Localities Want to Make Retiree Bills More Affordable. Why Won’t States Let Them?
The cost of post-retirement benefits is threatening governments’ ability to provide vital services.
The towns and cities of Michigan asked their state legislature for some help. It wasn’t even a request for money. They wanted the state to give them the tools to address looming retirement benefit costs that threaten their ability to provide vital community services.
Michigan’s local governments had put together a meaningful proposal last year to reform other post-employment benefits (OPEB) -- the health care and other costs associated with retirement that are in addition to traditional pensions. Under the aegis of the Michigan Municipal League, localities were asking lawmakers to let them make the hard decisions to pare back health-care costs and bring them in line with the private-sector market. “Nobody is talking about ending health care for retirees,” Dan Gilmartin, the league’s executive director and CEO, wrote to members. “But there are innovative ways to reduce costs, and put some of the responsibility for paying a share of those costs onto the individuals who are benefiting -- just as happens at most companies.”
State laws, Gilmartin added, do not provide clear authority for communities to rein in costs on their own.
In December, the legislature declined localities’ request for more leeway. Instead, “the common-sense plans were derailed and stripped down and replaced with a reporting-focused, nonaction-oriented proposal,” according to Gilmartin.
In Michigan, as in many states, local governments provide health-care benefits to retirees. When the Michigan Legislature started cutting state taxes a few years ago, it eliminated state revenue sharing and restricted taxable property assessment increases. That fiscal double whammy undercut the ability of these local governments to meet the spiraling costs of retiree health care as well as provide adequate compensation to attract good staff to local public service, whether that be patrolling city streets, fighting fires, or enforcing city zoning and building codes.
The challenge of meeting legacy costs -- OPEB as well as pensions -- is not unique to Michigan. Many public employers in states all over the country have agreed to benefits that now appear unaffordable. Increasingly, promises made prior to the Great Recession are today pitted against basic public services.
It’s also true that in recent years nearly every state has tinkered with its pension plans in one way or another, either by making meaningful changes to the structure, financing or both, according to the National Association of State Retirement Administrators. Nevertheless, the combination of longer lifespans and insufficient modifications has meant that state and local governments have been unable to ensure that promised benefits are affordable and sustainable, while at the same time making sure that vital funds are available for essential public services.
At a time when Americans are living longer -- and where, in a number of states, public pension promises are protected by state constitutions -- we have already seen that something will have to give. We’ve seen that already in municipal bankruptcy cases in Detroit, Central Falls, R.I., and other municipalities. There is insufficient public money for growing pension and post-retirement health-care liabilities.
Localities aren’t asking their states for a handout. They are willing -- though not happy -- to make the tough decisions. In Central Falls, former state Supreme Court Justice Robert G. Flanders, the city’s municipal bankruptcy receiver, told me, with tears in his eyes, he had unilaterally informed as many of the city’s retirees as he could locate that he was cutting their retirement benefits in half. That was the price to ensure the city could provide essential services.
We cannot allow governments to fail because the cost of retiree benefits crowds out essential public services. Rather, perhaps it is time to consider creating or naming a new national commission to consider options -- whether they be new federal bankruptcy courts for public pension funds, or the repeal of state statutes that have proved to be obstacles for localities to carry out vital public pension and other retirement benefit reforms. It’s the price of survival.