News Story

State Budget Shifts Extra Revenue Sharing Funds To Detroit

Detroit to receive $140.5 million; Grand Rapids and Flint to get $12 million combined

Fresh off the Michigan Legislature approving a $195 million bailout for Detroit, some elected state officials and the governor are looking to favor the city again, but this time with the statutory revenue sharing.

Detroit is budgeted in 2014-15 to receive $140.5 million in the money taken from sales tax revenue, a $4.2 million increase from 2013-14. That’s what is proposed in Gov. Rick Snyder’s budget, which is in committee.

By comparison, the city of Flint is budgeted to receive $6.7 million in state shared revenue and Grand Rapids is expected to receive $5.3 million in 2014-15. Detroit has a population of 701,475 while Grand Rapids has 190,411 residents and Flint has 100,515 residents.

Detroit would get 56 percent of all the statutory revenue sharing in 2014-15. There are about 500 municipalities that are eligible to receive statutory shared revenue.

"The state is the most generous with Detroit by far with statutory revenue sharing,” said James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy.

Detroit officials as well as some others have continuously said that Detroit is not getting enough money from the state. For example, the Michigan Municipal League, which represents local communities and advocates on their behalf at the state and federal level, released a report earlier this year that said $6.2 billion in revenue sharing has been "diverted" from local communities. Detroit reportedly lost out on $732 million from 2003 to 2013, according to the Michigan Municipal League report.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

Analysis

Legislators Should Look To Oklahoma To Address Pension Change ‘Transition Costs’

The unfunded liabilities for Michigan’s school pension fund increased to $25.8 billion this year. Legislators may feel that there is nothing to be done to prevent these liabilities from racking up, but they’re wrong.

They can close the plan and offer new employees participation in a defined contribution plan, where the state cannot underfund benefits. Recent developments in Oklahoma shed light on how they can do this without triggering restrictive “transition costs.”

In the face of growing unfunded liabilities in its pension system, Oklahoma closed its pension system to new employees of the state and participating municipalities. The state now offers state workers a defined contribution plan with 7 percent matching contributions.

Actuaries often recommend switching how unfunded liabilities are accounted for when a plan closes, and these changes tend to imply a more front loaded payment mechanism. The increased cash contribution from this accounting change is called the transition cost. Yet the state will continue to keep its previous methods for paying down unfunded liabilities, avoiding even this different accounting treatment.

That is, the state will continue amortizing unfunded liabilities over the payroll of members of the defined contribution plan as well as those of the defined benefit plan. No accounting change will occur to trigger those phantom “transition costs.”

This option was mentioned in my 2012 study on transition costs in the school pension system, “Five Options for Addressing ‘Transition Costs’ When Closing the MPSERS Pension Plan.” If legislators feel their current policies for paying down unfunded liabilities in MPSERS are prudent, they have no need to change them if they decide to close the system.

The school pension system currently costs more than 30 percent of payroll and the new unfunded liabilities will continue to increase these rates. School employees ought to have a plan that is current and predictable, in addition to being affordable to their employers.

Oklahoma shows that this can be done in a way that avoids the phantom transition costs.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.