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Tue November 12, 2013
Retiree debt isn’t just a problem in Detroit
Yesterday, I said that if you thought your town’s pension funds were woefully underfunded, you might want to take another look. Well, somebody now has.
Last year, the non-partisan, non-profit Center for Michigan began publishing an online magazine called Bridge, which almost immediately began doing some of the best journalism in the state.
Bridge is now rolling out a series looking at retiree debt and unfunded liabilities in communities across and around the state, and it is clear that the situation is even worse than I imagined. This is not based on emotion or anecdotal evidence.
Eric Scorsone, the former chief economist for the Michigan Senate Fiscal Agency, recently did an analysis for Michigan State University. His conclusions can be summed up in a four word quote: “It’s not just Detroit.“ Indeed not.
Ted Roelofs, a respected longtime reporter for the Grand Rapids Press, looked at the data for a series he’s been writing in Bridge. He found that more than 300 of Michigan’s other cities and municipalities had combined underfunded legacy costs of more than $12 billion dollars, a combined burden bigger than Detroit’s.
We think of Ann Arbor as an affluent place without any real problems. Think again. Based on figures from two years ago, Ann Arbor had legacy debt -- meaning, primarily, pension and health care obligations-- equal to 30 percent of the state’s annual revenue.
Grand Rapids is almost as bad -- 25 percent. Saginaw is a shocking 85 percent. That’s like saying that 85 percent of your yearly income is going to service the debt on your credit cards. Does this mean you are going to crash and burn? It certainly does.
Here’s the bottom line: Cities across Michigan, Roelofs writes, “could soon face the same heartbreaking choice confronting Detroit: Whether to sharply reduce benefits to retired municipal employees … or continue to stick residents and businesses with the bill.” Actually, that bill will get progressively harder, and eventually impossible, to pay.
In Saginaw, Roelofs notes, someone owning a $200,000 house would have to pay almost $5,000 a year to fund that city’s annual legacy costs. Of course there aren’t many houses worth that much in Saginaw. And there is no way residents can come up with that kind of money.
In an increasing number of cities, including Flint and Detroit, citizens no longer can make these difficult decisions. Those cities and others have been taken over by state-appointed emergency managers. In Detroit, the manager and a bankruptcy judge will be deciding what happens, and based on this data, more bankruptcies may be likely to follow. This is truly frightening.
What happened is that Michigan’s municipalities made promises based on unrealistic assumptions. Signs as early as the mid-1980s that the system was headed for trouble were ignored. Now, we all need to be thinking hard about what to do.
Do we tax ourselves to death or deny people pension money they have worked hard for their entire lives?
Unless a city goes bankrupt, pensions, though not retiree health care costs, are protected by the state constitution. This may just be the biggest problem facing Michigan government in our lifetimes.
Jack Lessenberry is Michigan Radio’s political analyst. Views expressed in the essays by Lessenberry are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, The University of Michigan.