Having successfully tackled teacher pension reform, Michigan Gov. Rick Snyder and state legislative leaders now want to devise a plan to rein in pension debt at the municipal level.
Leaders of municipal organizations, however, are raising caution signs about the effort and stressing that a “one-size-fits-all” approach handed down from the state legislature wouldn’t be the best approach for Michigan’s 2,800 units of local government.
Snyder signed legislative reforms to the state teacher pension system in July that will phase out a hybrid pension plan for new enrollees and create a 401(k)-type system based on defined contributions rather than defined benefits. Supporters say the reforms will over time protect taxpayers from rising pension liabilities.
“Now that the school employee retirement reforms are in place, Gov. Snyder has indicated to the state legislature a willingness to look at unfunded liabilities at the municipal level next,” Anna Heaton, a spokeswoman for Snyder, told Wachdog.org. “What form that will take remains to be seen. We will work with lawmakers on the proposals they put forward in the fall.”
State lawmakers and the governor have said they now see municipal liabilities as a policy priority, especially in light of a study by a task force appointed by the governor. That panel, the Responsible Retirement Reform for Local Government Task Force, released its report in mid-July, but the 20-member group agreed on only a handful of general principles.
The task force called for greater fiscal transparency on retirement debts at the local level, a “fiscal stress test” to better identify government units at the greatest financial risk and the establishment of a Municipal Stability Board to help troubled local governments develop long-term course-correction plans.
“We just had the governor’s task force report issued a couple of weeks ago,” Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League, told Watchdog.org. “We haven’t seen any proposals come out of that report yet.”
And a bigger issue than local pension debt is what’s known as the OPEB problem, a reference to other post-employment benefits such as retiree health care costs, according to Hackbarth.
“The OPEB problem for cities is much greater than any perceived problem with pensions …” he said. “There are large unfunded liabilities on that side of the ledger.”
The task force report estimates the OPEB debt at $10.1 billion, compared to local pension system debts of $7.5 billion.
Addressing local government liabilities resulting from pensions and employee health care would be much more complex than the teacher pension reforms, Hackbarth said, because each local government entity may have its own system or multiple systems for different employee groups.
And the effects of those liabilities can affect local governments’ ability to provide basic services to residents, Hackbarth said.
The Michigan Municipal League has taken no position on the use of 401(k)-style systems to reduce liabilities at the local level. It’s unclear on how such defined-contribution plans can fit in to an overall reform plan given the complexity of pension systems in local governments, he said.
“It will be challenging for state officials to do the same thing for local governments they did for teacher pensions,” James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, told Watchdog.org.
Thousands of general-purpose and special-purpose local government entities exist, some of which are in good fiscal shape while others face problems of pension and OPEB underfunding, according to Hohman. But even so, reforms are possible, he said.
“All local governments are creatures of state policy,” Hohman said, indicating that it is within the state’s purview to call on local government entities to provide pension systems that resemble 401(k) plans.
Hohman hasn’t yet seen any drafts of legislation aimed at local pension reforms. The legislative leaders will be consulting their caucuses in order to come up with legislation they can all support, he said.
The Mackinac Center supported the state’s teacher pension reforms, which prioritize defined-contribution plans and place constraints on future defined-benefit system growth.
Among the state’s 1,800 general-purpose municipal governments, such as cities, only 519 now have traditional pension systems, according to the governor’s task force.
The Michigan Association of Counties has also taken a cautious approach to local pension reforms. Its executive director, Stephan Currie, said state lawmakers need to realize that there’s no quick fix for such unfunded liabilities.
“A ‘one-size-for-all’ approach will not work for everyone, which the (governor’s) report rightly highlights,” Currie said in a prepared statement. “For example, most of our 83 county members either are in solid shape in setting aside money for these commitments or did not extend them in the first place. We need to start with a system that identifies the governments struggling with legacy costs, as is urged in the report.”