Legacy costs tough for Michigan local governments: Part three – Strategies for legacy costs
Commitments to pensions and other post-employment benefits (OPEBs) have created financial problems for local governments trying to balance budgets with stagnant or falling revenues and rising costs.
Introduction to legacy costs and legacy cost challenges in this Michigan State University Extension news series include information from a recent presentation to northern lower Michigan county commissioners by Dr. Eric Scorsone, the director of the MSU Extension Center for Local Government Finance and Policy.
Some local governments have borrowed money by selling bonds, in order to catch up on their retirement liabilities. Scorsone pointed out that while this is an option, it is not without its own risks. The local government could get stuck paying a higher rate of interest on the bonds than they are earning on their own investments. His advice was to reduce the level of OPEB costs first.
Scorsone offered the group several points regarding policy solutions and challenges. More contributions will likely need to be made, either by the local government or the employee. This may mean higher taxes or cuts in services, both hard decisions. Reducing administrative costs and fees of the retirement programs is another option. Typically, this requires being part of a larger pool, so that more dollars are being managed with the same overhead costs. Finally, changing benefits may be necessary. Remember that pensions carry a constitutional guarantee. Changes to defined contribution plans give the local unit more control over costs. OPEBs, which often have fluctuating costs to deal with, are easier to change. This will give the local government more flexibility in responding to changing investment scenarios and may also make it easier to maintain other services.
Finally, Scorsone closed with three key questions:
- Can we afford it? Is it sustainable over the long term? These are decisions with long term impacts. We have to look farther ahead than we are used to doing.
- What is the impact on talent recruitment and retention and employee morale? Changes are difficult, especially for local units where employees have given up pay raises in exchange for better benefits, at a time when benefit costs were not so high.
- What are other governments doing? Each local government has to make the right decisions based on their own revenue, programs and citizen needs. Often, though, talking with others about the things they are doing to solve problems can point a local government toward an option they were unaware of or had not yet carefully considered.
The MSU Extension Center for Local Government Finance and Policy has a number of resources on its website. One is Funding the Legacy: The Cost of Municipal Workers Retirement Benefits to Michigan Communities, published in 2013. Another is an update to Funding the Legacy, titled Legacy Costs Facing Michigan Municipalities, published in 2016.