The mortgage

By Andy Balaskovitz

Financial Health Team to recommend Lansing increase its funding for long-term pension and health care liabilities

A key member of the mostly mayoral-appointed Financial Health Team in Lansing says the city should increase funding — or decrease costs — for its long-term liabilities for pensions and retiree health care by $9 million to $15 million a year.

If the city were a household, long-term liabilities would be akin to the mortgage. The city needs to make higher mortgage payments, said attorney Steven Liedel, a member of the Financial Health Team, which will give Mayor Virg Bernero its recommendations in March.

“With any balanced approach, you want to make adjustments to the system so it’s sustainable,” said Liedel, who is helping lead a Financial Health Team subcommittee on long-term budget solutions. “It’s a structural issue for the city. It can have an operating budget that’s balanced. But without adjustments to deal with long-term obligations, the city is going to continue to have budget struggles every year to meet those obligations. It’s like a household saying our budget is balanced, except for our mortgage.”

Unfunded liabilities are long-term costs for paying city employee pensions and retiree health care. They’ve steadily increased since 2008, largely due to double-digit inflation in health care costs and a dip in the stock market. Between 2005 and 2010, unfunded pension liabilities more than doubled from $54.2 million to $165 million. Between Dec. 31, 2007, and Dec. 31, 2009, unfunded liabilities in retiree health care increased 36.6 percent from $275.5 million to $376.4 million, according to figures from the city’s Finance Department.

Liedel said retiree health care was around $410 million in 2010, meaning the city’s unfunded liabilities are now in the neighborhood of $600 million.

“To significantly get at that over the next 30 years, we basically need to spend an additional $9 million to $15 million so the system is fully funded,” Liedel said, adding that there could be cost savings to paying the systems down more.

That’s why former Mayor David Hollister, who leads the Financial Health Team, has said several times that the city faces a $9 million operating deficit heading into the next fiscal year as well as a $9 million deficit in pension and health care liabilities.

It’s uncertain how such increases would be paid for, but there are a few options. One is increasing the General Fund contribution; another is restructuring future employee contracts that cost the city less. The city could also issue bonds to help pay for it, which has been done in places like Oakland County (where it’s worked “very well”) and Detroit (where it’s been a “disaster”), Liedel said.

The city funds 10 percent of its retiree health care obligations and about 60 percent of its pension obligations, Liedel said. While the team may not recommend those both be increased to 100 percent, it will likely call for an increase.

To ignore these unfunded liabilities is “certainly not prudent,” said Tony Minghine, associate executive director and chief operating officer of the Michigan Municipal League. “To not fund it now means someone else is paying for it down the road.”

And the problem for cities is exacerbated due to double-digit inflation in health care costs, Minghine said.

“What they’re trying to do is recognize that we need to deal with these costs here and now and not kick the can down the road. The idea that these costs have gotten to be so large absolutely impacts any city’s ability to provide services,” he said.

Yet Scott Dedic, chairman of the city’s Employee Retirement System Board, said it’s “not that simple” to start fully funding its long-term obligations. Moreover, he says the city’s funding levels are “functional.”

“I would support maintaining the current system and trying to eat away at unfunded liabilities,” he said.

The Bernero administration says its goal is to increase its contributions to unfunded liabilities, but it has to balance that with cuts to services.

“Things are not fully funded because we have to make hard choices,” said Chad Gamble, Lansing’s chief operating officer. “Fully funding obviously impacts public safety and roads in the city. It’s on our radar and something that we are looking forward to begin trying to address more completely in budget cycles moving forward.”