Grand Rapids must deal with its debt

Are the finances of Grand Rapids headed the way of Detroit’s? Hopefully not, and probably not in the short term. Still, Grand Rapids faces structural issues in retirement benefit debt that may cripple our city’s finances if ignored.

A recent Michigan State University study finds that communities across Michigan face problems financing pension and health care benefits for retirees. [See Bridge coverage of city legacy costs across Michigan] In Grand Rapids this debt accounts for 30 percent of general revenue, according to the study co-authored by Eric A. Scorsone and Nicolette N. Bateson.

The total debt of $325 million amounts to over $1,700 for each of the city’s 188,000 plus residents. In terms of annual property taxes, it would cost roughly $400 more for an owner of a $150,000 home to cover this debt burden.

Clearly, this simple analysis reveals problems in benefit-related debt for Grand Rapids. The question is, what to do about it? The answer, unfortunately, is not clear; nor will it be easy to find.

Promises were made to retirees that would be difficult to break, and increasing taxes is never easy to do. Short of a massive and unexpected windfall, this is the crux of the problem. It’s unfair to deny rightfully earned benefits to city retirees, yet if taxes are not increased to cover these costs, other city services may be cut or eliminated.

Are there other options? Well, the problem could be ignored, but this is what may lead us to the way of Detroit. And bankruptcy is not the ideal solution. There are different strategies being tested around the country, though they have their own risks.

One such strategy involves incurring more debt and investing it. The hope is that the returns will outweigh the cost and allow the excess to go toward paying off other things, like benefit debt. This certainly could reap some rewards, but carries the risk of increasing total debt if bad investment choices are made.

Another more common and less risky strategy is creating efficiencies in government. At the heart of this is budgeting based on outcomes. This means budgeting for the longer term in which popular programs that work well maintain or increase funding, while those that don’t get cut. The concept is simple, but the process is difficult and requires a cultural change in governing.

Grand Rapids’ 2014 Fiscal Plan provides a five-year plan through 2018 to focus spending and investment over a longer term. This helps in making the budgeting process outcome-based. There are also steps noted in the plan that work to address retirement expenses, though more needs to be done to address shortfalls in incurred retirement debt.

Without smart policy decisions that look at the facts, as well as human dimensions, of this debt dilemma, our city will dig itself deeper into a hole. Hopefully we will continue to build on efforts to deal with and answer the tough questions posed by retirement debt.

