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MANAGEMENT UPDATE.

MICHIGAN CITIES, PENSION AID, AND A TEACHING MOMENT

Small and mid-size communities in Michigan have struggled to balance the cost of overall retirement expenditures as the state’s industrial base and their revenues have shrunk. The approach taken by the state is one that can be a teaching moment for other states. William Glasgall, Senior Vice President and Director, State and Local Initiatives at the Volcker Alliance. is one of the most knowledgeable and astute observers of public sector finance in the country and has written the following for the B&G Weekly Selection to bring readers of this website up to date on this fascinating sequence of events.    


Norway, Michigan, home to the abandoned Iron Mountain mine on the state’s Upper Peninsula, has seen its population and fortunes wane as the area’s once-abundant ore production declined over decades. As prosperity receded, Norway’s ability to fund pensions for city employees while also supporting essential services shrank as well. By 2023, the city’s pension assets were enough to cover only 40%t of its estimated obligations to city workers, according to the Iron Mountain Daily News. That compares with an estimated national pension funding average of 77%, according to Equable Institute, a pension research group.



Norway’s policy predicament is mirrored by small- and midsized municipalities across Michigan. But instead of filing for bankruptcy as debt-burdened Detroit did in 2013, Norway and other qualifying cities and municipal agencies where pension assets were less than 60% of their liabilities were able to grab a lifeline from a new $750 million state rescue effort, the Protecting MI Pension Program, that emerged from legislation passed in 2017 and 2022. The program is serving not only as a fiscal stabilizer for cities facing pension failure but also as a teaching moment to help keep them out of trouble. It may also serve as a model for other states where troubled local pensions threaten the retirement security of thousands of government employees.


As of September, 123 communities, including larger ones such as Benton Harbor and Saginaw, had received about $533 million in Protecting MI pension grants. “Funding these systems enables our communities to uphold their commitment to 25,000-plus public servants and focus on providing the services Michiganders come to expect,” said state Treasurer Rachael Eubanks


Like the federal bailout of New York City after it flirted with bankruptcy in 1975, Michigan’s program comes with stringent restrictions on local financial practices. According to a Reason Foundation analysis, those receiving state aid must pay actuarially determined pension contributions in full and not provide new benefit enhancements unless already promised ones are fully funded. Recipients may also face other corrective actions ordered by the state Municipal Stability Board. While the bailout rules are harsh, the aid was warmly welcomed in Norway, where the $3.7 million state grant was about equal to its 2023 general fund revenue. According to City Manager Dan Stoltman, the dollars will help boost city pension funding closer to 60%. And that, he told the Daily News, “makes the light at the end of the tunnel a little closer and a lot brighter for our future.” 


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