Kicking the Big Can
January 12, 2017
The world’s biggest can isn’t far away. A short drive from Toledo is Napoleon, Ohio and the Campbell Soup Supply Company. About 2 hours and small change from Lansing, you find a giant Tomato Soup can, big enough to make Andy Warhol jealous. Our Legislature sure could have used it in 2016 Lame Duck, as they kicked an even bigger can down the old highway: retiree benefits.
Government employee benefits, both pension and OPEB—‘Other Post Employment Benefits’—(health care) have been punted cans for years. Our problem: the money it takes to pay these benefits is grotesquely larger than the amount put away to pay them. For example, in 2012, when we worked on the Michigan Public School Employees Retirement System–MPSERS, the teacher’s system was short $60 Billion to cover its projected obligations. Talk about a maxed credit card!
The teachers’ system was the worst case then. Public school teacher benefits are negotiated and owed by local school districts. Think of it as a credit card: your district buys labor from the teachers, represented by their union. Some of the price of that labor is paid up front in higher wages, the rest is charged to the credit card in terms of future benefits. Then the union helps the board get reelected.
The 2012 teachers were canaries in a great big Indiana Jones coal mine. This fall, in September, came a study through the West Michigan Policy Forum, which seems to be taking up the analysis role formerly filled by Midland’s Mackinaw Center. Titled “The Retirement Plans Challenge in Michigan” the paper was written by analysts from Price Waterhouse Cooper. The WMPF document leaves the teacher situation alone and goes to local city governments and their obligations: mainly police and fire.
It’s a document to sober a Lions fan. Taking seven municipalities from Ann Arbor to Saginaw, the issue of unfunded liabilities is shown to be closing on the MPSERS level at its worst. All cities are deeply maxed in terms of what they owe versus what they’ve put away. Locals rely heavily on property taxes for revenue, whose growth is capped by Headlee and Prop A. The budgets of the municipalities, like those of the school districts, are being eaten up by legacy costs. GM anyone? This is the “silent killer.”
When you’re deep underwater, you need to do two things: first: stop signing IOUs and incurring new debt. This means say ‘no!’ Stop negotiating what you can’t afford. Second, if your current debts are essentially unpayable, you have to restructure that debt. That means cutting benefits. Hard medicine indeed, but the alternative is a system crash that leaves creditors – retirees– with even less.
So to address this looming fiscal disaster, the Michigan House and Senate acted in the 2016 lame duck session. The House Bills 6074 to 6086 were a package designed to stop the bleeding by forcing local governments to put an 80% cap on what they agree to in collective bargaining contracts for retirement health benefits. Needless to say the unions went nuts. “…an unprecedented attack on police officers.” said the Police Officers Association of Michigan, “..seek to impose draconian measures.” There was a call to action; think the Great Chicago Fire chasing the Blues Brothers. The responders responded!
Cops and firefighters surged up to Lansing to let their elected representatives know precisely what they thought of them. If it’s tough to look your kids’ angry teacher in the eye and explain, it’s doubly hard to face the guy who may have saved your life on an emergency run last year. The package was quietly withdrawn, reform effort defeated. Score one for the public sector unions. Or was it?
That big old can got booted again, and it’s like a snowball: the more it rolls the bigger it gets. As the costs for the employee retiree benefits grow, they inevitably hit a point of no return. As GM and City of Detroit retirees found out, a “promise” is only as good as the promisor’s ability to pay. We deeply respect our first responders, their service is priceless; but here are the Chuck Moss Rules:
- We can’t pay people what they’re worth, just what we can afford to pay.
- The longer you evade a problem, the bigger it gets.
- Something that can’t go on forever, won’t.
- Promises that can’t be kept, won’t be.
Cops arrest guys who run Ponzi schemes. Firemen put out fires before they spread. Just sayin’.
teaches Political Science at Oakland University and serves on the Board of the Regional Transportation Authority. He was elected to represent the 40th District in the Michigan House and was appointed Chairman of the all-important Appropriations Committee, responsible for the entire state budget. Prior to politics, Chuck was political columnist for the DETROIT NEWS, and has hosted talk shows for radio and television.