Editorial: Michigan cities must tackle pension debt
Unfunded liabilities, including pensions, remain one of the biggest drags on communities in Michigan. While local governments must follow through on constitutionally protected pension promises, they need to ensure they're creating a more sustainable financial path.
A new report from the Mackinac Center for Public Policy highlights there's a lot of work to do.
The 100 largest municipalities have over $5.5 billion combined in unfunded pension liabilities, the study found.
The report includes an interactive map showing the status of these cities' pension funds.
Twenty local governments boast fully funded pension programs. Of these, only five maintain traditional, defined-benefit pensions: Pontiac, Kalamazoo, Troy, Kentwood and Saginaw Township. Far from the wealthiest municipalities in Michigan, these towns have been wise.
"They have been prudent about their pension systems and have kept employees from being their largest creditors," says James Hohman, director of fiscal policy at the Mackinac Center.
The other 15 represent municipalities that have defined-contribution programs — 401(k)-style retirement plans, which depend on yearly contributions from the employee, often with an employer match.
Six cities have pensions that are 50% funded or less, placing them in a much more vulnerable situation: Flint (36% funded with $346 million in pension liability), Burton (48% with $26 million), Eastpointe (50% with around $43 million), Hamtramck (44% with $55 million), Lincoln Park (27% with $88 million) and Romulus (42% with $30 million).
Seventy-two additional communities face different levels of underfunded pensions.
While many of these governments have been better about putting money aside for pensions still, the funding gap continues to grow, says Hohman.
“There’s nothing about this system that more money can’t fix," Hohman says. "Local pension managers don't need to be reminded of the risk that these pension systems pose to municipal finance. They need to pay what they owe and try to prevent unfunded liabilities in the future."
Patrick Anderson, CEO of Anderson Economic Group, says taxpayers should hold their government officials accountable.
"Some of the worst abuses of taxpayers' rights have occurred through nefarious, hidden and deliberately confused pension payments or lack thereof," he says.
Anderson says we need look no further than Detroit’s bankruptcy or the fiscal crisis facing Chicago to see the result of "the failure of elected officials to make good on promises they made to employees and employee unions when they were incurring pension obligations.”
Michigan’s constitution is clear. Governments have a contractual obligation to set aside funding for promised pension benefits, and to do so in the same year their obligations are incurred. If that is not managed, then funding last year’s pension obligations is supposed to be the first line item on next year's budget.
All struggling cities should show they have a plan for paying off outstanding debt, while still maintaining basic government services.
And, if these communities aren’t already, they need to transition away from defined-benefit pensions to defined-contribution systems that nearly all employees in the private sector now have.
Those decisions are key to a sound financial future.