Retiree Benefits Pose Problems For Pothole Patching Plans In Grand Rapids

Costs are crowding out road funding

There are potholes Grand Rapids city officials fail to mention in their attempt to turn a temporary income tax increase into a more permanent one — the $153.9 million hole to meet pension liabilities and the $163 million bill for retiree health care.

Those costs are little known or understood by the public and help explain why the city’s streets are in such deplorable condition. The pension hole, for example, has to be amortized over time, and to do that it has to pay an amount each year about equal to what it needs to fix the roads.

How did the city get into this mess? The answer is simple: City officials promised benefits they couldn't afford and then failed to a fund a system to adequately pay them. 

It is a story repeating itself in city after city because unlike private industry, where markets dictate the sustainability of pay and benefit packages, politicians and public sector unions have assumed they get a blank check from taxpayers. Rather than being honest with the public (and the government workers who depend on this money), politicians push the costs into the future. Eventually the bills come due and when they do, they come at the expense of essential government services — like patching potholes.

It is far easier to sell a "streets" tax than a tax to support a defined benefit pension program that few people in the private sector enjoy. The federal government estimates that only about 14 percent of private sector workers are eligible to receive a pension. 

While the city has shifted new employees to 401(k)-type, defined contribution plans, the city still has high liabilities. In addition to the defined benefit pension most are receiving, the city gives workers lifetime retiree health benefits. Last year, those benefits cost the city $16.7 million or $229 per household.

Michigan's constitution makes the pension benefits earned by employees a contractual obligation for the city, but there is no such protection for retiree health benefits. The city could follow the lead of Kent County by giving retirees a monthly stipend and having them find their own health insurance. 

Additionally, the overall taxes in Grand Rapids are high enough to cause problems. Local income tax obligation is a consideration for companies when deciding where to relocate or expand. According to the Michigan Department of Treasury, only 22 Michigan cities levy an income tax on workers. And like Detroit, Saginaw and Highland Park, Grand Rapids is exempted from the 1 percent limit on resident workers and 0.5 percent limit on non-residents workers.

In 2010, the city said it needed to go even higher than its current exemption, asking voters to approve an income tax increase of 15 percent. Among other things, the city threatened to stop taking care of parks if the tax increase did not pass. Then, in 2013, Grand Rapids went back to the taxpayers for a property tax increase to take care of the parks. 

The 2010 increase passed by 204 votes. The city didn't take any chances with the property tax increase request, putting the item on a ballot in an off-election year when few people showed up at the polls.

City officials want more, and earlier this year they scrambled to get another increase request ready so it could be on the ballot next week (May 6), which happens to be one of three election days this year expected to have the least turnout.

According to the city comptroller report, taxes account for 56 percent of the revenue with income tax providing a growing chunk of that. Income tax receipts increased 10.7 percent in 2013 while property tax revenue fell 5.7 percent. Raising income taxes does not require approval of all workers affected — only workers who live in the city can vote.

To make the increase more attractive, the ballot proposal includes a measure that will relieve property owners of expensive sidewalk repairs. There are other enticements such as "improving accessibility" for bike riders and users of public transportation and something called "low impact design," which "improves water quality by filtering trash and particulates before entering the river."

But then what will be left to fix potholes? The ballot proposal states that the money raised will be "for street, sidewalk and right-of-way repair, improvement and reconstruction." The city has established guidelines that most of that money will go to streets, but nothing is set in stone. 

James Hohman, assistant director of fiscal policy for the Mackinac Center for Public Policy, said Grand Rapids already sets aside nearly $16 million each year to spend solely on roads, of which nearly $13 million comes not out of the general fund, but from the state.

Before going to taxpayers again, perhaps Grand Rapids should start making some repairs on its fiscal policies. Making reforms to its pension and retiree health benefits programs could go a long way in filling potholes. 

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.