Benefit Costs Sunk Benton Harbor's Finances

The story of Benton Harbor's financial troubles has been well known since the town made national news when Gov. Jennifer Granholm appointed former state Auditor General Joseph Harris as the emergency manager in April of 2010.

Benton Harbor was in the midst of a six-year cycle where it had overspent its budget by $8 million.

What may not be as well known are the details of a union contract that played a part in the city’s financial crisis. The city had worked under the contract for eight years, an unusually long life for a union deal.

Under that contract, the city was giving raises as high as 15 percent to some of its employees and paying for 100 percent of health care premiums for all its employees. Also, employees contributed just 3 percent of their salary to their defined-benefit retirement plans.

In 2002, the city’s Michigan Council No. 25 AFSCME AFL-CIO Local 1433 contract was signed. It expired in 2008, but stayed in place until the new contract was passed July 1, 2011.

“This situation didn’t happen overnight,” said Paul Kersey, director of labor policy at the Mackinac Center for Public Policy. “The difficulties they were having certainly didn’t just pop out of nowhere.”

Kersey said salary increases were generally not that big of a concern, despite across-the-board increases of 3 percent every year and three-year step increases that ranged from 5 percent to 16 percent.

The salaries weren’t that high.

For example, an employee under the contract with two years experience would have seen his or her salary increase 8.1 percent from $20,352 in 2006 to $22,002 in 2007.

“The real backbreaker is the long-term costs — a pension that is underfunded, the health care package that is getting more expensive — and the city is on the hook for all of it,” Kersey said. “Those are the things that break a city. The problem really was the benefits.”

Berrien County Treasurer Bret Witkowski said the city of Benton Harbor’s property tax revenue was fairly steady from 2002 to 2008. But he said the city has so many tax-free enterprise zones that it was difficult to make an apples-to-apples comparison of property tax revenue from year to year.

Witkowski said Benton Harbor already has the highest millage rate in the county at 24.03 mills. The next closest was the city of Watervliet at 22.69 mills. Property taxes account for more than 33 percent of the Benton Harbor’s revenues.

Kersey said the new contract is much more realistic for a city in Benton Harbor’s financial condition.

The employees now pay for 20 percent of their health care premiums and contribute 10 percent of their salaries to their retirement plans. Across-the-board increases were cut by 50 percent to 1.5 percent.

Harris didn’t return messages seeking comment.