Howes: New law reveals Michigan municipal legacy obligations
Correction: George Lahanas is city manager of East Lansing. An earlier version of this story gave an incorrect title.
The financial strain weighing on many Michigan municipalities isn’t gone, it’s just been hidden — until now.
In its first round of assessments under a new state law, the state Treasury Department on Monday said 110 of 490 local units of government across the state are underfunded for retiree health care benefits, pension obligations or both. Even more municipalities are expected to make future lists.
Nineteen localities in Wayne County, including Allen Park, Dearborn and two of the five Grosse Pointes (Farms and Woods), are behind on their retiree health care funding, the state says. And six Wayne County jurisdictions, including Redford Township, Trenton, Wayne and Westland are underfunded on both — as are Hazel Park, Oak Park and Madison Heights in Oakland County.
The effort to highlight the expanding obligations competing for scarce taxpayer dollars is long overdue. This in the state that witnessed the largest municipal bankruptcy in American history and its impact on retirees, a place where systemic change seldom occurs without a precipitating financial crisis.
Lansing’s review is a product of the “Protecting Local Government Retirement and Benefits Act” that became law last December. It compiles local data to detect fiscal time bombs lurking inside local budgets, and uses it to prod localities to address their funding shortfalls with “corrective action” plans.
“By working together, we can help ensure the benefits promised by communities are delivered to their retirees and help ensure that the fiscal health of communities allows them to be vibrant now and into the future,” Eric Scorsone, deputy state treasurer and head of Treasury’s State and Local Finance Group, said in a statement.
In an interview, he added: “This is just a start. One of the common denominators of the financial crisis has been legacy costs. We know this is a big liability out there” — and it continues to grow for current and retired public employees, as well as their counterparts in public schools, whose districts are not covered by the new state law.
The problem is huge, and it’s not limited to Michigan or the industrial Midwest. Public obligations for pensions and retiree health care generally are not subject to the same level of transparency, disclosure or correction as private-sector plans covered under the Employee Security Income Security Act of 1974.
That needs to change. The unfunded liability for the Michigan Public School Employees Retirement System totaled $29.1 billion, or 40.3 percent, at the end of Fiscal Year 2015-16, the Senate Fiscal Agency reported last July. The aggregate number reflects the totality of the burden, compared to hundreds of separate pension plans operated by each municipality with varying levels of funding.
Under the new law, a municipality’s retiree health plan is considered underfunded if its assets are “less than 40 percent” of its obligations, or require annual contributions “greater than 12 percent” of a jurisdiction’s annual operating revenues. A pension plan is deemed underfunded if it is “less than 60 percent funded,” or its annual contributions are “greater than 10 percent” of annual operating revenues.
The new law requires local units of government — cities, villages, townships, counties and county commissions — with fiscal years ending June 30, 2017, to report pension and retiree health care finances by the end of January. Municipalities whose books close later could be included in future lists.
The goal: highlight financial reality to pressure local officials into reconciling long-term obligations with current contributions and recurring revenue. They can make adjustments over time, not in a single year, to minimize unpopular choices that “crowd out” their ability to provide municipal services many taxpayers expect.
Even without explicit enforcement mechanisms, the new law likely won’t be popular — though it should be, especially among retirees and organized labor leaders seeking assurances that obligations will be honored. Public notoriety, courtesy of the state Treasury, could force some hard choices in municipal offices and council chambers, where long-term financial obligations mostly could be ignored or left for successors to worry about.
Not anymore — which is precisely the point. The law, an outgrowth of the Responsible Retiree Reform for Local Government Task Force, aims to increase transparency and community awareness of local government finance — and to emphasize that failure to account for such obligations could impact negatively municipal bond ratings and delivery of local services.
In a statement last week, East Lansing City Manager George Lahanas attributed his city’s inclusion on the Treasury’s first list to recession, below-average market returns and “tight restrictions” on the city’s ability to raise revenue to fund obligations and current operations.
“The city’s pension plan was 80 percent funded in 2003 and is 50 percent funded today,” he said. “The city has implemented numerous cost-controlling measures over the years to address the legacy cost challenges. .... City officials have identified that more aggressive payments need to be made moving forward to further address the challenges.”
That’s the whole point.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.