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untanglingwebs
El Supremo
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Editorial: Without changes, the state is setting up more cities to fail
Here's the scary truth about Detroit's historic bankruptcy: This city isn't that different from other places around the state. High legacy costs, massive debt loads, declining population — cities across the state are struggling. And unless state and local elected officials stop ignoring these problems, there's a good chance more Michigan cities will follow Detroit into bankruptcy.
May 25, 2014Editorial: Without changes, the state is setting up ... - Detroit Free Press
www.freep.com/article/20140525/OPINION01/305250057/michigan-emergency-manager - 164k - Cached - Similar pages
1 day ago ... Here's the scary truth about Detroit's historic bankruptcy: This city isn't that different from other places around the state. High legacy costs
Last edited by untanglingwebs on Mon May 26, 2014 7:42 am; edited 1 time in total |
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Mon May 26, 2014 7:35 am |
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untanglingwebs
El Supremo
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Editorial: Without changes, the state is setting up more cities to fail
May 25, 2014
A man walks past a mural painted on a boarded up business in downtown Flint depicting landmarks and events associated with the city. / September photo by Ryan Garza / Detroit Free Press
By The Detroit Free Press Editorial Board
FILED UNDER
Cities in trouble
Operating under emergency managers
Allen Park
Detroit
Flint
Hamtramck
Operating under consent agreements
River Rouge
Inkster
Royal Oak Township
Under financial review
Highland Park
Financial emergency exists
Lincoln Park
Transitioning out of emergency management
Benton Harbor
Ecorse
Pontiac
Here’s the scary truth about Detroit’s historic bankruptcy: This city isn’t that different from other places around the state. High legacy costs, massive debt loads, declining population — you can find those ills all across Michigan.
And unless state and local elected officials stop ignoring these problems, there’s a good chance more Michigan cities will follow Detroit into bankruptcy.
■ Full coverage: Detroit financial crisis
Just look at Flint. Now in its second round of emergency management, Flint is struggling to fund its pensions and shed the high cost of providing health care for retired workers. But even with an emergency manager in place, Flint’s options are limited. Unlike Detroit, the city doesn’t owe a lot to banks — the city’s most substantial liabilities are loans it made to itself, and the costs of the promises it made to retirees.
“Since 2011, we’ve made the difficult decisions to reduce expenditures,” said emergency manager Darnell Earley. “You reach a point where there’s no place else to go with that.”
So Flint’s emergency manager — a predecessor of Earley, who was appointed last year — moved to cut health benefits; retiree groups filed suit in federal court. There’s currently an injunction barring Earley from making the cuts, which cost the city about $5 million a year. With no revenue growth, the city can’t adequately support its pensions, which were 60% funded when a state review was conducted in 2011. Catching up will consume an ever-increasing share of Flint’s general fund, but making cuts to pensions is likewise complicated — outside of bankruptcy court, they’re protected by the state constitution.
■ Related: Pension problems aren’t just a Detroit problem
But without changes, Earley says, the city will be forced to make substantial cuts to its police and fire departments.
These are unpalatable choices. Cities made promises to workers, who built their lives around guaranteed retirement benefits. Reneging on those promises is unconscionable. Also unacceptable are service cuts so deep that residents’ lives are endangered.
But budgets in cities like Flint have been cut to the bone, Earley said, and without the ability to alter legacy costs, the city won’t be able to balance its books.
Overhaul overdue
It should never have come to this.
A municipal financial gauge developed by Michigan State University professor Eric Scorsone tells a harsh story about Michigan’s fiscal reality: When a matrix of factors — such as legacy costs and population decline — are taken into account, dozens of cities are in financial danger.
But neither Gov. Rick Snyder nor the Michigan Legislature have acknowledged that there’s a problem, much less taken steps to fix it.
During his first term, Snyder has cut revenue-sharing, replacing most of it with a competitive incentive program that pits cities against each other, asking for operational efficiencies in return for state tax revenue allotments. It’s fair to ask cities to function more efficiently, but it’s a false equivalency, based on the premise that funding cuts can always be managed.
Yet even well-managed, affluent municipalities are struggling with underfunded pension and retiree health care obligations, driven in part by the precipitous drop in property values during and after the foreclosure crisis. Because of the way Michigan assesses and captures property tax revenue, cities won’t recoup lost revenue for decades — but costs are fixed or growing.
