Published: March 14, 2013

Michigan cities face crisis with retiree benefits

Contact(s): Andy Henion Media Communications office: (517) 355-3294 cell: (517) 281-6949, Beth Stuever ANR Communications office: (269) 274-1399, Eric Scorsone Extension office: (517) 353-9460

The price tag for providing health care benefits to Michigan’s retired municipal workers will approach a staggering $13 billion over the next 30 years, according to the first comprehensive report on the unfunded legacy costs.

Michigan cities, townships and villages are not required to put aside money for promised retiree health benefits. But by “kicking the can down the road,” says Michigan State University’s Eric Scorsone, the debt grows out of control and municipalities face the possibility of raising taxes, slashing services or breaking promises to retirees to eventually deal with the problem.

Scorsone, the report’s lead author and an MSU Extension economist, presented the report this morning to the state House Committee on Financial Liability Reform.

“We believe this is a critical public policy issue that is going to threaten local government’s ability to provide public services in the future,” Scorsone said. “It’s a crisis now and it’s only going to get worse.”

Scorsone and Nicolette Bateson, a certified public accountant and MSU researcher, examined all 1,773 cities, townships and villages in Michigan and found that 311 offered some form of post-employment health care benefits.

While the collective bill of funding those benefits is $12.7 billion, the bulk of it – almost $11 billion – is attributable to local governments in a 10-county region of Southeast Michigan including Oakland, Macomb and Wayne counties. The city of Detroit alone will owe $5 billion in retiree health care costs.

Scorsone said the larger cities of Grand Rapids, Flint, Lansing and Saginaw also face massive health care bills for retirees.

“Why was Flint put under an emergency financial manager? Why does Detroit face the prospect of being put under an emergency financial manager? Why is the city of Lansing in such financial trouble? It’s because of these legacy costs,” Scorsone said. “And these costs are going to consume more and more of the budget.”

Here’s another way to consider the liability. Cities generally levy about 15-20 mills to fund municipal services. Paying for the retiree health care costs would require them to roughly double that tax burden, Scorsone said. A mill is equal to $1 of tax for each $1,000 of property assessment.

Historically, municipalities offered retiree benefits as a way to compete for workers against the Big Three automakers and other private employers. Health care benefits also helped municipal workers such as firefighters and police officers who retired in their 50s – long before Medicare kicked in at age 65. Typically, the benefits were written into union contracts.

But municipalities have not been required to fund retiree health care during an employee’s tenure. This is different than the pay-as-you-go pension system. Municipalities weren’t even required to report retiree health care costs until 2007. Because of that change, economists are finally determining the scope of the problem.

Other states face similar problems with unfunded legacy costs. Massachusetts, for example, has higher retiree health care bills than Michigan even though it has far fewer people, Scorsone said.

Some states have attempted to save money by creating a health insurance pool for a wide range of active and retired public employees. Such a proposal failed in Michigan in 2009.

Scorsone said state lawmakers should step in to deal with the problem.

“We believe the Legislature needs to look at policy options, needs to act, because the Legislature has power the local governments do not have,” Scorsone said. “Statewide policy makes more sense than each municipality trying to fix this on their own.”

A report by MSU Extension economist Eric Scorsone finds that Michigan's municipalities face nearly $13 billion in unfunded costs for retiree health care benefits.

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