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Comments

David Waymire
Thu, 03/20/2014 - 8:27am
A direct result of tax cuts at the state level that have led to $6 billin in revenue sharing cuts over the last decade or so. Suburban and rural residents who work iand play in the city are freeloading. Time to restore state income tax rate to 4.4 percent, and restore revenu sharing. Our unemployment rate was lower, our rank in per cap income was higher and our cities were healthier when we were truly fiscally responsible, ie, we paid for our promises.
DeWit
Sun, 03/23/2014 - 2:45pm
I don't see how working in a city and living in a suburb is freeloading. Doesn't the city tax the place were the people work? Doesn't the city tax the establishments that the suburban city workers frequent? Is it your position that somehow the city has claim to the wages of those workers? I would argue that the business that supply those jobs could easily relocate to some other place, possibly the suburb and the city would be much worse off. The fact that major cities, at least in Michigan, have become less attractive has nothing to do with where people choose to live. It has to do with who is in-charge of those cities and how they serve the needs of the residents. I infer from your comments that you blame commuters for the problems of cities when in-fact it is the leadership of those cities that is to blame for people leaving. The perfect example is Coleman Young. His tenure in Detroit was riddled with corruption, graft and incompetence. People chose to leave because they wanted better for their families and they deserved better from the city that let them down.
John M
Thu, 03/20/2014 - 9:06am
That study was published in 2011. I'd be curious to see the numbers updated for 2013/2014.
Rick B.
Thu, 03/20/2014 - 9:18am
Assuming no corruption in GR, and assuming corruption Did have a Large impact Detroit's current situation, I would hope GR can handle it's historically Agreed to Obligations to it's Retirees and near Retirees. Yes, start changing what you need to now, but honor your past obligations. Also fully agree w/ prevous commenter regarding negative aspects of "overdone" Tax cuts. My opion is those need to be much more "balanced" rather than focussed on particular groups. Of course you need to "create more efficiencies" in Local and State of MI Govt. - that IS happening.
Thu, 03/20/2014 - 9:21am
Might it be possible to have a public policy discussion without using such loaded terms as "freeloading?" Is that really necessary to make a point? Should the people in rural areas in turn call city residents names when they bring their kayaks and bikes out to recreate? Well. actually we do have a name for them, it is "welcome guests." Even when their recreation activities impose costs on the rural local governments. I had always thought that cities were the appropriate places for cultural and sports amenities precisely to attract non residents to come visit and spend money, Am I now to understand that when I come to enjoy what cities have to offer I have to endure the stigma of "freeloading?" Sorry, that's what I thought I was supposed to do. Sparking political warfare between local governments might be good business for the lobbyists and paid consultants, but it is not good for the state of Michigan. Let's work for win-win outcomes.
Barry Visel
Thu, 03/20/2014 - 10:11am
Way to go Larry! I was trying to think of a response but you said it perfectly, thanks.
***
Thu, 03/20/2014 - 10:41am
Interesting that Grand Rapids legacy costs are $325 million while Lansing being a much smaller city is at $502 million.
John Roach
Thu, 03/20/2014 - 11:14am
Perhaps it is time for public employee benefits to be limited to contributory plans where there is "skin in the game". The private sector has provided leadership that might well be followed. They have recognized that impossible promises will lead to bankruptcy. The legislature should propose a constitutional amendment removing the privileged treatment of public sector employees. Care will have tobe taken do restore equity in a compassionate manner.
William C. Plumpe
Thu, 03/20/2014 - 6:12pm
I agree. Change all pension rules for new employees and existing employees who have not vested to defined contribution rather than defined benefit plan (Assuming this is not too expensive. It can cost more up front but saves money in the long run). Enough said.
Scott Roelofs
Fri, 03/21/2014 - 4:03pm
According to the Employee Benefit Research Institute, private-sector employees who participate in a "defined benefit" pension plan has fallen from 38% of the workforce in 1979 to 14% in 2011. The treadline continues to decline. It's a different story however, with government employees. The Bureau of Labor Statistics says that 78% of state and local government employees had a defined benefit pension plan in 2011, and most federal government employees also have it. In Michigan, state employees hired after 3/31/1997 are in a defined contribution plan, which is far less of a burden on state taxpayers. Those hired prior to 1997 had a choice of which plan they wanted. The problem is that too many local (and still, many state) government employees are on a defined benefit plan which commits the taxpayer to decades of payouts. The solution is to follow what many employers in the private sector have done, which is to freeze these pension programs. Vested benefits are NOT taken away, but they do not accrue any more value. The present value of each account is determined, and the value is put under the control of the employee in terms of investment options. I wonder how long the non-government workers who do not have any pension at all (other than SS at age 67+) will continue to support increased taxes to fund the government pensions?
Rick B.
Fri, 03/21/2014 - 12:42pm
