We must help our financially-troubled
November 19, 2013
In March 2013, MSU released a report
the Legacy: The Cost of Municipal Workersí Retirement Benefits to
Michigan Communities." One of the authors was Eric A.
Scorsone. Scorsone served on Lansing's Financial Health Team, and
report came out the same week as "Funding the Legacy."
The MSU report focuses on
post-employment benefits other than pensions. That would be,
for the most part, health insurance, but together they are
called "other post-retirement benefits", or OPEB.
Earlier this month, Bridge, the
online magazine of the Center for Michigan, published a series of
articles on the unfunded pensions and OPEB facing many Michigan
Detroit - coming to a city near you
Debt-ridden Detroit has close
In downsized Flint, desperate
retirees vs. struggling taxpayers
How retirement debt swallowed our
Small towns, big problems
Searchable database: Legacy costs
in your community
Two cities that took control of
Youíre the Mayor
"Funding the Legacy" was often cited
in the Bridge articles.
The "Funding the Legacy" authors got
their information from fiscal
year 2011 annual audit reports filed with the Michigan Department of
Treasury. Here are some of their
Of 1,773 local units of government in
Michigan, 311 (representing 67% of Michiganís population) were
found to provide some level of OPEB at the end of FY 2011.
The total OPEB liability for Michiganís
cities, villages and townships is $13.5 billion. This liability
is funded at 6 percent, resulting in a net unfunded liability of
$12.7 billion. $4.9 billion of that is Detroit's.
The amount of net unfunded OPEB ($12.7
billion) for local units is 1.6 times the combined amount of
unfunded pension ($3.1 billion) and governmental activities debt
($4.7 billion) for the 284 units that provided complete data.
The following two charts are from the
Detroit - coming to a city near you. As you'd expect, Detroit
has by far the highest unfunded legacy cost:
Largest unfunded legacy costs in Michigan
Legacy costs are
commitments made in the past that will be paid by
future generations. The two biggest legacy costs are
pensions and health care insurance for retired
public workers. The 10 local governments with the
highest unfunded legacy costs in Michigan:
Legacy costs (2011)
Source: Eric Scorsone
/ MSU Extension.
When population is considered,
however, Detroit is no longer at the top of the list:
Lansing, my home, is third on the list
for total unfunded legacy cost, but not among the top
ten when population is considered. Lansing's unfunded legacy cost
per resident is $4,396. You can
find the legacy cost per resident for any city, village or township
Why the state must help our cities
The state of Michigan - which means
all of us - must come to the rescue of our cities. I realize that
this is not fair to residents of cities without unfunded
legacy costs - cities that were smart enough to avoid offering
their employees over-generous benefits, or at least smart enough to
set aside enough money to pay for them. But most
residents of cities without unfunded legacy costs are no more
responsible for their enviable position than are those in deep debt.
How many of us, after all, know about funding post-employment benefits? And having city leaders with
enough sense to avoid extravagant promises to employees is more a
matter of luck than an informed electorate.
One reason we must all help is that
many of those cities just can't do it on their own. They've already
cut budgets to the bone and have shrinking populations and little
industry. They are in danger of going bankrupt, like Detroit, which
means their retirees could lose their pensions or health insurance
Another is that in 1965 the state
forced collective bargaining on local governments and public
schools. Since then, employee wages and benefits have been
negotiated out of view of the public (see
Sadly, this is what democracy looks like) by agents unelected and
unknown, often without the best interest of citizens in mind (see
Lansing's Early Retirement of 1992). In those closed
collective bargaining sessions, financial commitments
were made on behalf of citizens without their knowledge.
How the state can help
Make collective bargaining optional.
The Legislature needs to repeal
the Public Employment Relations Act (PERA), which requires schools
and local governments to bargain collectively with employee unions.
There is no need to ban collective bargaining; just make it
Modify the City Income Tax. The Legislature needs to
the City Income Tax Act, Public Act 284 of 1964, which restricts cities' ability
to raise revenue through income taxes. For cities with populations
under a certain size, rates are limited to 1% for residents
and .5% for non-residents. Eighteen cities have 1%/.5%
income tax rates:
Larger cities are allowed higher
rates. Detroit is limited to 2.5%/1.25%, and that's what they have.
Others are limited to 2%/1%. Grand Rapids' tax is 1.3%/.65%,
Highland Park's is 2%/1% and Saginaw's is 1.5%/.75%.
Pensions, annuities, IRA distributions
and unemployment compensation are
exempt from the tax, although they are no longer exempt from the
state income tax.
The City Income Tax prohibits income
taxes for villages and townships, which are not immune to
underfunded legacy obligations. For example, the village of Kalkaska
has 2020 residents and unfunded legacy costs totaling $7,795,847, or
$3,859 per resident. Redford Charter Township has a population of
48,362 and unfunded legacy costs of $150,273,416, or $3,107 per
Here's how the tax should be modified:
Villages and townships should
be allowed to have income taxes, same as cities.
The tax rate should be up to
the locality to decide (by referendum).
Deductions and personal
exemptions should be the same as for the state income tax.
These changes will allow local
increase revenues without depending on revenue sharing and
Offer financial aid. The
state should offer to
pay some portion - maybe half - of unfunded legacy costs if
a local government has a viable plan for paying off the
rest. That plan might include enacting an income tax (or
increasing the rate for an existing tax), not offering pensions to new
employees, requiring increased pension/insurance
contributions from current employees and not offering post-employment health
As a state, we must help our cities,
townships and villages get out from under their debt, and we must
put in place whatever controls are needed to prevent this from
Your thoughts? Email me at
email@example.com or call me at 517-505-2696.