CHICAGO — A survey that included more than half of Michigan’s counties show they are struggling with unfunded other post-employment benefit liabilities of $3 billion.
The counties reported non-pension OPEB liabilities totaling $4 billion, of which $3 billion is unfunded. The report, by the independent research group Citizens Research Council of Michigan, examined 50 of Michigan’s 83 counties. Researchers examined only counties in an effort to narrow their focus, but the report warned that most local governments across the state face similar liabilities amid rising fiscal challenges.
“Health care costs are eating up the budgets of these counties,” said Eric Lupher, director of local affairs at the council who wrote the report. “It’s not only the retiree OPEBs but the active workers as well.”
Rating analysts and other market participants say measures taken by local governments to manage and eventually fund their OPEB liabilities will prove increasingly important to overall credit strength over the next several years.
Several counties surveyed are taking some action to address their liability, though most are not, according to the report. Of the 44 counties that offer either full or limited retiree OPEB benefits, 24 pre-fund some of the costs.
But with big declines in counties’ main revenue sources — property taxes and state revenue aid — officials said they expect both the number of counties that pre-fund their OPEBs and the average amount of prefunding to drop in 2010 and 2011.
“It is encouraging that some counties are being proactive about the burden, but there are other counties out there that the amount of liability far outweighs their ability to pay it,” Lupher said. “The prospects for municipal finance with this on the horizon are scary.”
County officials say they have two choices for financing the liability: cutting general fund services or raising taxes.
Many governments have also started to limit or deny health care benefits for new hires. But the move in practice has little impact on the liability, in part because so few governments are hiring, Lupher said.
Last year, officials in Wayne County — the state’s largest by population — floated the idea of issuing up to $500 million of taxable bonds to cover about half of the $888 million liability. In its current pay-as-you-go mode, the county pays around $55 million annually to cover its OPEB liability.
In 2006, Oakland County became Michigan’s first government to borrow to finance the liability, issuing $557 million of taxable certificates of participation to fully fund it.
Oakland’s obligation was already about 37% funded, and so proceeds from the COPs fully funded the remaining liability. But Lupher said no counties talked about borrowing to finance the liability during the course of his research.
“Oakland was in a unique position in that their bonds were enough to get them over the top,” Lupher said. “Other counties I don’t think have set it as a high priority to be fully funded — there are other greater needs.”
On average, a county’s annual required contribution totals 8% of its general fund. Several counties reported higher percentages. Muskegon County’s ARC totals 15.4% of its general fund budget, for example, and Wayne County’s ARC totals 10.5% of its general fund budget. No county has sufficient assets to cover its liability and most have far less than half the assets needed to cover the liability, the report said.