The Michigan Legislature overwhelmingly approved legislation Tuesday aimed at getting a handle on municipalities' underfunded pension and retiree health care plans, after majority Republicans last week backed away from provisions that could have led to state intervention in some local governments.
The bills initially faced stiff opposition from police and firefighters, but now have widespread backing in both parties and will be signed into law by Gov. Rick Snyder.
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A look at the issue:
Roughly a third of Michigan's 1,800 local governments provide post-retirement benefits, but many are not setting aside enough money today to pay for them later. Unfunded liabilities total nearly $18 billion. Underfunding, which is especially common for health insurance, can jeopardize a municipality's fiscal sustainability, according to a task force created by the Republican governor. Cities can spend 20 percent of their budget on retiree costs, squeezing basic government services. Other reasons for underfunded systems include longer lifespans, the rising cost of medical treatment and what some see as overly rosy investment assumptions. The liabilities were a factor, along with many others, in Detroit's bankruptcy.
The legislation reflects recommendations from Snyder's task force. Communities will have to set aside money for retirement health costs for employees hired after June 30, 2018. The state treasurer annually will determine the funding status of each local government's retirement system. Those not meeting minimum funding thresholds — 40 percent for health care and 60 percent for pensions — can get a waiver if they are addressing the underfunding. Otherwise, they will submit corrective action plans to a new Municipal Stability Board appointed by the governor. Steps may include closing pension plans and capping employer health costs. The board will approve or reject plans — but not be empowered to force changes.
Groups representing municipalities say the bills fall short and would not give them enough flexibility to manage costs by changing copays and deductibles included in generous retirement plans approved long ago. "You end up with situations where you have someone who's retired and the plan that the local unit's paying for isn't even offered on the market anymore because it's so expensive. So that local unit is paying exorbitant rates, and it is a completely different cost structure than what they're paying even for their active employees," said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League.
Lawmakers dropped various proposals, including one to appoint financial management teams that would have imposed measures if corrective actions failed or were ignored. Some Republicans argued the approach was a better, more limited option than placing state emergency managers in communities, which has proven controversial. But Democrats said the concept went too far and would have interfered with collective bargaining and taken away health benefits. Republicans, ultimately unwilling to take steps seen as curtailing the benefits of first responders, got the message when police and firefighters rallied at the Capitol. Municipal leaders, while wanting a stick at the end of a multi-stage process, preferred a possible binding arbitration process over amending the emergency management law.
Legal protections for pensions and retiree health benefits differ. The state constitution prevents pensions from being altered, but health insurance is owed only if it is a "vested" benefit — an issue that has been litigated in federal courts. During Detroit's bankruptcy, thousands of people still had their pensions cut and health coverage replaced with a monthly stipend to buy insurance through the federal exchanges.
Supporters say the legislation is an important first step to getting an honest assessment of the problem, identifying municipalities most at risk of bankruptcy or severe financial hardship, and coaxing municipalities to act so they can continue to provide promised benefits. A main sponsor, Republican Sen. Jim Stamas of Midland, said the "overwhelmingly majority" of communities will not be affected other than reporting to the state. "This increased transparency will help local governments," he said. "If a local unit is in trouble, this will let them know as early as possible — giving the community its best chance to resolve the problem before it impacts local workers or retiree benefits."
Other legislators add that cuts in state revenue sharing to municipalities and limits on the growth of property taxes are factors that should not be ignored. This year's payments are a combined $173 million below what they were 15 years ago, a 12 percent reduction, which over time has totaled billions of dollars. "Our work isn't over. Dramatic shortages in revenue sharing payments helped create this situation, and it's our responsibility to fix it once and for all," said Democratic Rep. Abdullah Hammoud, of Dearborn.
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