Norton Shores Resident Fears Pension Underfunding Will Cause Tax Increases, Job Losses

'The financial death spiral happens ... and big companies move out'

By Anne Schieber Dykstra | October 4, 2016

Jim Riley saved and invested so he could retire. Now he wonders why his city government hasn’t done the same for its employees.

As a retiree who wishes to enjoy his golden years in the lakeshore community where he worked and lived, he is concerned about the consequences of the city of Norton Shores’ unfunded pension and retiree health benefit liabilities.

“As a taxpayer, I know there are few options when you have a significant underage of funding. You can increase taxes. You can cut back on city services significantly. Or, you can attack the current union contracts and the wages of current employees and reduce the wages and benefits. I don’t know how that can be done legally but those are the options,” said Riley.

After reading the Mackinac Center’s ranking of pension underfunding for Michigan’s largest 100 cities, Riley was inspired to take action. He is alerting his neighbors about the underfunding and encouraging them to lobby city administrators and elected officials. He has met with city administrators and two of the city’s nine council members.

According to the Mackinac Center’s analysis, Norton Shores is listed sixth from the bottom in pension underfunding. According to the city’s most recent comprehensive annual financial report, the pension liability is $20.3 million. The city also has a liability of $38.1 million for retiree health benefits. The city has funded less than 51 percent of its pension obligations and less than 5 percent for health benefits.

After the analysis surfaced and taxpayers demanded explanations, City Administrator Mark Meyers sent a memo about the liabilities to the Council.

The memo states that the funding problem began 25 years ago when the city didn’t make contributions to the pension fund for 3 consecutive years. He also said the city adopted a more conservative approach to the assumptions it uses for contributions, which made the underfunding look greater than it did in the past.

Meyer says employees are now required to pay higher contributions to the plan and that their benefits will be reduced. He said also that the city will put an additional $2.5 million in the fund over the next seven years. Meyer added that when the pension system is 80 percent, the city will close it to new employees.

“The city takes the matter seriously. We have implemented a number of strategies to lower costs and increase funding,” said Meyer, adding that more steps will be announced in the next 60 to 90 days.

He says the city always had a “pay as you go” system for retiree health benefits but is now required to report the liability under new accounting standards. The city has reduced benefits for employees hired after 2011, put nearly $2 million aside to cover benefits and has increased the health insurance premium co-pay over the past 12 years. Under the Michigan Constitution, pension benefits earned by government employees may not be cut (outside of federal bankruptcy court). Post-retirement health insurance benefits, however, can be cut or even eliminated for current as well as future employees.

T.J. Parker, a retired engineer, joined Riley in speaking out. Both made comments to the Council at a recent meeting.

“They didn’t give me any answers tonight that I actually liked. My take on retirement is if you made a contract with people, you should darn well have the money to meet those requirements. I heard the comment tonight, well, we have other commitments. That is an awful large commitment to break,” said Parker.

Riley worries that the liabilities will drive up taxes and chase large taxpayers, like employers, out of town.

“I can personally afford more in property taxes but the financial death tax spiral happens when communities increase their taxes and big companies say I’m going to move out because of the tax situation,” said Riley.

Five of the City’s nine council members will be up for re-election next year and Riley believes unfunded pension and retiree health obligations will be a major deciding factor for voters.

“We know the ultimate result is Detroit. It is Muskegon Heights schools. This is what is frightening to me. We’re not talking about Puerto Rico or Greece or Indonesia, we’re talking about cities near us,” said Riley.

He called for taxpayers and businesses in communities with similar liabilities to speak out and for state lawmakers to pass laws prohibiting municipal pension and retiree health benefit underfunding.

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.

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Education Union Should Be Voice For Pension Reform

School employees deserve more than political promises

By James M. Hohman | October 3, 2016

In the pages of its MEA Voice publication the Michigan Education Association opposes efforts to put retirement income security back in the hands of its members. The union instead wants to keep educators in the state-controlled defined benefit pension plan that has accumulated $26.7 billion in unfunded liabilities. The union ought to reconsider; the current system is unfair to its members and taxpayers alike.

Politicians have promised $67.7 billion worth of benefits and have only saved $41.0 billion to pay for them. The funding assumptions used by politicians to guess how much benefits will cost have come up short.

The MEA has make one small nod to problematic funding assumptions: It blamed underfunding on the last recession. But proper funding assumptions are supposed to work during both good and bad times, not to assume recessions never happen. This current system, on the other hand, has been fully funded only once in the past 30 years.

The MEA could have argued to stop the pension underfunding. It could have called for more stringent funding assumptions. It might have complained in the past when the state put less in the system than the annually required contribution. Instead, its resistance to reform has increased the danger to public school employees across Michigan.

Over time, this state has increased the amount of money it expects school districts to contribute to the pension system. The costs for districts rose from an amount equal to 12 percent of their payroll in 2002 to 37 percent today, with 89 percent of those contributions going to close the underfunding gap. In contrast, there would be fewer layoffs if fewer dollars were needed to keep pension system afloat.

Instead of requiring school employees to participate in this underfunded system, the state should let them build a secure retirement that does not rely on political promises: A defined contribution retirement system that provides real money and puts employees in control of their retirement. Now that is something the MEA ought to support.