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.