This is already being done at the State of MI level John, as you say to.... "removing the privileged treatment of public sector employees". Non-public sector employees out there.... please realize any priveleged treatement which MAY have existed for public sector employees truly ended many many years ago. If you want to continue bad mouthing public sector employees, please get the facts.
Harris
Thu, 03/20/2014 - 11:16am
I'm not sure we should have any 30-year old telling us what to do with the city. The essay confuses the longstanding legacy costs with the actual impact on the year budget. It is the latter that matters. Second, there needs to be a frank discussion as to why revenues have shrunk. This is a function of both the economy and of actions by the State in redirecting revenue sharing money -- that suburban and outstate legislators underfund the city should be no political surprise, but let's at least note what is happening. Third, one might reasonably ask what Grand Rapids is doing, what the trends are etc. To avoid the question of present actions and trends is simply to posit that the status quo continues. Such an assumption is typically the thought of the young and/or the partisan.
Michael
Thu, 03/20/2014 - 11:55am
Municipal pensions and retirees is suffering as is public education retirees, and the state bears blame in denying revenue sharing while hording millions from cuts. The cut in revenue from the state to the local communities is not a problem only the cities are experiencing. Due to the cuts from our legislature and Governor over the last several years we have had several important services interrupted. This winter is a great example of what cuts do locally. Many Road Commissions have lost substantial funding and now operate with skeleton crews and less equipment. The byproduct is unsafe roads which causes schools to close at a higher rate which is plaguing most districts. Schools themselves have suffered substantially due to the idea we can do more with less money. Most school districts north of Cadillac have shut multiple school buildings due to funds, not lack of students, in the last 4 years. Less buildings is never a better option for education, it means longer bus rides, more costs, it means more students per room, less teacher teaching "my child" time, it means less opportunities in the arts and sports, each building offers opportunities with one building you deny many the opportunity that would have had, it means less local control, the larger housing areas tend to keep their building and it gives them more control of the education in that community. Stop voting for those that believe government revenue is a bad thing, just read the failures of the Articles of Confederation, the causes of the French and Russian Revolution, read the causes of Shay's Rebellion, and lastly the Roaring 20's impact on 1929. History does not lie, when governments fail to fulfill their commitment it causes pain, suffering, and makes those well off even more at the expense of everyone else. We are a modified free enterprise because wealth has to be shared at some point. Taxes are that sharing and must be done with simplicity, equity, and easily. We fail in the area of equity currently as each municipal or state employee that was promised a retirement or pension can assert.
S.E.
Thu, 03/20/2014 - 12:04pm
Until 2008, I think, the City of Grand Rapids' pension funds had been funded to a level of 105% or more for a number of years. The City for several years made no contributions to the pension funds from its yearly budget; only the employees were contributing. The financial crisis hit the pension funds and the City budget in a number of ways. Investment balances were hurt by the markets. Suddenly the overfunded status of the pensions changed to underfunded, implying the need for increased contribution by the City from its annual budget. Meanwhile property tax revenues were hurt by the collapse of the housing market. Income tax collections were hurt by rising unemployment. To help balance the annual budget, City fathers offered early retirment to certain eligible employes. While helping the budget, this hurt the pensions, by reducing the number of employees contributing, while accelerating the outflow of benefits. And of course other cuts were made to balance the budget. The City has taken a number of steps to address the pension issue. Several redefined pension alternatives were offered to existing employees, all of which involve higher employee contributions and/or lower payouts. New hires are being offered only a defined contribution retirement plan. Before panic sets in, we ought to allow some time to examine how improved financial markets reduce the "debt" -- which is not actually debt, but the difference between an estimate of total pension obligations and the amount invested currently in the pension funds. In the meantime property tax and income tax revenues are starting to recover. It's probably too much to expect that our State government will restore revenue sharing. They think that the only way to govern is to cut taxes. But let's allow some time to pass before taking more drastic actions based on data from 2011.
blufox
Thu, 03/20/2014 - 5:16pm
Grand Rapids is making progress on addressing legacy costs. They have eliminated retiree health care and restructured the retirement plan to increase the employee contribution. What the City can't "fix" is getting screwed by the State on revenue sharing. Since the Republicans control the State government, and most of them are from more rural areas, they are more than content to be blood suckers of a city's amenities. Look at the roads. If you live on a gravel road, why are you concerned about potholes in a City? Alfred E. (I'm a Republican) Newman: What. Me worry?
William C. Plumpe
Thu, 03/20/2014 - 6:04pm
Gee sorry to do an "I told you so" or something like that but I thought that Republicans never ever went into debt and that they never ever have fiscal problems. That only happens to those "tax and spend" Democrats particularly in that evil minority majority City Detroit. And I thought that Amway and Dick De Voss were going to save Grand Rapids forever and that they had nothing to worry about. You must be wrong. Enough said.
