Legislation to permit local government bonding to pay for underfunded pension and other retirement liabilities through 2023 is making its way through the lame-duck session of the Michigan legislature.
Without an extender, the existing law will expire Dec. 31. The legislation, which would also lower the ratings floor at which municipalities would be eligible to issue POBs, will be heard in the House this week after winning Senate passage last week.
Senate Bill 1129, introduced by Sen. Jim Stamas, R-Midland, would extend the 2018 expiration date on borrowing for five years. It would also open up the option to local units of governments that have a single-A rating as long as they don’t have a corrective action plan or are in compliance with such a plan, as determined by the Municipal Stability Board.
Currently, local governments have to be rated AA or higher to issue such bonds.
The bill was passed in a 28-to-9 vote last Wednesday, receiving bipartisan support and is expected to receive support from soon-to-depart Gov. Rick Snyder, a Republican. Republicans control the legislature. The bill is scheduled to be discussed in a House committee on Thursday morning. The original legislation was passed in 2012.
“There are times with our smaller communities that bonding makes sense, when we have taken all steps to ensure that we met the long term obligation and at the same time have a plan in place that limits that and puts in place what the community can actually afford,” Stamas said. “It not only protects those with promises that were made but it also puts in place the ability for the community to provide the services that the taxpayers of those communities are paying their taxes for.”
Rogers City serves as a model for those smaller A-rated communities that the legislation was intended to target. The city is one of nine in the state with a pension funding ratio of 47% or less and contributes at least 14% its governmental funds into its pensions today. The city has a $5.8 million unfunded pension liability gap.
“We are at the lowest rung of the ladder,” said City Manager Joe Hefele in his testimony before a Senate committee. “We looked at every plan change we could make to existing employees and we actually implemented substantial ones but it only brought our funding level up a couple percent because 80% of our problem is tied in with those already retired.”
Hefele said that after exhausting all possible option like switching new employees to defined contributions and increasing the city’s contribution payments, the city found that would cost taxpayers more than $15 million over 22 years; issuing a bond would cost $9 million.
“We are saving our taxpayers $6 million by issuing the bonds and right now we are also paying about $350,000 into our pension costs to put that into perspective the city’s general operating tax revenue is about $1.2 million,” he said.
Stamas said that roughly 200 communities would become eligible to issue bonds with the single-A rating and about 30 of those communities have a need to bond.
“This is a major issue that the league has supported,” Chris Hackbarth, director of state and federal affairs at the Michigan Municipal League.
“This is not just a Rogers City issue we have other communities across the state dealing with this, where they are being crippled by some of this debt and having a consistent payment that they count on and budget for and will help them close their and help that community remain viable over the long term,” Hackbarth said.
Issuing pension or OPEB bonds in such circumstances is OK if done responsibly, said Michigan State University economist Eric Scorsone. “I worry about getting it right for many of the smaller entities and understanding the risks they are taking on; do local officials realize what they are doing?”