A Solution to Local Government Debt

Local government retiree liabilities in Michigan have grown to at least $17 billion. Retirement debt costs are the fastest-rising expense for many municipalities, crowding out spending on core government services and have led to higher taxes.

Gov. Rick Snyder created a task force early this year that produced a new report. There is agreement that local debt is a problem, but there was little consensus from the task force on how to fix it. Union representatives seem to think this problem can be solved simply by getting more revenue from the state or by raising taxes. Local government groups similarly see tax hikes as a solution to the problem and want the power to more easily raise taxes.

But the primary problem is not lack of revenue — local government revenue has been pretty robust, increasing above inflation, on average, despite a decade-long recession. And though there are some cities which have seen real declines in revenue, the skyrocketing cost of pension and retiree health care liabilities dwarfs these revenue problems.

Take the city of Lansing as an example. Over the past decade, if property tax revenue and state revenue sharing had grown to keep pace with inflation, the city would have an extra $10 million to spend. But over that same period, the city added $270 million in retiree debt, making that hypothetical extra money almost meaningless. Many other cities are facing similar scenarios.

The problem is clear: Local government leaders are promising benefits to workers and have failed to put aside enough money to pay for them. For every $1 in health care benefits promised to future retirees, cities have saved only 19 cents. Almost no city or county is prefunding retiree health care, meaning they are essentially making empty promises to workers about what they can expect to receive in retirement.

The positive side to this challenge is that local governments have the tools to deal with this problem and many have been starting to use them. The solution is to stop letting today’s elected officials make promises to future retirees that they don’t have to pay for. This means only offering workers defined contribution, 401(K)-type retirement plans and prefunding the retiree health care part of these plans.

But not all municipalities are taking this problem serious enough. Too many are still holding on to the hope that they’ll be able to ignore these costs a little longer and grow out of this problem. But as the city of Lansing example demonstrates, this is unlikely to fix the problem. To that end, lawmakers might need to step in and create incentives for local governments to deal with these issues now, before they get even worse.