News Story

Detroit Bailout Bill Leaves Taxpayers On The Hook For New Pension Underfunding

Committee version guts original pension reform bill; full House could vote today

A Michigan House committee on Wednesday approved a package of bills that gives a partial bailout to Detroit and continues to allow the city the ability to rack up unfunded retiree liabilities.

An 11-bill package was recently proposed to deal with the Detroit bankruptcy situation. The focal point was an allocation of $195 million to the city, while the other legislation mostly dealt with protecting state taxpayers, citizens and public workers to prevent the fiscal situation from happening in the future. The bills were taken up by the “Detroit's Recovery and Michigan's Future" committee.

Initially, one of the bills, House Bill 5568, would have ended Detroit's defined benefit pension system and shifted new employees to a defined contribution, 401(k)-type plan. The city had been using overly optimistic assumptions and funding practices that contributed to the bankruptcy.

Because of the underfunding, retiree benefits were gobbling up 40 percent of Detroit's general fund budget and were projected to be 70 percent in 2023. Defined contribution plans cannot rack up unfunded liabilities.

But the bill was changed by the committee. The legislation that passed out of committee allows the city to leave open its pension plan and rack up liabilities in the future.

"The city may offer any retirement plan it wants," Committee Chairman Rep. John Walsh, R-Livonia, told The Detroit News.

House Bill 5568 now allows the city's Plan of Adjustment to set the terms until 2023. There have been several plans. The latest backs off Emergency Manager Kevyn Orr's initial push to close the defined benefit system. The plan also calls for more conservative funding assumptions and requires employees to shoulder some of the burden if the plan becomes underfunded.

While these terms limit some of the exposure to unfunded liabilities, the city retains the ability to continue to develop gaps between what officials set aside to pay for retirement and what employees are offered.

Rep. Greg MacMaster, R-Kewadin, said this "is not something I favor at all."

"The city is supposed to switch from a defined benefit to a defined contribution but [now] they have the ability to go back," Rep. MacMaster said. "For me, it opens the door for them to go back in the opposite direction which is kind of what got them to where they are now. ... I'm surprised that our leadership was even willing to consider moving in that direction."

Ari Adler, communications director for Michigan House Speaker Jase Bolger, R-Marshall, said the bills will help turn the city around financially.

"Detroit will have a better balance sheet because of these reforms than it has in at least 50 years, and we have removed uncertainty for taxpayers," Adler said. "In addition, the financial review commission will have final approval authority on any collectively bargained retirement plan for the city of Detroit."

James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, said the state should not leave worker retirement money in the hands of politicians by not closing the system.

"Detroit is in bankruptcy court asking for concessions from pensioners because the city underfunded the pensions it promised its employees," Hohman said. "Are legislators going to prevent the city from being in this situation again or not? This bill says they will not."

The allocation of the money from state taxpayers without preventing Detroit from racking up more unfunded liabilities was passed by Rep. John Walsh, R-Livonia; Rep. Earl Poleski, R-Jackson; and Rep. Michael McCready, R-Bloomfield Hills. The Democrats on the committee, Rep. Thomas Stallworth III, D-Detroit and Rep. Harvey Santana, D-Detroit, abstained.

The bill now heads to the Michigan House for a full vote, which is scheduled to happen today.

Members of the House committee did not respond to requests for comment.

(Correction: The vote out of committee was reported Wednesday night as being unanimous. The Democrats on the committee abstained from voting. The story has been edited to properly reflect the vote.)

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.