Detroit Free Press columnist Nancy Kaffer breaks down the state’s looming budget crisis.
Nancy Kaffer/Detroit Free Press
When the Michigan Legislature, prompted by Gov. Rick Snyder, calls out retiree health care as a looming financial disaster for some Michigan cities, they’re not wrong. They are, in fact, right on the money.
But as usual, Lansing is far more focused on noise than signal.
The Legislature passed a bill that would force cities that face shortfalls in funding retirees’ health care to pay them down.
But with what money?
Cities have been so shorted by state funding ($8 billion since 2002) that they have no financial room to maneuver.
For many of them, it’s a question of falling behind on their long-term retiree health care investments, or facing insolvency.
Look no further than Detroit, where a shortfall in funding for retirees’ health care helped drive the city into bankruptcy. And in bankruptcy, many of those benefits were slashed, rather than fulfilled, leaving city workers with less than they’d been promised.
That’s terribly short-sighted policy – but it’s precisely what the Legislature seems to be embracing for everyone else.
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The set of bills passed Wednesday night by both the state Senate and House would require more reporting, and more warning triggers, for cities falling short of their ability to pay the benefits they’d promised. Across the state, that’s about 30 cities.
These bills are watered-down version of an earlier proposal that included the creation of state-appointed panels for cities whose retiree health care liabilities had reached crisis proportions with wide latitude to alter the city’s budget or force the sale of assets — something opponents had criticized as akin to the state’s controversial emergency manager law.
Paired with the notable lack of financial assistance, it all seemed like a gotcha, and lawmakers were right to delete these provisions — following intense lobbying by advocates for police, firefighters and cities.
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Good benefits are how governments sweeten the pot for workers, who could, in theory, command higher salaries in the private sector. Pensions and retiree health care benefits aren’t supposed to be paid out on demand; governments are meant to pay into an investment fund that generates sufficient income to satisfy each year’s obligations. If the fund doesn’t perform, the government, and sometimes employees, have to pay the difference.
Because health care costs are more volatile, and for a few other reasons, it’s more challenging to estimate their future cost. And because governments have spent the last decade skint, elected leaders have sometimes robbed Peter to pay Paul, shorting those funds to meet other financial obligations.
Across Michigan, state Treasurer Nick Khouri estimates, cities are roughly $18 billion short on pension and retiree health care costs; about half of that is for retiree health care. That means, generally, that over the next 30 years, those cities won’t have the necessary funds to pay the promised benefits.
Some 74% of leaders in the state’s largest cities say they’re worried about paying for retiree health care, the last survey on the subject conducted by the University of Michigan’s Center for Local, State, and Urban Policy found; in cities already under fiscal stress, 87% say retiree health care costs are a problem.
This fiscal year, for the first time, accounting standards will require local governments to disclose such liabilities on the balance sheet. And for communities that haven’t taken the cost of present and future benefits into account, that’s likely to be a rude awakening.
Lansing is right to consider the fiscal health of cities, and what might happen if these unfunded liabilities continue. Shadow emergency management isn’t the answer, but nor is cursory oversight — if cities were able to pay their obligations, they’d be doing it.
But without any financial or resource assistance, what does Lansing expect cities to do about it?
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