Added on March 4, 2019  Marsha Chartrand

An $18B debt is coming due, and it’s haunting small town Michigan

by Roelofs (Bridge)

Once a mining community, Iron Mountain is probably more famous now as proud home town to Michigan State University men’s basketball coach Tom Izzo.

But this Upper Peninsula city is also notable these days for something no one brags about: It’s one of dozens of small rural Michigan communities and public bodies that face mountains of unfunded public pension and retirement health care debt.

With $48 million in unfunded legacy debt, this city of 7,400 people owes nearly $1.5 million a year in retirement health care alone. That sucked nearly $1 million from its 2017-18 $6.8 million general fund budget, atop $400,000 the city siphoned from utility, street and motor vehicle and equipment funds to help fund retiree health care.

Iron Mountain spends another $650,00 a year on pensions for retired non-public safety workers, in addition to 3.3 mills a year in property tax homeowners shell out for police and fire pensions.

All that leaves less money for everything that makes a city livable, from police and fire protection to parks and recreation and roads.

Iron Mountain, about 75 miles southwest of Marquette, makes do with 41 full-time employees, down from 55 a decade ago. Two-thirds of its roads are in poor condition. City Manager Jordan Stanchina said he’s put off water and sewer projects and delayed replacing worn-out backhoes and loaders.

“On street repair, we’d like to be doing double or triple what we are doing,” Stanchina said. “Right now, we’re just trying to keep our heads above water.”

Iron Mountain is among nearly 250 municipalities and public bodies across the state flagged late last year for carrying significant unfunded debt levels by the  Treasury Department under a new state law.

A task force appointed by former Republican Gov. Rick Snyder found local governments in the state that provide retiree health care had $10.1 billion in unfunded liabilities, along with another $7.5 billion in unfunded pension debt.

That prompted legislators to pass a law in 2017 that requires communities and public agencies to report pension and retiree health care debt to the Treasury Department and submit plans for corrective action if the debt is deep enough.

As Bridge Magazine has reported, Michigan’s legacy debt crisis stretches back decades, traceable in many cases to union pension and health care benefits cities couldn’t afford in the long run. Until recently, many cities also failed to set aside money for retiree health care benefits when employees were still working, forcing them to divert more money from the general fund to pay benefits when they retire.

Experts agree communities will largely have to dig their way out on their own. If they haven’t done it already, that means switching from pensions to 401(k)-style retirement benefits for new employees and negotiating retiree health care plans with more limited benefits. For example, the City of Portage, next to Kalamazoo, switched in the 1980s from a defined pension benefit to a less costly defined contribution plan. It also took similar steps to limit its costs for retiree health care.

To be sure, cities like Flint, Saginaw, Lansing and areas downriver of Detroit such as Ecorse and Lincoln Park remain Exhibit A for Michigan’s ongoing municipal debt morass.

Those larger dollar figures can overshadow the struggles of easily overlooked places like Iron Mountain and Iron River in the U.P. and Rogers City southeast of the Mackinac Bridge. The state’s heightened scrutiny on legacy debt has also laid bare a significant debt gap in public bodies like road commissions as well.

“It’s a significant problem in some rural areas,” said Eric Scorsone, a Michigan State University associate professor, former deputy treasurer and chairman of the Treasury’s Municipal Stability Board that oversees legacy debt reporting.

“It’s easy to think the debt numbers are small compared to the (larger cities). But if you look at the debt on a per capita basis, they are pretty substantial.”

The average per capita municipal legacy debt in Michigan is about $1,000. In Iron Mountain and nearby Crystal Falls it’s over $5,000, totals approaching the more high-profile per capita debt of places like Lansing, at just over $6,000.

And cutting employees further may not be the answer: Michigan already has the lowest number of per-capita state and local government employees in the nation, according to a study by Governing Magazine.

In 2014, Michigan had 182,000 state and municipal employees, or 184 per 10,000 residents. That’s 20 percent less than the national average of 232 per 10,000.

Pinched from all sides

Property values – while now rising in much of the state – are either stagnant or falling in much of rural Michigan. At the same time, many rural areas continue to be drained of people as 14 of 15 U.P. counties lost population since 2010. That leaves fewer taxpayers to sustain legacy debt.

From 2014 to 2017, taxable property values in Iron Mountain grew by 2.1 percent, while the average rise for Michigan’s 1,500 townships and cities was ten-fold higher at 21 percent. Making matters worse, the town’s population has fallen 13 percent since 1990. So as legacy costs rise, they inevitably eat into services taxpayers expect from their communities.

“When you look at rural communities, if you don’t get new construction there are not ways to grow property tax revenues beyond the rate of inflation,” said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League.

“This is absolutely a problem.”

Municipal leaders have complained for years of being starved for cash, in part because state law limits how fast property values can grow under the Headlee Amendment, which restricts city revenue collections in better economic times. That left many communities unable to fully recover from the housing crash a decade ago.