“The municipal financing mechanism is definitely in need of overhauling, and cities need to be made a priority in discussions at the legislative level as the Legislature puts the budget together,” Earley said. “As has been proven, cities are creatures of the state, and the state should look very closely at those things that are broken and do whatever they can to fix them.”
Small alterations to the way that cities collect revenue could make a tremendous difference, some municipal experts say. For example, changing Michigan’s Proposal A to allow cities to retain the full value of property when home sales occur — under the current system, increased taxes from a recently sold, newly valued home trigger a rollback in value of properties that haven’t changed hands — or capping what kind of benefits can be offered to municipal employees, Scorsone said.
“If we’re not going to allow property taxes to grow at the rate of the economy, which seems reasonable, we have to ask, ‘What are the other options?’ ” Scorsone said. “And why is the Legislature pursuing policies that are clearly detrimental to cities, when that means more cities are going to face” the state’s emergency manager law?
Plenty of blame
Local elected officials are no less culpable. The financial crises in cities like Detroit and Flint came as no surprise, presaged by years — if not decades — of population decline, plummeting revenues and failing services. And for the most part, elected officials can’t or won’t address the problems until it’s too late.
In cities with underfunded pension systems and massive retiree health care obligations, unsustainable promises were made decades ago and can’t easily be altered.
But the focus among elected officials, it seems, is on warding off state intervention, on fighting any suggestion of loss of local control, even when that means digging a deeper financial hole.
In Wayne County, pensions are 45% funded — the state’s emergency manager law allows for intervention if funding is below 80% — and there’s an $850-million accumulated deficit. The county’s operational deficit is about $30 million.
But Wayne County Executive Robert Ficano, who is up for re-election this year, insists that his administration can patch the budget holes before state intervention becomes necessary.
Ficano’s deficit-elimination plan is dependent on buy-in from outside groups, such as the county’s labor unions and its other elected officials, who have little motive to accept the executive’s proposed cuts.
It’s reminiscent of deficit-elimination plans presented by a series of Detroit mayors who met fierce resistance from the labor unions representing city workers, even as the appointment of an emergency manager loomed.
Yet earlier this month, Ficano insisted to the Free Press Editorial Board that his plan is viable, that a buy-in is just around the corner.
There are tools
Preserving democracy is important. So is ensuring the safety and well-being of residents. So while a wave of emergency manager appointments, or a series of municipal bankruptcies, would be troubling, elected officials owe it to residents to explore all options.
Though Michigan officials have stopped far short of searching for a global solution to the municipal funding crisis, there is state help available.
The state’s Office of Local Responsibility exists to offer policy expertise, technical assistance, recommendations and guidance to Michigan’s financially stressed cities, said state Treasury Department spokesman Terry Stanton. Cities can approach the office, which also sometimes reaches out to municipalities that are obviously in trouble.
Then there’s the state’s emergency manager law, which offers cities in fiscal distress the ability to negotiate a consent agreement with the state. Such agreements bestow some of the powers of an emergency manager onto a local elected official, with the caveat that a failed consent agreement could lead to the appointment of an emergency manager or a municipal bankruptcy.
For leaders of distressed cities, these are tools worth exploring.
Others not so lucky
In Detroit, the city’s financial position worsened as mayor after mayor resisted state involvement. Debt piled up and resources dwindled, leaving Detroit bankrupt in 2013 with few assets left to draw on.
And yet Detroit’s bankruptcy is progressing at a pace most Michigan cities couldn’t hope to match.
Here’s another hard truth that state and local officials must accept: If Flint, or Hamtramck, or Highland Park file for bankruptcy protection, they’ll do so with considerably fewer advantages. Though Detroit emergency manager Kevyn Orr has drawn substantial fire from critics, there’s no question that he’s eminently qualified to lead a municipal bankruptcy. Likewise, Orr’s former firm, Jones Day, has served as lead council on the bankruptcy. Cities like Flint and Hamtramck can’t afford this kind of representation.
More crucially, a grand bargain among philanthropic foundations, the State of Michigan and the Detroit Institute of Arts will protect the museum’s collection and soften cuts to Detroit pensions. Smaller cities won’t get that kind of help.
