Grand Rapids — Michigan has “a real problem” with the unfunded government retirement costs of its cities that has caused a mortgaging of “the future for far too long,” a former head of the nation’s government accounting office said Monday at the West Michigan Policy Forum.
The state has $51.4 billion worth of unfunded retirement costs liabilities and ranks in the country’s bottom 10 at No. 42 among states for its “relative financial positions” that includes state assets and debts, according to a report prepared by former U.S. Comptroller General David Walker.
The report commissioned by the Grand Rapids Chamber of Commerce also showed the cities of Grand Rapids, Ann Arbor, Lincoln Park, Saginaw, Port Huron, Kalamazoo and Traverse City have $1.69 billion in unfunded retirement liabilities. The seven cities have another $1.15 billion for other retirement plan liabilities, especially in health care where “considerable uncertainty exists” on costs and those could balloon, according to the report.
It is a dire picture for public-sector retirement costs that needs to be addressed quickly, said Walker, senior strategic adviser at accounting firm PricewaterhouseCoopers.
“For many, many years, deals were struck between career politicians and labor leaders and nobody represented the taxpayers,” he said. “It’s time to recognize that reality and make it right.”
The former head of the Government Accountability Office said business and government leaders need to find a solution that is fair to both retirees and taxpayers “because we’ve mortgaged the future for far too long.”
The policy forum annually brings business and political heavyweights to discuss problems and often form conservative-leaning solutions. The conference was the backdrop for 2008 discussions on repealing and replacing the Michigan Business Tax and making Michigan a right-to-work state — both of which the Republican-led Legislature approved and Gov. Rick Snyder signed into law after taking office in 2011.
The Republican governor briefly noted the pension issue during his 30-minute address and told reporters afterward it is a problem that needs to be addressed.
“Some of these liabilities, depending on the jurisdictions, can be very large or could be major burdens over the long term,” Snyder said. “And how do you strike the right balance?”
“Because you want to do right by the employees to make sure they’re treated appropriately, you know, you’re not taking things away from them,” he said. “But you’re building a better future for all of us. And I think there are some reform areas that could well be considered there.”
Walker said many municipalities have changed their retirement plans for new workers, including switching to “defined contribution” or 401(k)-style plans where employees contribute to their retirement benefits or a hybrid of defined contribution and traditional pension plans for public retirees.
Employers could offer voluntary early retirement or “lump sum” offers to reduce costs in addition to freezing traditional pension plans and providing future accruals to old employees “under a lower-cost plan consistent with benefits provided to new hires,” the report said.
On retirement health benefits, the report said employers could “drop or reduce” health benefits once the retiree becomes eligible for Medicare, the government health care program for seniors, and “reformulate” health plans under the Affordable Care Act. The moves could help shift heavy debt burdens from local government to the federal government, according to the PwC report.
During a panel discussion, Grand Traverse County Administrator Tom Menzel said cities likely will have to take money from essential services like firefighting to pay pension and health care costs.
“That still might not be enough to meet the legacy costs,” Menzel said.
But Nick Ciaramitaro, director of legislation for Michigan AFSCME Council 25, argued that resolving legacy costs to employees can’t be solved by taking it “out of the pockets of retirees.”
Switching to a defined contribution plan ends up costing more money for employers because they have to contribute more to the plan to provide the same benefits that a traditional pension or defined-benefit plan, he said. “It’s a lose-lose situation,” Ciaramitaro said.
But he agreed that “double dipping” – employees who receive retirement benefits but come back to work on a contract – has to end.