A Michigan municipality is trimming its budget after voters rejected a tax measure for unfunded retiree liabilities.
Moody’s Investors Service downgraded Bloomfield Township one notch to Aa1 from Aaa Aug. 8 after voters on Aug. 6 rejected the levy request meant to improve ongoing funding of the township's $161 million in unfunded pension and healthcare liabilities.
The rating agency said the township’s pension and other post-employment benefit liabilities, and rising costs to service them, are the biggest credit challenges for the wealthy Detroit bedroom community of 41,000.
“Inclusive of bonded debt and unfunded post-employment liabilities, the township's leverage, especially compared to revenue, is very high,” Moody’s said.
The township has $25 million in voter approved general obligation unlimited tax bonds outstanding and $79 million of general obligation limited tax bonds outstanding.
“Combined, the township's bonded debt, adjusted net pension liability and adjusted net OPEB liability stands at over 6 times fiscal 2018 operating revenue,” Moody's wrote.
S&P Global Ratings affirmed its AAA rating and stable outlook on the township Aug. 8, but cited the large pension and OPEB obligation as a credit weakness. “The township has a strong history of adjusting its budget when necessary, and as a result, we expect Bloomfield to maintain its reserves and cash on hand at levels we consider very strong,” S&P said.
The rating agencies were acting in advance of the township's $50 million pension obligation bond refunding deal.
The township's retiree liability is primarily on the retiree health care side, with the pensions 97% funded through a pension obligation bond done in 2013.
"The township has high costs compared to other governments, and they can do a lot more to control costs on retiree health insurance benefits than they do on pensions," said James Hohman, director of fiscal policy at the Mackinac Center. "These benefits are rarely available in the private sector and workers at retirement ages are already covered by Medicare."
Bloomfield treasurer Brian Kepes said a plan B to cut spending on OPEB liabilities is already underway, adding that the township will realize savings from the pension bond refunding.
“In terms of the Moody’s downgrade quite frankly our funding shows that we actually will reduce our OPEB liability given the interest rate assumption going from 4% to 6%, by about 20%,” said township treasurer Brian Kepes. “So we are actually strengthening our financial position, which S&P completely understood and acknowledged and Moody's didn't.”
Hilltop Securities priced the bonds Aug. 15.
Lou Orcutt, managing director at Hilltop, said the refunding produced net present value savings of $4.4 million. The bonds priced with true interest cost of 2.20% with coupons ranging from 1.797% to 2.324% with a final maturity of 2032.
In 2013, the township issued approximately $80 million in pension obligation bonds to finance the unfunded pension liability of the township's defined benefit pension plan. That plan had been closed to all new hires since 2005 and was replaced with a lower cost defined benefit contribution plan for new hires.
Prudential Retirement Insurance and Annuity Company holds the township's defined benefit pension plan. The township had been paying Prudential from the equity account to maintain the defined benefit account at its necessary level.
“One thing about POBs is that there is no arbitrage; if you are earning 7.5% that comes with the volatility of the market whereas the 5% you are paying or whatever it is that you are paying, that is a fixed cost so what you are getting for that money is a lot of risk,” said Todd Kanaster, a director of municipal pensions at S&P.
Timing is another consideration, said Kanaster. "I you take out a POB and a recession hits then you are pretty much hurting for the entire life of the bond," he said.
The township's funding level has been decreasing annually since the 2013 pension bond sale.
The trust is now below 100% funded and has an actuarially determined contribution. Township officials say this is due to many factors including mortality rates and fund assets not meeting the actuarially projected return. Most recently the actuary reduced the assumed rate on township investments to 5.75% from 6%.
Township supervisor Leo Savoie said that as a result, township is facing an unexpected expense of $3.7 million. “This expense is expected to continue each year for the foreseeable future with a potential to grow larger,” Savoie said.
“That means that even though the township borrowed enough to bring the pension system into full funding at the time, since then they generated a new $15 million gap between what has been earned in pensions and what they’ve set aside to pay for them,” Hohman said.
Mary Alice LeDuc of NO SAD, the group opposing the failed Special Assessment District measure, said the township has had lots of issues with Prudential. More than 60% of voters said "no" to the measure.
“Unfortunately, from what I understand is that the contract that was signed goes back to the 1960s and it was a very unfavorable contract for the township and for whatever reason it has a lot of locks in place such that the township cannot review the investment,” LeDuc said.
The township has been able to renegotiate some fee reductions with Prudential, but LeDuc said that the investment returns are “still pitiful and are not at market rates and we are locked into this.
“The reasons are not well explained and not fully shared so we are in this bad contract with poor investment returns and now Prudential has come to the township to say that we need another $3 million more a year after we already supposedly fully funded the liability,” LeDuc said. “We have more liabilities because they made bad investments and then we don’t have the due diligence to be able to evaluate where there investments are.”
The OPEB health care fund was closed to new hires in 2011. The township said it isn’t considering bonding as an option to address its underfunded healthcare liabilities.
“The annual premiums to provide retiree benefits cost $4.8 million, according to township financial statements, so apparently, coverage of this group costs over $14,000 per recipient,” Hohman said. “This is high considering that employees would be covered by Medicare under normal retirement ages, and retirees tend to get single and dual-person coverage instead of the more expensive full family coverage.”
Kepes said that Bloomfield had already enacted hiring freezes in certain areas to be able to effectuate in anticipation that the referendum didn’t pass. “We are continuing those,” he said. “We are going to be working with the board and the community to live within our means and spend accordingly.”
For LeDuc and her group, budget cuts are the most effective plan to tackle these rising costs.
“Right now according to the state, local governments only have to provide a 30-year plan which from our standpoint means a $2.2 million contribution per year over the 30-year plan,” LeDuc said. “We can come up with $2.2 million out of the budget and we don’t need to bond to fund that.”
Michigan’s largest 100 cities have an accumulated public pension shortage topping $5.5 billion, according to the Mackinac Center for Public Policy.
“Local governments have a responsibility to fulfill their promises to retirees. In order to do so, they must make fiscally sound policy decisions,” Hohman said.
Michigan’s Protecting Local Government Retirement and Benefits Act, Public Act 202, signed into law in 2017, implements recommendations on addressing unfunded pension and retiree healthcare liabilities of local governments in Michigan.
For pension plans, the criteria for underfunded status is less than 60% funding; and for retiree health systems, less than 40% funding. It changes the game for how local governments are viewed by the state, and mandates that they fulfill their promises to their retirees.
