Traverse City Record-Eagle

Michigan

March 15, 2013

Study: Cities have $12.7B in retiree health care costs

LANSING (AP) — Michigan cities and townships that provide health care for retired public workers face nearly $13 billion in unfunded costs, according to a report released Thursday, with half setting aside no money to cope with a bill gobbling up more of their budgets.

The sobering study, released the same day an emergency financial manager was assigned to Detroit, shows the city is not alone in grappling with how to pay promised health benefits to retirees. More than 300 cities, townships and villages — home to two-thirds of state residents — face a combined $12.7 billion in unfunded liabilities in the next 30 years.

“It’s a crisis now and it’s only going to get worse,” said Eric Scorsone, an economist at Michigan State University and expert on government finances.

Detailing his findings to a state legislative committee on Thursday, he warned that higher taxes, budget cuts or broken promises to retirees are inevitable, and called on lawmakers to step in and help find solutions.

“For Michigan, as a state, for our local governments, this is the biggest long-term financial challenge we have right now,” said Scorsone, lead author of the report.

Unlike pension benefits, retiree health care is often not pre-funded, where money is put aside so it can generate investment income used to help pay future costs. About half of the municipalities that offer health insurance to retirees pay as they go, relying mostly on tax revenue to foot the bill each year despite longer lifespans and rapidly rising health care costs, according to the report.

The study reviewed 2011 annual audit reports that local governments filed with the state. It is the first attempt to comprehensibly collect and analyze the cost of Michigan municipal workers’ retirement benefits since local governments had to start calculating non-pension legacy costs in 2007, according to the report. A 2011 study by the Citizens Research Council showed $4 billion in health care liabilities for 83 counties.

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