The Week in Public Finance: Detroit's Big Pension Plan, Debating the Pension Crisis and Counties Under the Gun

A roundup of money (and other) news governments can use.
by | March 24, 2017

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Detroit Hops on Pension Bandwagon

Detroit is joining Oklahoma and Kentucky in establishing a pension reserve fund. The fund essentially acts like a savings account; it's a place for governments to set aside money to help with increasing pension costs. In Detroit’s case, the fund will help the city plan for 2024, when pension costs are expected to skyrocket from $20 million annually to $200 million a year.

Thanks to Detroit's exit plan from bankruptcy in 2014, the city isn't paying the full cost of its pensions right now. A charitable foundation and the city's water and sewer system are shouldering much of those costs until 2023.

The Takeaway:  Pension reserve funds are still largely experimental. The idea is that they will help buffer a pension system from reduced government payments during times of fiscal stress. Of course, a lot depends on how these reserve funds are cultivated. To be truly effective, they must grow to total much more than the government’s annual pension payment.

In Detroit, the city plans to set aside its excess operating revenue to grow the fund over the next seven years. It is on track to put down a $40 million deposit later this year, thanks to a surplus in the current fiscal year (which ends June 30). If all goes to plan, the reserve fund will help the city slowly adjust to its increased pension costs over about a 10 year time frame.

But an analysis this week from Moody’s Investors Service warns that a pension reserve fund doesn’t fully protect a pension from the whims of lawmakers in tight fiscal times. “Because future [reserve fund] deposits are not legally mandated,” analyst Matthew Butler writes, “they could be an attractive cost-cutting target to close potential budget gaps.”

Crisis? What Pension Crisis?

A new paper from the University of California at Berkeley contends that concerns about the declining health of public retirement systems in the modern era are largely overblown. The author, Tom Sgouros, argues that maintaining a fully funded pension is not necessary for governments because they’ll always be around to pay the bill.

Sgouros also argues that the accounting standards used to evaluate pension plans are partly to blame for the current pension crisis narrative. Be it city council members or "analysts at Moody’s determined to justify a downgrade," these players often misuse the data to blame pension plans for municipal woes. “Debt due in the distant future is not a crisis today," he writes, "even if it is a cause for concern."

The Takeaway: Sgouros makes several good (and interesting) points. But he doesn’t really acknowledge that pension funds are essentially money set aside to invest and help pay for retirement benefits and are thus designed to defray the ultimate cost of those benefits to the government. In other words, pay less today rather than a lot more down the road. The accounting and numbers may be twisted in seven different kinds of ways, depending on who’s doing the talking, but it’s not a reason say the entire process doesn’t matter.

On Medicaid: Don't Forget About Counties

Without the votes to pass, Republican leaders in the House of Representatives have pushed back to Friday their vote on repealing and replacing Obamacare. While this has raised questions about Republicans' ability to coalesce around a proposal, it’s clear that no matter what happens, Congress wants to severely cut down on its Medicaid spending. We’ve talked a lot about how changing Medicaid to a per-capita funding structure could force states to make some major spending decisions, particularly in regards to who gets covered. But an overlooked aspect of the Republicans’ health-care wish list is how reduced Medicaid funding in the future could also put the squeeze on county budgets.

Counties are major Medicaid providers and collectively invest $83 billion annually -- about one-fifth of budgets – into health systems. Those dollars support 961 hospitals, 883 skilled nursing facilities, 750 behavioral health authorities and 1,943 public health departments, all of which typically serve a disproportionate share of low-income populations and would be greatly impacted by reductions in Medicaid spending, says the National Association of Counties.

The Takeaway: The biggest reason counties are afraid of less Medicaid funding is because they typically have much less taxing flexibility than states. That means when faced with paying more for something, it’s much harder to find new and reliable revenue sources. A total of 42 states impose limitations on counties’ ability to raise property tax rates and assessments, which for many is their largest source of revenue. Some counties also tax income and/or sales, but those are often subject to voter approval and politically difficult to increase.

In addition, many counties are under a state mandate to provide health care for low-income populations, such as the underinsured and uninsured, the homeless, and those cycling in and out of county jails -- and are not reimbursed for all these costs. In 2013, for example, Harris County, Texas, spent $500 million on uncompensated care. With pressures like these, it’s hard to imagine county residents won’t pay a price – either in higher taxes or reduced services.

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