Michigan cities and townships that provide health care for retired public workers face nearly $13 billion in unfunded costs, according to a report released Thursday, with half setting aside no money to cope with a bill gobbling up more of their budgets.
The sobering study, released the same day an emergency financial manager was assigned to Detroit, shows the city is not alone in grappling with how to pay promised health benefits to retirees. More than 300 cities, townships and villages -- home to two-thirds of state residents -- face a combined $12.7 billion in unfunded liabilities in the next 30 years.
"It's a crisis now and it's only going to get worse," said Eric Scorsone, an economist at Michigan State University and expert on government finances.
Detailing his findings to a state legislative committee on Thursday, he warned that higher taxes, budget cuts or broken promises to retirees are inevitable, and called on lawmakers to step in and help find solutions.
"For Michigan, as a state, for our local governments, this is the biggest long-term financial challenge we have right now," said Scorsone, lead author of the report.
Unlike pension benefits, retiree health care is often not pre-funded, where money is put aside so it can generate investment income used to help pay future costs. About half of the municipalities that offer health insurance to retirees pay as they go, relying mostly on tax revenue to foot the bill each year despite longer lifespans and rapidly rising health care costs, according to the report.
The study reviewed 2011 annual audit reports that local governments filed with the state. It is the first attempt to comprehensively collect and analyze the cost of Michigan municipal workers' retirement benefits since local governments had to start calculating non-pension legacy costs in 2007, according to the report. A 2011 study by the Citizens Research Council showed $4 billion in health care liabilities for 83 counties.
Detroit's $5 billion tab accounts for nearly 40 percent of the $12.7 billion liability. But Scorsone said larger cities such as Grand Rapids, Flint -- which has an emergency manager -- Lansing and Saginaw also face large health care bills for retirees.
Nearly $11 billion is attributable to municipalities in a 10-county region in southeast Michigan.
"Many Michigan municipalities have taken incremental steps to reduce the (non-pension) liability, but the local governments with the greatest amount of fiscal stress will need more drastic measures," the report said.
Scorsone stopped short of recommending specific actions, but said other cities and states have considered pooling resources, cutting retirees' benefits or making them pay more -- depending on what union contracts allow -- and moving retirees under 65 into the new health insurance exchanges required under the federal health care overhaul. He also mentioned that new laws make current public employees and teachers pay more of their health costs but said there could be barriers to trying the same thing with unionized retirees, depending on how past labor contracts were written.
He urged municipal and union leaders to work together to avoid Michigan having to install more emergency managers at the local level.
Rep. Earl Poleski, R-Jackson, chairman of the House Financial Liability Reform Committee, said the question is how to fix the problem.
"Frankly, we've made promises to people that it appears are going to be very difficult to fulfill. It's the job of our committee to try and mitigate those exposures on the behalf of taxpayers while respecting the obligations that have been made to employees and others," he said.
Poleski said lawmakers may give local governments some tools to make appropriate changes, but ultimately "they have to summon the political ability to deal with their unfunded obligations."
Scorsone said cities and townships historically offered retiree benefits to compete with the Detroit Three automakers and other private employers. Health benefits in particular help workers such as police and firefighters who retire in their 50s before Medicare kicks in at age 65.
MSU report: http://bit.ly/10LcGtO
Breakdown of municipalities' liabilities: http://bit.ly/13VplyI