The state’s emergency manager law is a bandage meant to stanch financial bleeding, never meant to be a widespread solution. But 12 cities are currently operating under an emergency manager or consent agreement, or are under financial review. Unless the state changes the way it funds municipal government — and local leaders get serious about fiscal health — expect to see those numbers grow. |
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Mon May 26, 2014 7:37 am |
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untanglingwebs
El Supremo
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Mon May 26, 2014 7:46 am |
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untanglingwebs
El Supremo
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Editorial: Pension, retiree health care problems aren't just a Detroit problem
10:53 AM, April 6, 2014 |
By The Detroit Free Press Editorial Board
Editorial: Without changes, the state is setting up more cities to fail
Northville has almost nothing in common with Detroit.
Straddling western Wayne and southern Oakland counties, Northville is among Michigan’s most affluent cities. Its median household income is $88,237 — more than three times Detroit’s. Slightly more than 2% of Northville’s 5,985 residents live in poverty; more than 38% of the 701,475 Detroiters do. Northville has a healthy revenue stream and a fat rainy-day fund. Detroit, famously, went bankrupt last year.
■ Full coverage: Detroit’s financial crisis
But Northville and Detroit share a problem that’s afflicting cities all over Michigan: retiree benefits.
Just like Detroit, Northville has made big promises to its employees about their retirement pay and health care. And just like Detroit, Northville has failed to assure those promises were funded.
So as Detroit tries to sort out its underfunded pensions and plans to walk away from most of its retiree health care obligations as part of its bankruptcy, Northville is apprehensively contemplating what it will do about the same problems in an otherwise financially health community.
Northville’s pensions are only 58% funded, according to the city’s 2012 annual report, meaning the city would need six times what it spends each year on employee salaries to fully fund the cost of providing pensions over the next 30 years. That problem is getting worse; the pensions were 63% funded just three years ago.
Northville’s retiree health care obligations are only 24% funded, but that’s actually an improvement. The city has been contributing more money to the fund and paring back the scope of promised benefits for future retirees.
You’ll find the same issues in cities all over the state, not just big urban centers with well-known problems related to population loss, eroding tax bases and mismanagement. But it’s also cities like Birmingham, which has funded only 26% of its long-term retiree health care costs. Or Bloomfield Hills, where the pensions are only 57% funded. Or Grosse Pointe Park, whose pensions are 71% funded.
Meeting these costs is holding cities back, constraining their ability to dedicate slender revenue streams to providing essential services.
Statewide, cities are more than $30 billion behind on meeting the costs of pensions and health care over the next 30 years, according to a Michigan State University study based on 2011 data.
The widespread nature of retiree benefit under-funding, particularly in southeast Michigan, is the reason that Gov. Rick Snyder and the Legislature need to be more focused. It’s a statewide problem that needs a statewide solution.
The Detroit bankruptcy is an outsized example of what can happen when these costs aren’t accounted for properly and funded sufficiently. Other urban centers, like Flint and Pontiac, where retiree costs continue to plague finances despite repeated state intervention, could be next in line for federal court reorganizations.
But left unaddressed, the pension and retiree health care troubles found even in unexpected places will over-burden financially health communities from Marquette to Monroe.
Pension and retiree health care costs — and how much money a city must set aside annually to pay for those benefits — are calculated over 30 years. Actuaries make these assessments based on a host of factors: Statistical mortality rates, age, salary and benefits of workers at retirement, past and projected investment returns. For pensions, these formulae tend to work.
Pension funds work in much the same way as a personal investment account. When times are good, interest generated by the fund’s investment is sufficient to pay not just for obligations to current retirees, but to put money aside for future benefits promised to workers who haven’t yet retired. When the pension fund’s investments don’t make enough, the local government must make up the difference. If the government can’t afford to pay the total amount it owes, that’s called an “unfunded liability.” But that’s not all — if a local government doesn’t make a required annual payment, it’s treated as debt, and the pension system charges interest. So, if you’re not paying in full, the amount you owe grows.
The wild card
It’s pretty easy to estimate what pensions will cost each year — pension benefits are fixed when an employee retires. But health care is a wild card. Costs increase unpredictably and, for the last decade, steeply.
Over the last 10 years, annual health care premium increases have jumped by double-digit percentages. Over the same decade, the income that cities rely on to pay those bills has dropped.
Regionally, property tax revenue — most cities’ chief source of income — has dropped by about 32% since 2007. Because of the way Michigan’s Headlee Amendment and Proposal A limit property tax captured by local governments to the rate of inflation or 5%, whichever is less, it could be decades before tax revenue returns to 2007 levels. State revenue-sharing, the tax revenue that the state collects on behalf of local communities and then redistributes, has also declined. Cities have lost about $689 million in revenue-sharing over the last decade, according to the Michigan Municipal League.
