We must help our financially-troubled cities

November 19, 2013

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In March 2013, MSU released a report called "Funding the Legacy: The Cost of Municipal Workers’ Retirement Benefits to Michigan Communities."  One of the authors was Eric A. Scorsone. Scorsone served on Lansing's Financial Health Team, and its 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 local governments:

Detroit - coming to a city near you

Debt-ridden Detroit has close company

In downsized Flint, desperate retirees vs. struggling taxpayers

How retirement debt swallowed our towns

Small towns, big problems

Searchable database: Legacy costs in your community

Two cities that took control of retiree costs

You’re 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 findings:

  • Of 1,773 local units of government in Michigan, 311 (representing 67% of Michigan’s population) were found to provide some level of OPEB at the end of FY 2011.

  • The total OPEB liability for Michigan’s 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 Bridge article 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:

Local government

Legacy costs (2011)
Detroit

$5,586,937,313
Flint

$1,112,098,934
Lansing

$502,405,000
Warren

$414,548,667
Grand Rapids

$325,040,512
Saginaw

$311,646,267
Taylor

$276,925,086
Westland

$228,793,659
Ann Arbor

$227,233,000
Southfield

$206,168,452

Source: Eric Scorsone / MSU Extension.

When population is considered, however, Detroit is no longer at the top of the list:

Largest legacy costs per person

Ten Michigan cities with the largest legacy costs per city resident. This is each individual’s share of the currently unfunded bill for pensions and health care and other benefits for retired city workers.

City

2010 Pop.

Total unfunded legacy costs (2011)

Unfunded legacy costs for each resident
River Rouge 7,903 $88,923,694 $11,252
Flint 102,434 $1,112,098,934 $10,857
Detroit 713,777 $5,586,937,313 $7,827
Melvindale 10,715 $79,462,584 $7,416
Center Line 8,257 $54,045,925 $6,545
Ecorse 9,512 $60,794,028 $6,391
Saginaw 51,508 $311,646,267 $6,050
Bloomfield Hills 3,869 $23,301,774 $6,023
Fraser 14,480 $78,449,068 $5,418
Allen Park 28,210 $144,225,807 $5,113

Source: Eric Scorsone / MSU Extension.

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 here.

 

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 or both.

 

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

 

1.

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 optional.

2.

Modify the City Income Tax. The Legislature needs to modify 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:

 

Albion

Battle Creek

Big Rapids

Flint

Grayling

Hamtramck

Hudson

Ionia

Jackson

Lansing

Lapeer

Muskegon

Muskegon Heights

Pontiac

Port Huron

Portland

Springfield

Walker

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 resident.

Here's how the tax should be modified:

 

 a.

Villages and townships should be allowed to have income taxes, same as cities.

 

 b.

The tax rate should be up to the locality to decide (by referendum).
 

 c.

Deductions and personal exemptions should be the same as for the state income tax.
 

These changes will allow local governments to increase revenues without depending on revenue sharing and property taxes.

3.

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 insurance.

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 happening again.

 

Your thoughts?  Email me at stevenrharry@gmail.com or call me at 517-505-2696.