Lansing — Local governments across Michigan have promised retiree health care benefits they cannot afford, House Speaker Kevin Cotter said Thursday, warning that collective unfunded liabilities of $11 billion could drive more Michigan cities toward bankruptcy.
“The current system is not sustainable,” Cotter said, promoting a controversial new plan that could raise health care costs for many municipal retirees, including police officers and firefighters, who worked for local governments with large unfunded liabilities.
“Unless we address this mounting problem, many local governments will go bankrupt, retirees will be harmed, and services critical to our residents will be impaired,” Cotter said in testimony before the House Local Government Committee.
The 13-bill package, introduced Wednesday with little more than two weeks left in the “lame-duck” legislative session, would require local government retirees to pay 20 percent of their health care costs in communities that have accrued significant unfunded liabilities.
The legislation would eliminate retiree health benefits for new hires beginning in May 2017. Instead, local governments could choose to contribute an amount capped at 2 percent of an employee’s base pay to a tax-deferred Health Savings Account.
Cotter touted the proposal Thursday before the House Local Government Committee, which heard three hours of testimony but did not vote on the package. Additional debate is expected next week.
Critics say the legislation, if enacted, could have a “potentially devastating effect” on retirees who are living on fixed incomes and have already made retirement plans based on promised benefits.
“This legislation affects real people, with real lives, with real needs,” said Howell Police Chief George Basar, executive director of the Michigan Association of Chiefs of Police. “Unfortunately, our Legislature just looks at us as numbers on a spreadsheet with no consideration of the impact on real lives.”
Basar noted that Michigan’s Republican-led Legislature imposed a so-called pension tax on retiree income as part of a major 2011 tax code rewrite. The new health care proposal is “another assault on senior citizens and retirees in this state,” he said.
Both sides of the debate acknowledge that unfunded liabilities are a real and growing problem for local governments. While some have well-funded retiree health care programs, most do not, said Eric Scorsone, an expert with the Michigan Treasury.
Cities, townships and villages face a combined $8 billion in unfunded retiree health care liabilities, Scorsone said. Counties have a combined $3 billion in unfunded health care liabilities.
“This is one of the biggest financial risks we see as we’re trying to maintain the fiscal health of our communities,” he said.
Cotter cited Detroit as an example of a city where unfunded liabilities caused near collapse. It’s not believed the proposal would affect retirees in Detroit because its unfunded health care liabilities were wiped out in the city’s historic bankruptcy case.
Rep. Jeremy Moss, D-Southfield, agreed that the problem is worth addressing at some point but criticized the new proposal as a “cuts-only” approach. He suggested there are “more creative options” to drive revenue toward local governments facing looming health care costs.
Moss also called it a “shame” that Thursday’s hearing occurred at the same time as the funeral for slain Wayne State University police officer Collin Rose. He said other officers had called his office to complain that they could not make it to Lansing.
“They had to attend the funeral as an obligation for their respect for somebody who was gunned down in the line of duty,” Moss said. “Now, here in the Capitol while they’re attending that, their pocketbooks are getting robbed.”
Rep. Lee Chatfield, who chairs the committee, said he plans to hold at least one more hearing on the package before any potential votes, but he dismissed any suggestion the final weeks of the year are a bad time to consider such a significant policy.
“When we take our oath, we’re saying we’re going to work hard from the first day we’re sworn in to the last day of session,” said Chatfield, R-Levering. “We need to continue working, even in lame-duck, for the people of Michigan and tackle the tough issues that are facing our state.”