LANSING – A new study shows 311 local governments in Michigan have a combined unfunded liability of $12.7 billion, a specialist from Michigan State University told the House Financial Liability Reform Committee on Thursday.
Eric Scorsone, an MSU Extension specialist, said in a new report that Detroit carries 39 percent of the unfunded liabilities, with $4.9 billion. He said the information is lagging, and the numbers may be higher now.
The statewide amount of unfunded liability is 1.6 times the combined amount of unfunded pensions, which is $3.1 billion, and governmental activities debt, which is $4.7 billion, he said. Scorsone also said almost $11 billion is concentrated in the southeast area of the state.
The report said of the 284 units studied, 138 are prefunding liabilities. The units that are prefunding generally have a population of 30,001 to 200,000.
He said in totality, the prefunding numbers are small and not adequate. He said the funding needs to be around 80 percent of the liability, and the cities are funding between none and 5 percent.
He compared it to parents not saving for their child’s education until the child was 17. He said at that point, parents pay out of pocket and have to cut out other spending.
He said Michigan is not alone in this issue among the states.
“We wanted to bring this problem to your attention because we feel that each city trying to address this problem independently is going to be very challenging,” he said. “We think the state needs to provide some guidance.”
He said each mayor or chief administrative officer will have a different challenge in negotiating with labor unions.
Solutions to the unfunded liabilities, which are mostly health care costs, could include pooling investment funds together and steering retirees in the 55- to 64-year-old range to the health care exchange, where there are subsidies for retirees who are not yet eligible for Medicare (he said this would depend on what kind of exchange the state develops).
He said in Chicago the city has created a commission to look at the unfunded liability issue and is exploring directing pre-Medicare retirees to the health care exchange and in Boston, the city was able to reduce its liability by negotiating with labor unions and retirees. In Ohio and Oregon, there are statewide systems to prefund the liabilities.
He also said Flint has reduced its liability by almost 40 percent by changing some of its copay systems. However, the report said large cities may need more drastic measures to get their liability under control.
“We feel this is a critical issue,” he said. “Comparing it to the debt and comparing to the pensions, we think this is probably the biggest challenge to long-term solvency, particular to our large cities.”
Scorsone suggested various solutions on the statewide and local level. However, Rep. Mike Shirkey (R-Clarklake) said he was more interested in ways to prevent the problem in the future.
“I’m not too interested in legislative solutions to solve somebody else’s problem,” Shirkey said.
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