Lansing looks to bonds to help solve local pension, health-care debts

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Joe Hefele has looked for ways to solve Rogers City’s looming pension crisis.

Hefele, the city manager, said he has frozen full-time hiring to avoid adding anyone to the underfunded pension system, and studied modifying or closing the city’s pension plan. Yet the city’s roughly $350,000 pension contribution this year is expected to more than double within 10 years, and top $1 million within 20 years.

The small community in the northeastern Lower Peninsula has more than $11.3 million in total pension obligations to its employees, and enough money set aside to cover just 49 percent of it. Hefele said he has come to the conclusion that the best option to raise the money needed for pensions and still afford to provide city services is to issue bonds.

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Hefele supports a bill moving in Lansing’s lame-duck legislative session, which is scheduled to wrap this week, to allow more communities to use bonds to pay for the long-term pension and retiree health care benefits they promised their employees.

Senate Bill 838 passed the Michigan House on Tuesday by a 103-6 vote, with no debate. The bill recently passed the Senate after months of sitting idle.

It now returns to the Senate, which has to adopt some House changes to the measure before before lame-duck session ends this week. If the Senate agrees, the bill goes to outgoing Gov. Rick Snyder.

“That legislation, for Rogers City, really is the difference between a bright future and inevitable bankruptcy,” Hefele told Bridge Magazine Tuesday. He previously testified in support of the bill before a Senate committee.

The bill, sponsored by state Sen. Jack Brandenburg, a Republican from Macomb County’s Harrison Township, would allow communities with a single-A credit rating to take advantage of using bonds to increase funding in their pension and retirement health care systems.

Currently, state law limits bonding only to local governments with a AA credit rating or higher. Some municipalities complain that requirement keeps the tool out of the toolbox of communities that may not get the higher rating, but still are considered to be investment-worthy.

Ratings agencies, such as Moody’s or Standard & Poor’s, assign credit ratings as a way to measure a municipality’s credit risk, or the likelihood that it could repay debt. A city’s financial condition, as well as other economic trends, can factor into the rating. A single-A credit rating generally is considered investment grade, meaning there is a lower risk of defaulting on debt, though it is a step below a AA rating.

“Not every small community is going to be able to or wants to bond,” said state Sen. Jim Stamas, R-Midland, who worked on the credit rating provisions in the bill. “It’s one more opportunity if it makes sense for a community to do that.”

Bonding is not without risk. It would add new debt and create a fixed required payment. But the bill’s advocates say it could reduce payments by taxpayers if a community’s annual bond payment is lower than the retirement system contribution would have been. Though issuing bonds doesn’t mean that unfunded liabilities will never again increase.

Some Democrats also have had concerns about requiring retirement plans to be closed in order to issue a bond.

The Senate bill follows other efforts by the Republican-led Legislature over several years to rein in ballooning costs for local government pension and retiree health care benefits.

The most recent data provided by the state Treasury, as of the 2017 fiscal year, suggest that the total unfunded pension liability for local governments is $9.8 billion, and the total unfunded retiree health care obligation is $9.6 billion.

A task force convened by Snyder estimated that close to 20 cents of every dollar in many cities go to pension and retiree health care benefits, rather than municipal services.

Last year, Snyder signed legislation that requires more reporting about the funding levels of local government retirement benefits. The laws also require the state Treasury to determine whether a municipality’s retirement systems are underfunded and require a corrective action plan.

Pension plans that are less than 60 percent funded and retirement health systems that are less than 40 percent funded generally are considered underfunded, per the law.

A Treasury spokesman said a municipality couldn’t issue bonds under the bill if it was not in compliance with reporting requirements under the 2017 law, but bonding is one tool that could be included in a corrective plan.

Many communities have seen their unfunded retiree obligations increase for a number of reasons, from reducing the number of years they have to fully fund their retirement systems, to changes in assumptions about investment returns and how long retirees will live. That can mean that a municipality’s required payment also increases.

“There was no mismanagement in most communities in this situation,” said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League, which supports the bill.

Bonding would be a tool, not a one-size-fits-all solution, he added. Some communities are finding their annual payments are no longer sufficient because anticipated investment returns didn’t materialize, for instance, while others are facing accelerated timelines to fund their pension benefits because they closed their system to new hires and fewer employees are paying into it.

The Municipal Employees’ Retirement System, or MERS, which administers the retirement plans for many municipalities, said 79 percent of the local governments that it serves have taken steps in the last five years to lower unfunded obligations. A MERS spokeswoman said the organization has not taken a position on Brandenburg’s bill.

Communities that use the bonding opportunity would be able to borrow enough to cover up to 95 percent of its unfunded pension liability, and up to 60 percent of its unfunded retiree health care liability, under a revised bill adopted Tuesday in a House committee that rolls in parts of Stamas’ Senate Bill 1129. The money would be kept in a trust fund.

Municipalities that choose to issue bonds to pay for retirement obligations would have to close the plans to new hires in favor of a defined-contribution, or 401k-style, plan. A local government would have to negotiate the plans’ closure with affected employee unions.

Hefele, of Rogers City, said it’s projected his city will pay more than $15 million in annual pension contributions over the next 22 years. Bonding, he said, would allow Rogers City to boost its funding levels and fix its payment at around $410,000 per year, or roughly $9 million over the same 22-year period — a taxpayer savings of about $6 million.

The city has 27 retirees and eight former employees who are vested in the pension system, compared to 20 active employees, Hefele said.

Rogers City’s leaders have created long-term plans to address everything from streets and sidewalks to sewers, Hefele said. But without addressing the long-term obligations, he added, “there simply is not going to be any revenue to implement any of it.”