On top of that, communities have absorbed state revenue sharing cuts calculated at more than $8 billion since 2002, according to the Michigan Municipal League.

Those pressures prompted the state to give closer scrutiny to communities most pinched by legacy debt.

Under the 2017 law, cities must send Treasury a corrective action plan when less than 60 percent of their pension is funded and their annual obligations exceed 10 percent of revenue; and when retiree health care funding falls under 40 percent and annual obligations exceed 12 percent of revenues.

Lawmakers stripped an earlier provision of the bill to send financial management teams into financially stressed communities with broad powers to drive down retirement debt. Opponents argued that was a rerun of emergency management powers that led to the Flint water crisis.

In Rogers City, poring over spreadsheets

On the shores of Lake Huron in the northeast Lower Peninsula, Rogers City Manager Joe Hefele spent weeks last year poring over spread sheets analyzing his city’s $5.8 million unfunded pension debt.

The outlook was bleak.

The city now owes about $300,000 a year in pension contributions. But Hefele said those obligations are projected to balloon to more than $1 million a year in a few years. That’s half the city’s $2 million general fund – and would consume all the city’s property tax revenue.

It doesn’t help that as these obligations rise, the city’s taxable property values fell by 2.2 percent from 2014 to 2017.

City officials now pin their hopes on a state law passed in December’s legislative lame duck session that allows communities with a single-A bond rating to issue bonds to pay down pension and health care obligations. Hefele calculates a bond issue could save the city $6 million over 22 years.

He said this city of about 2,700 people has made substantial cuts to staff, as it leaves positions empty as employees retire. Its public works department has shrunk since 1999 from nine full-time jobs to six; its police department from eight to six; its water department from two to one and its office staff from seven to five.

As in any city with retired public employees, Rogers City can’t renegotiate pension benefits already due retirees since those are protected under the state constitution.

Hefele called a bond issue “our only way out. Otherwise we could be looking at bankruptcy.”

Paying down but still going backwards

About 50 miles northwest of Bay City, the Gladwin County Road Commission maintains more than 1,000 miles of roads with a workforce of about 30 employees. In winter, motorists count on its fleet of two dozen trucks and snowplows to keep roads clear.

“The public expects safe roads and well-maintained roads,” said Road Commission Manager Dave Pettersch.

But Pettersch said that’s getting harder to do each year. It’s faced with more than $14 million in unfunded pension and retiree health care debt.

According to Treasury Department data, it had $16 million in pension liability 2017 and $8.3 million in assets – leaving it just 52 percent funded. It has $6.76 million in health care debt – with just over $84,000 in assets, leaving it virtually unfunded.

The road commission owes about $1 million a year in annual contributions to pensions and more than $400,000 a year for retiree health care. That’s about 17 percent of its 2017 budget of about $9 million.

“It has an impact, there’s no doubt.” Pettersch said. “Every year we try to pay it down but it’s an ongoing debt that only grows. You’re putting into the system and you’re still going backwards.”

That puts a crimp on everything from construction to road maintenance to the  purchase of new equipment.

In 2009, the commission closed its pension plan to new employees and cut off retiree health care benefits for new employees. Still, its pension contribution is expected to continue to rise, by one estimate approaching $1.5 million by 2040.

“Past generations have tied our hands in this generation,” Pettersch said. “People are outliving how long they were expected to live in the 1960s. The amount of money that was needed was not put away.”

Down to two cops

On the shores of Lake Superior at the base of the Keweenaw Peninsula, the Village of Baraga is staring at a sobering amount of pension debt for a community its size.

It had $3.7 million in pension liabilities in 2017 and just $1.5 million in assets, leaving it just 41 percent funded. According to the Treasury Department, its required annual pension contribution of about $157,000 accounted for one-fourth of government revenues in 2017.

Village Manager LeAnn LeClaire said the village of about 2,000 people closed its pension eight years ago to new employees, replacing it with a lower-cost plan, and replaced its retiree health plan with a lower-cost version eight years ago.

She said the village has cut staff from 25 full-time employees to 11. Its police department now has two officers – half what it used to be –  while its public works department has four employees, down from 11.

LeClaire said it’s put off replacing aging culverts, as well as a new marina and hiking trail to the nearby Village of L’Anse. She’d like to put new playground equipment in its children’s park.

“We don’t have the money,” she said.

LeClaire is uncertain how long it might take the village dig out from under this debt.

“There definitely will be more cutbacks,” she said. “We’ve got a lot to think about.”

Back in Iron Mountain, Stanchina, the city manager, submitted corrective plans to the state in November, which were approved.

The city switched in 2018 from a traditional pension plan for new hires to a combination defined benefit plan and defined contribution plan that should lower the city’s liability over time. But it doesn’t expect to be 60 percent funded – the state standard – until 2033.

As of now, the city has about $34 million in retiree health liability and estimates it won’t become 40 percent funded, the state threshold, until 2049.

It is, Stanchina said, a long slog.

“We’re going to be at this for a while.”

Bridge staff reporter Mike Wilkinson contributed.