"When a city fails to properly fund employee pensions in the year they are earned, it creates an unfunded liability that will require more money later to backfill the obligation.
Since municipalities have limited budgets, they typically cut from police, fire, and other community services to pay the deferred pension costs.
Flint is one example out of many.
The cost of catching up on past pension underfunding has skyrocketed, and the city now pays $20.4 million every year — a 50 percent increase since 2010.
Filling this hole now consumes 42 percent of Flint’s general fund budget.
But some local governments have managed to contain these costs.
Bloomfield Township closed its defined benefit system to new hires on April 1, 2005. It now offers the 401(k) defined contribution benefit that has become standard in private sector workplaces.
Township Supervisor Leo Savoie served on the board of trustees in 2004.
He said the board moved to shift new employees out of the pension system to get a handle on long-term debt.
“We looked at how sustainable our benefit package was, and in order to make it viable and to keep legacy costs from crippling the community, we needed to switch from the defined benefit plan to the defined contribution plan,” he said.
By closing the defined benefit system, Bloomfield Township capped its unfunded pension liabilities.
The city then borrowed $80.3 million by issuing 20-year pension obligation bonds to set the cost of already-earned pension benefits at around $6 million per year.
Savoie said if the city had not reformed its pensions, the defined benefit system would have cost $10 million to $13 million per year, and the city would have incurred a deficit of $5 million to $8 million per year.
This would have choked off funding to essential government services such as police and fire.
The city has 153 police and fire department employees..."
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