Governments struggle to balance yesterday's promises to retirees with budgets of today

Feb 22, 2016

A budget shortfall forced Grand Traverse County to temporarily close Easling Pool last year.
Credit Grand Traverse County Easling Pool

The cost of paying benefits to retired government workers is skyrocketing and taxpayers in northern Michigan are footing the bill. The burden is forcing cities, townships and counties to get creative in how they deal with it.

 

In the village of Kalkaska, four former employees are suing over the village's decision to stop paying for their health care.

 

Virginia Thomas is one of the plaintiffs. When Thomas was ready to retire from her job as Kalkaska Village clerk, she figured she was set. She had signed an agreement that guaranteed her health insurance coverage for life.

 

 

Thomas and other employees had paid into a plan while they were working, and that money covered the cost of the health insurance in their retirement.

 

But then the money ran out.

 

“The village council had been replaced in Kalkaska," says attorney John DiGiacomo, who represents the former village employees. "They voted to discontinue this insurance, under a specific legal theory. And they did so.”

 

"These are people who are 60, 70, 80 years old, who relied on promises that were made to them that would receive lifetime insurance."

The retirees are suing for “breach of contract.” They say the agreement they signed with the village in 1996 was clear – they would receive health care benefits for life. But 20 years later, the village council needed to come up with more than $5 million to keep providing these benefits.

 

So they decided to stop paying.

 

DiGiacomo says village officials weren’t interested in reaching a settlement with its former employees.

 

“These are people who are 60, 70, 80 years old, who relied on promises that were made to them that would receive lifetime insurance," says DiGiacomo. "And now, they’re struggling to get by.”

 

Virginia Thomas already won $180,000 in a jury trial. The village is now appealing that case while the other cases work their way through the system.

 

The attorney representing Kalkaska village says the trust fund set up to pay health care costs simply dried up – and the council didn’t have much choice other than to stop paying.

 

But Kalkaska is a rare case. For most governments, completely defunding retirement benefits is not an option.

 

A 'crisis' in Grand Traverse County

 

“I would not be in favor of that," says Grand Traverse County Administrator Tom Menzel. "We would go to an emergency manager first, before we went to that.”

 

Menzel took over as county administrator last year, and by his estimation, he inherited a financial mess. It's a mess he says was created largely by ignoring, for years, the county’s unfunded retirement liability.

 

It’s the same story all over Michigan and the rest of the country. Baby boomers get older, require more health care and their former employers are stuck with ballooning costs to take care of them.

 

Menzel says that for Grand Traverse County, the problem has reached crisis level.

 

"For once, we're going to do something for them that isn't going to give them tremendous liabilities and problems. Because my generation has done that to them and I'm not going to be a part of that."

“This board of commissioners and myself are here at a time when you can no longer push it off and you can’t kick the can down the road," he says. "You have to make some very difficult decisions.”

 

One of those difficult decisions was the closing of the county-owned Easling Pool in Traverse City. The pool was closed for three months last year, until the local YMCA stepped in, offering to manage it. The county commission’s debate over the issue drew crowds of passionate supporters of the pool.

 

“You get 80 or 90 people showing up who are very focused on one issue (and) could care less about the solvency of the organization and that puts a lot of pressure on the elected officials," says Menzel.

 

Menzel was against the pool deal. He still thinks it should be permanently shut down to save maintenance costs.

 

Menzel came into the administrator job with a reputation for turning around troubled organizations, like the National Cherry Festival. He says a new law is forcing Grand Traverse County, for the first time, to put its unfunded retirement liability on its balance sheet.

 

That means more tough decisions on the horizon.

 

Menzel has already taken flak for shuffling the county’s animal control office off to the sheriff’s department, and for suggesting the register of deeds office be combined with the county clerk.

 

Now he’s preparing for a fight with the employees’ unions over a plan to ask employees to pay more for their retirement benefits.

 

“I tell people, ‘you all may hate me, but your children and grandchildren are going to love me.’" he says. "For once, we’re going to do something for them that isn’t going to give them tremendous liabilities and problems. Because my generation has done that to them and I’m not going to be a part of that.”

 

Raise taxes, slash budgets or stop paying?

 

Steve Currie studies these issues for the Michigan Association of Counties. He says the retirement liability problem cuts across all lines in Michigan – urban, rural, rich and poor – and everyone is struggling with it.

 

Currie says the recession of 2008 played a big part in making things worse.

 

“These are promises that were made in the past when maybe the economy was doing much better," says Currie. "Counties were growing (and) they were trying to attract talent by offering rich health care plans and retirement plans to make sure they’re getting the best and the brightest. And then you have what happened to the economy and you still have those commitments out there.”

 

Currie says there are a few ways counties can deal with unfunded retirement liability.

 

Oakland County in Southeast Michigan decided to borrow money to pay down its debt. Other counties are raising taxes.

 

But most are forced to pay more for their retirees out of the pool of money that goes toward everything else.

 

And Currie says everyone is cutting benefits for the people they’re hiring now. That’s a solution for the short term, but it has long-term implications.

 

“We’ve had a lot of talent leave the state and when you’re competing in the private sector and the public sector, I think we’re going to have to see local units of government get very creative in ways that they attract talent,” says Currie.

 

Currie hasn’t heard of anyone doing what the village of Kalkaska did.

 

The village retirees are waiting for their cases to play out in court. The Michigan Court of Appeals will hear Virginia Thomas’s case in two weeks.