Public Policy
  Analysis, opinion & ideas from Steve Harry



How the state can help local governments with underfunded pensions, retiree health care

January 7, 2018


Last January, Governor Rick Snyder created the Responsible Retirement Reform for Local Government Task Force to address the underfunded pension and retiree health care liabilities of local governments in Michigan. The group released their report in July. Task force members were able to agree on four recommendations:

  1. Greater reporting and transparency.

  2. A pension and OPEB fiscal stress test system to focus action on the local units experiencing the greatest fiscal stress.

  3. Creation of a Municipal Stability Board to assist in the review of a local unitís finances and the development of a corrective action plan.

  4. Require all local governments to pay - at a minimum - OPEB normal costs for new hires.

Due to a strong resistance to giving the the state the power to impose any corrective action on municipalities, three other recommendations were rejected:

  1. Establishment of new funding requirements.

  2. Establishment of plan design requirements for all local governments.

  3. Giving the Municipal Stability Board the power to impose changes if the local unit was unable to successfully implement a corrective action plan.

Bills passed in December by the state legislature give the force of law to the task force recommendations, but they don't really provide any sort of remedy. Still, there is something the state can do to help local governments with underfunded pension liabilities. It could reduce its control over them. It could quit forcing municipalities to engage in collective bargaining.


Local governments in Michigan were not required to bargain with unions until passage of the Public Employment Relations Act (PERA) in 1965. Until then, municipalities had full control over their employees' compensation. They unilaterally set pay rates, offered fringe benefits and established work rules. PERA put an end to that. With the enactment of PERA, municipalities had to hire labor relation specialists to spend hours at the bargaining table pleading with union representatives to keep compensation at reasonable rates. Today, any cuts designed to relieve the burden of underfunded pension and retiree health care must be negotiated at that same table.


Public Act 312 of 1969 reduced local control even further. Public safety is often the most costly item in a city's budget. With Public Act 312, the state forced compulsory arbitration on municipalities who could not reach agreement with police and firefighter unions. A panel of trained arbitrators was established under the Michigan Employment Relations Commission to hear these cases, and they are not merely referees. The Act requires that economic issues be decided with final-offer, or "last-best-offer" arbitration. This means that each side puts forth its best offer and the arbitrator chooses between them. There is no compromise; it's either one or the other.


The problem with Act 312 is not just that an agent of state government is interfering in a local government matter, usurping the power of elected officials. It is also the unfairness of final offer arbitration. The municipality is at a disadvantage in that it must offer enough to maintain its workforce. It cannot offer wages and benefits so low that it loses employees and can't recruit new ones. For the union, on the other hand, the sky is the limit. The union loses only if it asks so much that the arbitrator goes for the employer's offer. And even an outrageous offer is not guaranteed to lose, since arbitrators have to go with the union at least half the time or it would look like they were favoring employers.


Nothing gives municipal leaders a punch in the gut like an arbitration request. Training makes arbitrators neither wise nor fair-minded, and an outcome that busts the budget to give employees an unwarranted increase in compensation is always a possibility.


How to help municipalities deal with underfunded pension liabilities? Restore local control over employee compensation. Start by repealing Public Act 312.


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