent.
It’s also risky — if the 7.5 percent return isn’t realized, the county will have to dip into its general fund to make up the difference.
But without some solution, County Executive Mark Hackel warns health care costs could bankrupt the county in 15 years.
For a model of how the plan could work, Macomb turned to neighboring Oakland County.
Success didn’t happen overnight in Oakland.
In 2006, the county borrowed about $557 million at a 6.2 percent interest rate and invested it at 7.8 percent.
The trust was able to not only finance the county’s yearly obligations but also grow the health care fund for future retirees.
Today retiree health care is 117-percent funded. Deputy Oakland Executive Robert Daddow says that, barring a catastrophic stock market crash, Oakland shouldn’t have to tap any other funds to finance the benefits.
Daddow says borrowing to pay the retiree obligations was a major step but the plan wouldn’t have worked without other action.
Oakland has been trimming its health care costs over the past few years by negotiating higher co-pays and deductibles in its labor agreements.
Also, it established a cheaper prescription drug program.
Daddow says the “ultimate” health care trim was closing the program to new employees in 2006.
Macomb is on a similar path.
Finance director Pete Provenzano says the county is committed to a long-term plan to reduce health care costs through negotiating higher co-pays and deductibles in labor talks.
Macomb will close its retiree health care plan to new hires in 2016.
Both Daddow and Provenzano say past labor contracts have locked their counties into funding retiree health care plans.
Arbitrarily dropping the benefits would violate those agreements and probably land the counties in court.
Yet retiree health benefits are not guaranteed in the Michigan Constitution, unlike pensions.
Provenzano notes that before embarking on the trust plan, Macomb County was headed down the bankruptcy path.
The $15 million a year cost for retiree health care was estimated to balloon to $35 million by 2023, which would have resulted in massive cuts in county services and “likely” would have led to bankruptcy.
Macomb is moving in the right direction.
If the county follows Oakland County’s example while adjusting its labor contracts, it should emerge from under its heavy retiree obligations much more financially sound.