Local Governments Cry Poor but Act Rich

For over a decade, local governments in Michigan have been complaining they need more money from state taxpayers. A recent push by Wayne County Executive Warren Evans is only the most recent example.

That is what they say, but how they act suggests their fiscal complaints are exaggerated. For example, providing post-retirement health care benefits to employees is an expense that should be the first to go if there is a real financial problem.

Many local governments in Michigan pay for retired employees’ health insurance costs, a type of benefit that is rare in the private sector. Unlike pension promises, these other post-employment benefits, or OPEBs, may be trimmed or even rescinded, subject to collective bargaining in some cases. For example, state retirees recently experienced an 11 percent cut in this benefit.

Yet how governments pay for these benefits is a problem. They do not pay for them at all until the bills come due years later when an employee has retired and starts receiving the benefit.

That is because unlike pensions, OPEBs do not have to be prefunded at the time they are earned, but can be covered on a “pay as you go” basis. This pledges a (rescindable) benefit now and pays for it later. It makes future taxpayers responsible for today’s government employees.

Nevertheless, most Michigan local governments continue to promise these benefits to new employees. Offering a premium benefit that racks up millions in unfunded quasi-promises is not how an employer experiencing genuine financial stress would behave.

Consider the city of Warren, where retiree health care benefits are underfunded by $275.1 million. If Warren ceased all operations for two full years and dedicated all its tax revenue to backfilling this unfunded liability, there still would not be enough to cover it.

It is unclear that taxpayers and residents get any benefit from backloading current employee compensation costs. And given that the benefits may be rescinded later, it is hard to see what value they provide to government workers.

Some proponents of a larger and more activist state government have recently been arguing that Michigan should be a “high tax/high service” state. But granting extra benefits that have all but disappeared from private sector workplaces — when Michigan has the related problem of regular pension underfunding — illustrates that a high degree of services does not necessarily follow from higher taxes.

The gap between what local officials say and what they do suggests that state policymakers need to look upon their poor-mouthing with skepticism. To the extent that complaints of financial stress are valid, local governments should clean up their own act before looking to reach more deeply into the pockets of state taxpayers.