Detroit just among the first facing troubles funding retiree costs
Detroit’s bankruptcy is getting the headlines right now, but many governments in Michigan could be facing similar financial troubles in the future. Detroit might be just the first of many financial catastrophes in the state.
Detroit’s debt is supposed to be as much as $20 billion. About half of that is blamed on underfunded pensions and benefits for Detroit city retirees.
Last week some of those retirees gathered for a luncheon. Cheryl Williams says she’s worried about what bankruptcy might do to the retirees’ pensions and healthcare benefits. She worked in Detroit’s Finance Department for decades, so she knows something about the numbers. She says what happens to Detroit could happen in your community too.
“I’m hoping they’re not trying to set a precedent with Detroit because there are a lot of municipalities that are going to get hurt if they set a precedent with Detroit.”
So, what does she mean by that?
A lot of Michigan’s larger cities, counties, and charter townships started promising workers pensions and healthcare benefits decades ago to attract workers.
Anthony Minghine is the Chief Operating Officer for the Michigan Municipal League. He says local governments had to start offering better packages for employees.
“The auto industries and all of the support industries around autos are the ones that set the bar. Local government, in an attempt to compete for talent, had to match those types of benefits.”
So, basically the way it worked, governments said to employees, ‘Look, you work today. We’ll pay you in part now and then when you retire we’ll pay you the rest that you’ve earned.’
But ‘that pay you tomorrow’ scenario is at risk.
Most pension funds’ investments were hurt by the recession. But, Minghine says most municipalities can catch up on their obligations… although not all of them. It’s the obligations to pay for health care coverage that’s the real problem.
“I think the stat I saw is, it is roughly six-percent funded on a statewide basis when you look at it, so, pretty inadequately funded.”
When state and local governments started offering the health care coverage to employees and retirees, insurance premiums were cheap. No one saw healthcare costs soaring way above the inflation rate for years on end. So, you ended up with situations like Detroit. Pensions are underfunded by $3.5 billion. Healthcare obligations are underfunded by $5.7 billion according to the Emergency Manager’s estimates.
About a decade ago all these government entities were warned they needed to be aware of this problem. The Government Accounting Standards Board instructed governments to start figuring out what they could do about the ever-growing costs.
Some governments, such as Oakland County, worked on the problem. Most governments did not, or like the state, have only dealt with part of the problem.
Eric Lupher is with the Citizens Research Council of Michigan. He says they’ve been kicking the can down the road… especially recently because already they’ve been facing budget cuts because of the recession.
“Most of those governments have the same sort of liabilities as we’re looking at in Detroit. Very few of them have funded healthcare liabilities for their workers and those that are fully funded in a pension are very rare,” Lupher said.
So, governments facing these looming liabilities face a few scenarios:
- Bankruptcy in years to come.
- Cutting city services to citizens even further to fulfill promises to their employees.
- Eliminating pensions and retiree health care to many current and future employees, switching to defined contribution plans where those employees manage their own finances to pay for health care and life’s expenses in retirement.
Eric Lupher says that last option gets government off the hook, but not employees.
“Moving away from these sort of liabilities, giving governments more predictability on their costs, but it is transferring the risks from the government to the employee.”
Economists warn people really don’t understand what kind of money they’ll need for retirement. It will likely mean the future generations –both public and private sector workers- are going to be much more poor in retirement.