Fri, 03/21/2014 - 9:13pm
By reading some of the responses that people wrote about on this matter there is hope in the Grand Rapids area. It appears that the leadership in Grand Rapids realizes what the problems are and are working to resolve them. Hopefully the residents of the City will work with the leadership to move the city forward. Dale Westrick
John Q. Public
Sat, 03/22/2014 - 12:05am
I'll bet if Waymire knew how much money non-resident workers and visitors leave in cities via income, sales and excise taxes, in addition to parking fees and fines in municipal lots, he wouldn't be quite so loose with the term, "freeloading." I suspect he knows it, too, but he has a responsibility to earn the fees he charges for advocacy communications. I've had my car damaged by vandals and thieves multiple times while parked in cities, and never once in a township. And I'd be quite happy to stop freeloading by working from home, but my employers thinks it's valuable to make me come to the city every day, though I'm still trying to figure out exactly what that value is in excess of the expense.
David Waymire
Sun, 03/23/2014 - 7:31am
I see my freeloading term hit a nerve. I consdider myself one at this point. Live in a low property tax township. My assessments have been limited by Prop A provisions (look it up). My wife and I work and play extensively in Lansing and Charlotte. Pay income taxes in Lansing. Supported an income tax for roads in Charlotte, which was rejected after out-of-city business owners got the Koch Bros (Americans for (less) Prosperity) to pour money against it. I'm also beneficiary, as is almost every business in Downtown Lansing and in Charlotte that is not a bank, of the business tax change ending taxes on all but C corporations. No lobby firms, law firms, PR firms, small restaurants and retailers, cobblers, tailors, plumbers, electricians...you get the picture...now pay any business taxes. Most paid little before...but now, nothing. The net effect is I have now in my pocket dollars that used to go to revenue sharing to support city services. How do I spend that? Compared to a city worker, I spend more out of state (vacations) and more on online purchases that benefit out of state employment than do city workers. I also pay more in federal income taxes than I used to. Net effect is a fairly significant increase in the share of money that goes outside of the community state...and a fairly significant decrease in spending to support the services (like police for protection against car theft in cities, like city streets, like schools to provide access to opportunity) in cities. Many, many people are in that category. I'm open to a better name for myself than freeloader. But stand by the notion that cuts in income taxes, property tax assessment limits imposed by Proposal A, and cuts in business taxes are the primary factors in the legacy cost issues discussed in the article -- not some notion of corruption or inappropriate benefits for city workers, many of whom accepted lower salaries than in the private sector in exchange for a benefit package that included a pension.
John Q. Public
Tue, 03/25/2014 - 12:05am
Now I better understand. Because you're a freeloader, you think everybody else is, too. You could live in one of the cities you so frequently tout, but you choose instead to live in a low-property-tax township. Why do you do that? I'd bet that it's because cities don't stand up to the scrutiny of cost-benefit analysis. Your business doesn't require a physical presence in Michigan. Why not move it to a state with high business taxes? Nobody owes a government entity anything just because they frequent businesses located within some subjective man-made boundary line. Most police departments employ officers who proudly brag about what they call "aggressive law enforcement" but I call brazen abridgement of civil liberties. I have no need for the fire suppression services. The potholed streets bother me and my 4X4 far less than 99%+ of drivers. The less I can pay for services I don't use, the better. I'm not freeloading; I'm ceasing my subsidy of those who actually DO use those services: the residents. It's entirely possible that the average non-resident person is merely engaging in personal risk acceptance. They see little chance that they will need the services provided by cities, and to the extent they might, they are willing to accept the risk of non-availability personally instead of paying the "insurance premium" of higher taxes--since the police don't typically stop crime from happening, and fire departments spend most of their time as paramedics. That's not even mentioning the things--like out-of-state vacations--of which non-residents are now able to avail themselves because they aren't paying for things they don't use.
Matt
Sun, 03/23/2014 - 11:04am
Unfortunately there is an attitude seen in Dave's comment but very common elsewhere, particularly in the governmental arena that only sees public contributions to society in terms of taxes and how much can be extracted. Similarly only sees societal service in terms of public employment and societal progress only through governmental action. This mindset ignores the full spectrum of benefits from employment, real estate appreciation to charitable pursuits brought by private enterprise and a minimal amount of government assistance and the self inflicted destructive aspects brought on by municipal governments. A quick paging through a city offices directory illustrates my point. The confidence in "revenue sharing" that some how we'll take money from outstate tax payers run it through layers of political, bureaucratic, and governmental meat grinders and then given what's left of it to (often incompetent and destructive) city governments defies belief.