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Guest column: Unfunded legacy costs = big trouble for local governments

By Robert Daddow/Oakland County deputy executive

“Property tax revenues implode.”  “Deficit elimination plan draconian.”  “Troubled pension plan may not pay benefits.”  “Pension investments crash, will cost retirees.”  These troubling headlines reflect a branding that no responsible official would ever want to see for their community.  They create an image that stains a local unit as fiscally distressed and create a negative impression that can last years.

Too many local units of government in Michigan fail to fund in their current operating budgets' pension and retiree health-care (e.g. legacy) costs, as recommended by an actuary. Often, the refusal to fund arises as a concession to employee groups seeking to avoid an impact today that can be pushed into a future year’s budget.

But the future is now and legacy funding has become a staggering financial burden on many local governments. These costs are no longer merely the elephant in the room; they are a giant mammoth that threatens even core services.

Consider for example, the pension plans of the cities of Detroit, Flint and Pontiac; Wayne County; and the state of Michigan (including school districts). These units, as disclosed in their 2010 audited financial statements, have a combined, unfunded, actuarial accrued liability of $77.9 billion.

Proper annual funding for these entities would be new, annual revenue sources (taxes, fees) of between $5 billion to $7 billion in each of the next 30 years.

In Detroit alone, if the accrued legacy costs were to be funded solely by property taxes, an annual levy of 46 mills for 30 years would be required. And the 46-mill level stays at that rate only if one assumes no negative impact on the property values results from that millage burden.

Flint’s legacy costs are so great that contributions of $72.2 million for each of the next 30 years would be required to actuarially fund their obligations. This legacy commitment is in a city where the 2011 general fund revenues were only $67.2 million.

These legacy costs and related commitments are simply not sustainable.

Eventually, many of those local units will be unable to pay for the benefits committed to in prior years. Pontiac, for example, is no longer paying general retirees’ medical bills, despite commitments; the cash is simply not available to do so. The continued failure to set aside appropriate contributions on an annual basis will result in other local units following Pontiac into fiscal distress.

Fiscally distressed local units often have another problem: residents and businesses move out, leaving the legacy commitments to be borne by the few who remain.

Based on the 2010 census, Detroit’s estimated $7.1 billion in unfunded legacy commitments must be borne by 713,000 residents, some 25 percent fewer than the 951,000 residents bearing the burden in 2000. Businesses and residents leaving the city will not help fund legacy costs incurred during the years they were residents.

The future of Detroit’s next generation has been mortgaged.

The legacy cost issue no longer can be ignored. And because this is a statewide issue, it must be corrected with statewide actions, coupled with local responsibility.

A state task force must be established to explore the possible alternatives: properly funding legacy costs through a new revenue source and/or securing permanent legal relief from the legacy commitments.

Neither alternative will be welcomed by public officials, employees or taxpayers. But failing to act only insures continued injury to the employees and retirees -- and to the communities they served.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan. Bridge does not endorse any individual guest commentary submission. If you are interested in submitting a guest commentary, please contact Ron French. Click here for details and submission guidelines.

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