CHICAGO — After undertaking a massive restructuring of the troubled Detroit suburb of Pontiac, Mich., the city's emergency manager, Louis "Bud" Schimmel, has one last obstacle standing in the way of his retirement: the city's retiree health care debt.
Schimmel, 76, hopes to step down next month after spending nearly two years as Pontiac's emergency manager, the city's third since the state declared it to be in a state of fiscal emergency in March 2009.
Pontiac, with about 60,000 residents is located in metropolitan Detroit about 25 miles northwest of that city, and is the seat of triple-A rated Oakland County.
The city was hit hard by the decline of the domestic automobile industry, and has seen property tax revenue fall by nearly half since 2005.
General Motors, which used to employ 15,000 workers and account for 25% of taxable property value, now employs 3,000 and accounts for less than 2% of taxable property value, according to Fitch Ratings. Pontiac's unemployment rate hit 31% in 2009, and is still 21%.
Fitch previously maintained junk ratings on Pontiac — while revising its outlook to stable from negative last year — but withdrew the ratings last week after the city paid off its final piece of Fitch-rated debt.
Since taking office in September 2011, Schimmel has launched a major restructuring of the city that has focused on shrinking the government and eliminating debt.
He privatized assets, selling the sewer system, the parking system and the Pontiac Silverdome, where the Detroit Lions used to play.
He outsourced nearly all city services, including police and fire, and he drastically cut the number of city employees, reducing the city's payroll to 20 employees, down from more than 1,000 in 2009. He cut the budget in half, chopping it to $28 million from $57 million to bring it in line with revenue.
"I think for an urban city we've set the model here for how it ought to be done," said Schimmel, a Pontiac native who was director of the Municipal Advisory Council of Michigan and municipal finance director at the libertarian think tank Mackinac Center for Public Policy. "This is the ideal city for the future. Every service you could possibly outsource has been done. I don't think any other city has done what I've done in Pontiac."
Schimmel recently gave the state a new financial plan and two-year budget, and hopes to step down next month. But first, he said, he has to figure out a way to pay off the city's roughly $150 million other post-employment benefit liability.
"That costs $6 million a year, and the city cannot afford to pay any of that," said Schimmel. "I'd love to have the city pay for retiree health care, but we can't do it."
Most Michigan local governments, distressed or not, face the same problem, said Eric Scorsone, an economist at Michigan State University with a focus on public finance.
"Most of the time in Michigan, bonded debt isn't a huge problem for the general fund," Scorsone said. "Michigan's big problem is OPEB. That's a big problem for Pontiac, and it could be a big deal killer in five years."
Unlike many local Michigan governments, Pontiac has two things going for it: a pension plan that is funded at 150%, and a location in Oakland County, considered one of the strongest and best-managed counties in Michigan.
To take care of the OPEB debt, Schimmel put a proposal on the ballot last year asking for a property tax increase that would be used to pay off the debt. But voters rejected the measure.
He then proposed dipping into the pension fund to pay off the debt. His plan would have the city dissolve the pension fund and shift $300 million of its assets to the state of Michigan for management. The remaining $150 million would be used to pay off the city's OPEB costs for its 1,200 retirees.
"No one else is in a position where they have this great amount of overfunding," Schimmel said. "If you do nothing, everyone dies of the 1,200 [retirees], and you have $150 million left over and transferred to the city's general fund," he said. "That makes no sense. Why not use it now and take care of retiree health care?"
But the pension board has refused to agree to the plan, and state law allows an emergency manager to take over only pension plans that are less than 80% funded. So Schimmel has moved to his Plan B, which is to pass an ordinance — a sole power given to EMs under the state's law for distressed governments — that will require the city to raise retiree monthly pension payments by $400 a month for one year. After that everyone will be shifted to health insurance exchanges that will be set up under the new federal health care law.
Detroit's emergency manager Kevyn Orr and Chicago Mayor Rahm Emmanuel have crafted similar plans.
"This is the wave of the future," Schimmel said. "Cities are going to say to employees everywhere, 'Look, we can't have our own plans. We'll give you so much a month and you can buy insurance from the new exchanges'."
He needs approval from the state emergency loan board to enact the ordinance, and is hoping the board votes on it in July.
Retirees say the plan threatens their well-funded pension plan, and that Schimmel's proposals are part of a larger national movement to pit retirees against other municipal debt holders.
"We believe the emergency managers have not taken their obligations to the retirees as seriously as they have to other debt holders of the city," said Claudia Filler, president of the City of Pontiac Retired Employees Association.
"One can certainly see that this is not just a small local situation," added Filler. "Many communities are going to be facing, if they are not already, the same issue as Pontiac. It really has to give pause to public employees, whether they're teachers or working at any level, whether the promises made are going to be there when they retire," she said. "This really has major implications for public service."
The association has filed three lawsuits against Schimmel during his tenure, and is poised to file a new one this fall if the city cuts its OPEB benefits, Filler said.
"We have the experience of promises made to us now not being kept, so we're very, very wary," she said. "We believe at least our pension fund is very well funded and as long as that stays intact, we have confidence we'll at least be getting our pensions."
MSU's Scorsone said Schimmel's frustrated efforts to deal with Pontiac's OPEB debt illustrates a shift in the type of debt that is burdening municipalities.
"Bankruptcy is usually perceived of as getting out from bonded debt," Scorsone said. "This is a different model with employee costs being the liability," he said. "Part of the story of Pontiac is that we have some fixes in place but yet we still have other problems that may be the problems of the future."
Last August, in a precedent-setting deal, Schimmel sold the city's sewer system to Oakland County for $58 million. He used $31 million of the proceeds to pay off most of the city's outstanding bond debt, and another $17.1 million to eliminate the city's general fund deficit.
Filler said the use of proceeds showed preference to bondholders over the city's "moral and legal" obligations to retirees. Schimmel said the move allowed the city to save $12.7 million of interest costs over the life of the debt.
"I know people object and don't like privatization and say it can be a disaster if you don't monitor and oversee it, but we're doing those things," he said.
Scorsone said it's too soon to tell whether Schimmel's restructuring will prove to be a model for other troubled Michigan cities.
A spokesman for state Treasurer Andy Dillon said Schimmel has done "a number of things that may be helpful to other managers in other cities," but added that there is no "cookie-cutter approach" to managing a distressed city.
For his part, Schimmel said he has implemented a plan that will stabilize the city over the long term.
"This isn't a quick fix, this is a long-term fix," he said. "I will be shouting as I walk out the door, 'You better not mess this up.'"