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Small towns, big problems

KALKASKA -Seated at her kitchen table, Virginia Thomas confessed she is less trusting than she used to be.

Thomas, 75, worked nearly 30 years for the rural northern Michigan Village of Kalkaska, serving as everything from secretary to clerk to co-manager. She also put in four years on the village council and more than six years as mayor.

Thomas and other village employees gave up pay raises in exchange for retiree health insurance.

“When we retired, we thought we had health care until we died,” she said. “We all thought it was a promise.”

But with rumblings about the ability of the village to continue paying those benefits, Thomas and her husband, Duane, 82, are worried. Thomas said she needs a regular asthma shot and other medication that cost about $3,500 a month.

“If they cut us out of that prescription coverage, we might end up living on the street. We don't have any way of going out and earning extra money.

“I'm just praying about it every day.”

This village of roughly 2,000 is not much different from small towns across Michigan, which are now grappling with the same, more high-profile challenge faced by larger cities like Detroit: How to fund the health care of retired city workers promised in more prosperous times.

“It's an issue for everybody,” said Village Manager Penny Hill.

According to a statewide report by Michigan State University on municipal legacy costs, this Kalkaska County village had unfunded retiree debt of $6.4 million in fiscal 2011. Its annual cost was equivalent to 46 percent of the village’s general fund revenue. It also had more than $1.4 million in unfunded pensions.

In 2012, the village’s retiree health plan covered 14 members, including six current employees and eight retirees, according to a 2012 financial statement. Retirees do not contribute to its cost.

Hill said the benefit was negotiated decades ago in flusher times. Village officials failed to anticipate double-digit increases in the cost of insurance premiums. They likewise failed to foresee the closing or relocation of several manufacturing plants.

The fund for paying retiree health care is now empty.

“It was like a recipe for disaster for us,” she said. “It is putting a strain on our general fund. We are looking at our options.”

Hill said that includes investigating different insurance plans and health care providers as a means of cutting costs.

She added that the village is also exploring legal options.

“Legally,” she said, “we are looking at can we get out of it, basically.”

Not just in cities

To be sure, the biggest chunk of unfunded retiree health-care and pension debt in Michigan resides in large urban centers including Detroit, Flint, Saginaw, Lansing and Grand Rapids. According to the MSU study, nearly $11 billion of unfunded retiree health care debt – 86 percent of the state total of $12.7 billion - was concentrated in 10 southeast Michigan counties.

But smaller communities scattered around the state also face significant levels of legacy debt.

Norton Shores, a relatively prosperous suburb of about 24,000 people in Muskegon County, faced retiree health-care debt of $37 million in 2011, with just 2 percent of it funded, according to the MSU report, amounting to 30 percent of general fund revenue. It had $13 million in unfunded pension debt.

In southern Michigan, Sturgis, in St. Joseph County, population 11,000, had retiree health care debt of $17 million. None of it funded.

Tucked away in rural southwest Michigan, Bangor seems an unlikely place for unfunded legacy debt concerns.

But with a population of less than 2,000, the tiny Van Buren County city had more than $1.8 million in unfunded retiree health care debt in 2011, according to the MSU study. While that doesn't sound like much, its annual retiree health care cost amounted to 30 percent of its general fund.

Bangor interim city manager Larry Nielsen said funding that debt is one of many challenges confronting the community.

“Everybody focuses on the larger cities, but the scale of this to Bangor is significant,” Nielsen said. “It's just as significant in Bangor as it is looking at a Kalamazoo or a Detroit or other cities that have that obligation.”

Nielsen noted that, in recent years, the city has cut costs by relegating cemetery maintenance to a private contractor, reducing staff and trimming the police department budget. In recent bargaining, he said, it removed three active employees with retiree health benefits from the plan. It also negotiated an agreement with seven retired employees to switch insurance providers, saving about $11,000 a year.

Under the retiree health-care plan, the city funds 100 percent of health care premiums.

“Unless you get a handle on this,” Nielsen said, “the spiral downward is definitely there.”

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