Michigan residents deserve the financial stability and effective delivery of local government services that help ensure their communities are strong and thriving, and retirees who have worked years for local governments deserve to know their retirement benefits will be there when they need them.
But there is a problem facing some of our local governments and municipalities that threatens to crowd out these crucial services and jeopardize retiree benefits: mounting, unfunded liabilities — or in simple terms, long-term debts.
These debts are not unique to Michigan, but for many cities across the state, roughly 20 cents on the dollar go to pay this deficit. In some communities, this number is growing faster and taking up a larger percentage of what’s available in their budgets. That means 20 cents or more on every dollar is not available for direct services for residents, such as police and fire protection, and could result in the potential loss of retiree benefits in the future.
It’s a systemic problem for the nation as a whole — one rooted in unwise government practices such as the pay-as-you-go system that has been the norm for decades. Unforeseen expenses such as rising health insurance costs have also been a stressor for other post-employment benefits (OPEB) systems, which have been increasing at a much higher rate than general inflation over a long period of time.
Michigan also has jurisdictions — particularly older cities — that have seen population declines or stunted growth, which means there are more retirees than active people working. In some communities, there are as many as six retirees to each active worker. With fewer employees to help cover these retiree costs, these communities become even more underfunded.
So what happens if we do nothing? Well, according to a March 2017 S&P survey of pension obligations, Chicago ranked worst among the nation’s 15 largest cities. In fiscal year 2015, 38 percent of Chicago’s total governmental fund expenditures were required pension and actual OPEB contributions — representing the highest share of all 15 cities’ budgets.
Additionally, the city only made 52 percent of its annual legally required pension contribution, and money budgeted toward employee pensions in 2017 still fell short of the actuarially determined contribution levels. Chicago taxpayers have recently faced steep tax increases, with its pension problem being one of the culprits. These numbers paint a dark picture of what can happen in Michigan if we don’t make tough decisions to shore up our biggest financial woes and preserve the benefits for future generations.
Regardless of how we got here, acting on these growing liabilities now is the responsible thing to do. We can’t continue to burden this state’s residents with our historic liabilities. That’s why I established a task force to get out ahead of this looming issue before it becomes a full-blown crisis.
Together, legislators, state and local government officials, and employee representatives found consensus on key reforms that called for greater reporting and transparency, the development of a fiscal stress system, and new funding requirements necessary for long-term stability. The sooner a problem is identified, the sooner it can be addressed.
It’s a complex issue with no one-size-fits-all solution, but it’s one that needs our immediate attention. The time for local government retirement and benefits reform is now. As we approach the end of 2017, I will be working closely with our state’s lawmakers to pass legislation that creates a framework for a sustainable system that ensures retiree support and financial stability for residents now, and for years to come.
Rick Snyder is the governor of Michigan.