DALLAS -- Michigan cities should be required to prefund newly hired employees' retiree medical costs to help them deal with mounting local pension and health care costs.

That was the conclusion of a task force commissioned by Gov. Rick Snyder.

Michigan governments are said to collectively face an estimated $17 billion in unfunded liabilities in their municipal pension and retiree health care plans. Snyder formed the task force in February to help tackle local governments' unfunded retirement obligations. The total unfunded pension liability is estimated to be around $7.46 billion. The total unfunded liability for retiree health care is estimated at $10.13 billion.

Rick Snyder, governor of Michigan, speaks during a grand opening ceremony at the expanded Toyota Motor North American Research & Development (TMNA R&D) center in York Township, Michigan, U.S., on Thursday, May 4, 2017.
Michigan Gov. Rick Snyder convened the task force on unfunded obligations. Bloomberg

“Municipalities across Michigan and the nation are facing growing, unfunded long-term liabilities that jeopardize the quality of life in our communities, along with the retirees and employees who depend on these benefits," Snyder said in a statement. "This is why I asked legislators, state and local government officials, employee representatives, and pension managers and insurance professionals to work together to determine how we can best reform local government pension and health care in Michigan."

In a report released on Tuesday, the task force suggested that setting funds aside both from the employer and employee while the employee is working would ensure that adequate funds are available to meet commitments upon the employee’s retirement. Prefunding of other post-employment benefits allows for funds to be invested and earn income over time.

“With a lack of required prefunding, the long-term costs of the benefits to employers, employees and taxpayers increase,” according to the report. “Services rendered today are paid in the future. With the pay-as-you-go approach, the employer may not be prepared for the significant cost increases as employees retire and the liabilities become annual cash outflows.”

The task force also recommended greater transparency and reporting be required to better understand the size and scope of the problem, as well as where the biggest challenges exist. It also proposed creating a pension and OPEB fiscal stress test to alert and assist local governments.

Chris DeRose, chief executive officer of the Municipal Employees' Retirement System of Michigan and a task force member, said the report reinforced the idea that there is no one size fits all solution to retirement reform. MERS administers benefits for more than 84% of local government retirement plans.

"The task force recommendations focus our efforts on those communities experiencing the greatest fiscal stress," DeRose said. "The task force report also calls for beginning to prefund retiree health care benefits for the first time and correctly acknowledges this situation was not created overnight and will not be resolved overnight. Instead, it calls on us to roll up our sleeves and craft solutions that are fiscally responsible, while preserving the retirement options our police officers, firefighters and other public servants depend on."

Michigan Association of Counties Executive Director Steve Currie, a task force member, said there is no overnight fix. "We need to start with a system that identifies the governments struggling with legacy costs, as is urged in the report," he said.

The Michigan Municipal League, which represents cities, urban townships and villages, said the report fell short of offering a long-term solution to improving the fiscal stability of local units in Michigan.

“The League was hopeful that this work would have culminated in a real solution that would address what we believe to be one of the biggest threats we are facing at the local level. We strived to form a plan that balanced a desire to reduce costs while maintaining a quality work force. Regrettably, this report falls short of these goals,” said Anthony Minghine, Chief Operating Officer of the Michigan Municipal League and a task force member.

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