And while it’s a good idea to pay down retiree health care obligations in advance, there’s no requirement to do so. In fact, until 2008, cities weren’t even obligated to report their unfunded health care liabilities — the billions of dollars promised to retirees was entirely off-books.
When cities set aside money for health care, said Michigan State University associate professor Eric Scorsone, author of the study, it generates interest, decreasing the amount of money that cities have to contribute. When they don’t, it’s a larger bite from the general fund.
And when money’s tight, shortchanging the pension and health care funds — long-term obligations that won’t come due tomorrow — prove an attractive target for city leaders worried about making ends meet.
Not as bad as Detroit
Cities like Northville aren’t in the same dire straits as Detroit, which filed for municipal bankruptcy protection last year, for one reason: cash.
“The difference between us and Detroit is our cash position,” said Patrick Sullivan, city manager of Northville. “For most people, it’s eventually going to catch up with them. They’re not putting enough money away to satisfy their obligations, or not accurately estimating what their costs will be.”
The city is on track to meet only 63% of its pension obligations over the next 30 years, and would need to contribute 10% of its general fund revenues — that’s the same pool of money that the city uses to pay for basic services — each year to catch up.
In 2011, Northville was $16 million short on health care obligations over the next 30 years, which would have required another 30% of its fund balance to pay down. In the last few years, Sullivan said, the city has changed the way it estimates its future retiree health care costs, figuring in the lower-cost benefits current employees will receive, and upped its annual contribution. That’s brought the unfunded liability down to 24.2% — still, Sullivan notes, a long way to go.
But even for cities that have robust rainy day funds, continuing to draw from savings to pay benefits isn’t ideal — and it’s not sustainable.
Yet no one seems to know exactly how to solve these problems — and that’s among those who recognize that there is, indeed, a problem.
The Michigan Municipal League has proposed the creation of a statewide pool to satisfy retiree health care liabilities. A state law passed last year allows cities with top investment ratings to bond out for pension liabilities, but requires switching to a defined-contribution (rather than defined-benefit) system.
There’s merit in both, but neither addresses the true scope of the problem.
“The research shows that pension and (health care) is the dominant liability over everything else,” Scorsone said. “It’s really going to come to fixing that issue.” |
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Mon May 26, 2014 7:49 am |
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untanglingwebs
El Supremo
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Quote from Michigan's Municipal House of cards:
Just look at Flint. Now in its second round of emergency management, Flint is struggling to fund its pensions and shed the high cost of providing health care for retired workers. But even with an emergency manager in place, Flint’s options are limited. Unlike Detroit, the city doesn’t owe a lot to banks — the city’s most substantial liabilities are loans it made to itself, and the costs of the promises it made to retirees.
“Since 2011, we’ve made the difficult decisions to reduce expenditures,” said emergency manager Darnell Earley. “You reach a point where there’s no place else to go with that.”
So Flint’s emergency manager — a predecessor of Earley, who was appointed last year — moved to cut health benefits; retiree groups filed suit in federal court. There’s currently an injunction barring Earley from making the cuts, which cost the city about $5 million a year. With no revenue growth, the city can’t adequately support its pensions, which were 60% funded when a state review was conducted in 2011. Catching up will consume an ever-increasing share of Flint’s general fund, but making cuts to pensions is likewise complicated — outside of bankruptcy court, they’re protected by the state constitution.
But without changes, Earley says, the city will be forced to make substantial cuts to its police and fire departments.
These are unpalatable choices. Cities made promises to workers, who built their lives around guaranteed retirement benefits. Reneging on those promises is unconscionable. Also unacceptable are service cuts so deep that residents’ lives are endangered.
But budgets in cities like Flint have been cut to the bone, Earley said, and without the ability to alter legacy costs, the city won’t be able to balance its books.
Overhaul overdue
It should never have come to this. |
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Mon May 26, 2014 7:53 am |
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untanglingwebs
El Supremo
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In this Flint talk thread, "No retiree health cuts for Flint-Bankruptcy next?"id the Detroit editorial that focuses on Flint's potential bankruptcy possibility.
Flint made retirement promises they couldn't keep and now the City is in dire financial straits.
Michigan itself is putting additional stress on residents. The gas tax will have an unequal impact on poorer residents with older vehicles that have lower miles per gallon. Many will be unable to afford the proposed higher taxes. |
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Mon May 26, 2014 8:15 am |
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