While Detroit’s record-setting municipal bankruptcy may be a distant memory, many business leaders around the state still view the financial health of Michigan’s municipalities as a potential ticking time bomb.
Many stakeholders still worry about the unfunded pension and health care liabilities for more than 100 of the state’s local units of government. If those unfunded liabilities are not reined in, residents could eventually face tax hikes and cuts to essential services, while municipalities could approach insolvency — or some combination of the three.
According to one observer of municipal finance policy, the issue is that no one knows quite when it could become a crisis. As well, government officials — much like business owners — tend to focus on the problems of the present.
“When I say that it’s not a crisis today, this is a brewing problem,” said Jase Bolger, policy adviser to the West Michigan Policy Forum (WMPF) and a former GOP Speaker of the Michigan House of Representatives. “This is a problem that, if not addressed, will become a crisis later. In many cases, the political environment or the government operations are held captive to the tyranny of the urgent. They don’t get to those long-term things and people just go along.”
As a pro-business policy consortium formed in 2008 by the Grand Rapids Area Chamber of Commerce, the WMPF has long considered municipal finance and unfunded liabilities to be critical issues for Michigan’s future success.
But to some local government leaders, the increased attention on local finances at the state level ignores work done by many municipalities to shore up long-standing debt, and has resulted in the state issuing a one-size fits all approach that does little to solve the problem.
“We’ve done things (to fix our budget problems) along with what we’ve paid in,” said Wyoming City Manager Curtis Holt, adding that the city’s health care liabilities are funded at around 50 percent. “We’re in a pretty good spot.”
Holt added that business leaders often are quick to pounce on municipalities for budget issues without taking into account the fact that cities like Wyoming also have to comply with complex mandates.
“In our case, we didn’t make a poor decision. An arbitrator said, ‘you’re going to do this,’” Holt said of changes made at the state level in the late 2000s around mandates to fund health care benefits.
Holt’s criticism of the state’s approach to better monitor municipal fiscal health is multifaceted and stems from a belief that state government officials are trying to take a “one-size fits all” approach to address issues. For his part, Holt holds the state largely responsible for creating those challenges through long-term reductions in revenue sharing with local units of government. The revenue-sharing model once accounted for as much as 20 percent of Wyoming’s overall revenues, but has been on an overall downward trajectory in recent years, Holt said.
With an overall budget of about $96 million, Wyoming is expected to receive about $6.8 million in state revenue sharing in the current fiscal year, according to the state’s Department of Treasury.
Still, the belief that unfunded municipal liabilities could become a major problem in the years ahead spans many organizations.
Bolger at the West Michigan Policy Forum pointed to a July report in the Wall Street Journal citing a Moody’s Investor Services analysis that found the total unfunded pension gap for cities and states across the country could be about $4 trillion, or the size of the entire German economy. Another report cited by the WSJ put that figure at around $1.4 trillion.
The West Michigan Policy Forum focused on unfunded municipal liabilities over an entire session at its biannual policy conference in 2016. Bolger said it’s likely to be a topic of discussion — but will not have a dedicated session — at this year’s event, scheduled for Monday, Sept. 24 at the Amway Grand Plaza Hotel in Grand Rapids.
‘Question of transparency’
In response to concerns from groups like WMPF, the state in 2017 enacted the Protecting Local Government Retirement and Benefits Act. The act created a municipal stability board that seeks to more closely monitor the unfunded liabilities municipalities possess and to help establish best practices for resolving them.
“The point of (Act) 202 is really a question about transparency,” said Rod Taylor, administrator for the Bureau of Local Government at the Michigan Department of Treasury. “The hope is that the locals are providing the appropriate transparency to their citizens, to their employees and others and then making decisions internally about what this might mean for them.”
While acknowledging that unfunded liabilities can be problematic if not addressed properly, some West Michigan municipal leaders feel that the state’s ongoing scrutiny of local government finances is unjust. That’s particularly true given that the state still has its own ongoing issues with unfunded pension liabilities, although that situation has improved in recent years, according to the Michigan Department of Technology Management and Budget.
Wyoming, in suburban Grand Rapids, shows up on a list from the state Department of Treasury as one of the few local government units in West Michigan with unfunded health care liabilities. However, the state waived the city from having to take any corrective action because of the work that Wyoming officials have put into its fiscal stability over the last decade, according to City Manager Holt.
“I think it depends on who the community is and what’s going on,” Holt said when asked if the concerns presented by the state and groups like WMPF are overblown. “I’d like to be funded at 100 percent, absolutely. But this ball was dropped on us. … We’ve really worked to address our issues, and worked very hard at it.”
Widespread or local?
To Holt’s point, the vast majority of municipalities that appear on the Treasury Department watch list are located in Southeast Michigan or more rural areas of Northern Michigan and the Upper Peninsula.
But others who monitor municipal finances around the state don’t buy the argument that one region has solved the issue, noting that fiscal circumstances can change quickly. Just because a municipality doesn’t appear on the state’s watchlist today, doesn’t mean they’re fully solvent.
“I believe this is a statewide issue and it’s not really a bigger problem in one area and a lesser problem in another area,” Taylor said. “It’s a statewide problem.”
Other West Michigan municipal officials were quick to note the work they’ve put into long-term fiscal planning, which has largely been achieved through “painful” reductions in employment levels, as well as through a pivot to defined contribution health care plans and closing general pension plans.
To that end, Grand Rapids is down 500 employees from its peak around a decade ago, said city CFO Jeff Dood. He noted that while the city had to cut staff during the Great Recession, it’s largely maintained service levels by leveraging more technology and funding its services on the front end.
“I’m not saying we’re finished, but all of our asset classes have gone through a significant asset management process, and we’re funding it, which was unheard of 10 years ago,” Dood said. “I think we’re set up really, really well to continue to provide sound governmental services and keep our facilities in the kind of repair that’s expected (by) citizens.”