Macomb County looks at new health care funding plan
Posted May 13, 2014
MACOMB COUNTY — In order to cover nearly $300 million in unfunded retiree health care liabilities, county officials are pursuing an extensive bond sale rather than continuing to fall short on their annual requirements.
For a decade, Macomb County has been unable to set aside the necessary funds to pay for the health insurance of its employees after retirement. The Board of Commissioners and leaders from other county departments began looking into the issue this year and have come to favor a funding strategy modeled after the one utilized by their neighbors to the west.
“We are looking at a model that Oakland County has been using since 2007 and which has proven to be very successful for them,” said Board Chair Dave Flynn, D-Sterling Heights. “We want to keep our promises to current employees and retirees about the health care benefits that they’ve earned over the course of their career in Macomb County.”
The plan would allow county officials to sell bonds to cover these liabilities for the next 25 years. By borrowing money at a low interest rate and investing at a higher rate of return, they hope to be able to cover these escalating costs, which an actuary recently valued at $270 million with annual required contributions of $30 million.
This unconventional funding mechanism has won the support of Flynn and Deputy County Executive Mark Deldin, who pointed to the city of Detroit’s post-bankruptcy struggles as an example of what Macomb County officials would like to avoid at all costs.
“You don’t have to look very far to see what happens when you don’t plan ahead for this,” Deldin said. “We made a promise to all of our employees, and we need to keep it. Interest rates are very low right now, so we need to lock down these bond sales as soon as possible.”
Macomb County suspended the pre-funding of its retiree health care liabilities in 2004 after significant budget cuts needed to be made. Additional economic hardship spurred by the recession combined with ballooning health care costs only exacerbated the problem. Now, county officials are facing a situation in which they will be unable to pay their health care premiums in the future, unless money is set aside in advance.
Commissioner Joe Sabatini, R-Macomb Township, co-chair of the board’s Audit Committee, pointed out that Macomb County has reached the point where it is only covering its retiree health care premiums and nothing else. This $15 million annual contribution is only about half of what is required, as county officials currently cannot make the full payment without impairing county services.
However, Sabatini stressed that this model is not sustainable, which is why he began working with County Finance Director Pete Provenzano to find an alternative funding strategy.
“I just don’t want to kick this can down the road any farther,” Sabatini said. “This problem is only going to continue to get worse if we don’t address it soon — maintaining the status quo, unfortunately, does not fix anything. This is going to be one of the biggest decisions that we will have to make as a board this year.”
Macomb County’s plan involves setting aside $340 million into an interim retiree medical benefits trust. This contribution would consist of a $270 million bond sale, $40 million from the county’s general fund balance and $30 million from a delinquent property tax fund.
The proposal assumes that Macomb County will receive a 7.5 percent rate of return on its investment. Flynn believes that this projection is “fairly conservative,” considering that the county has traditionally received a 9 percent return rate on its pension system. Still, he acknowledged that there are plenty of inherent risks with this approach.
“We would be leveraging our debt to secure our health care liabilities,” Flynn said, “so obviously, we could run into problems if the return on our investment falls short. But we are taking every available step to make sure that we lower our risk as much as possible.”
Sabatini was blunt about the plan’s potential for failure if the economy were to take another sudden nosedive.
“At the end of the day, there’s no guarantee that this is the solution to our retiree health care problem,” he said. “It’s always going to be a calculated risk. There are buffers built into it, but if the market drops down, then we could be facing some losses.”
If approved by the board, these bonds would be issued under Michigan Public Act 329 of 2012, which would also require that all of Macomb County’s existing benefit plans be closed. The bond proposal would then have to be submitted to the Michigan Department of Treasury for final approval no later than Dec. 31.
The board has put together a rough timeline mapping out steps to be taken over the next few months, with goals of sending the plan to the Treasury Department by Aug. 12 and selling the bonds by Oct. 30. Flynn admitted, though, that meeting such a tight schedule will be a challenge and wished that the state had not placed time limits on this offer.
“It seems somewhat counterproductive to me that this (funding) mechanism is only available until the end of 2014,” he said. “If it’s such a good tool, then why not make it available for a longer period of time?”
As Flynn previously stated, officials have already taken steps to reduce Macomb County’s level of risk with this proposal. At its April 30 meeting, the Board of Commissioners approved a resolution urging the County Executive’s Office to draft a request for proposal (RFP) for professional services to evaluate employee buyout options in lieu of providing retiree health care benefits. In addition, last year’s union negotiations resulted in a deal calling for the elimination of retiree health insurance for employees hired on or after Jan. 1, 2016.
However, Sabatini, who has an extensive background in accounting and finance, was reluctant to voice his support for the bond sale and wondered whether Macomb County officials would be able to meet the Dec. 31 deadline.
“I’m still working everything out in my mind,” he said. “There certainly are a lot of risks and also a lot of rewards associated with this proposal. It’s going to be tough to meet that deadline no matter what we do, so I guess we’ll just have to take things one step at a time. That’s the best we can do right now.”
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