LANSING, Mich.—Legislation introduced by Sen. Patrick Colbeck, R-Canton, that would allow local units of government to use bonding to eliminate spikes in pension costs has passed out of the Senate Appropriations Subcommittee on Retirement. Colbeck worked with Northville City Manager Pat Sullivan to find a solution to this problem that would not put retiree benefits at risk.
“Having the ability to convert to a less expensive, 401(k)-style pension plan is crucial to the survival of Northville and other Michigan cities,” Sullivan said. “Bonding to pay for the conversion will allow us to do this and save money for many years to come. We really appreciate Senator Colbeck’s leadership on this issue as it will give us an essential tool to balance our budgets in the future.”
The poor performance of investments over the last decade has led to higher than anticipated costs for the conversion from a defined benefit plan to a defined contribution plan. Senate Bill 1129 provides a targeted expansion of bonding authority in a limited fashion to help spread the same pension costs over a larger number of years, thereby preventing spikes in payment obligations.
In addition, it allows for a curve-smoothing of the debt obligation for a municipality and avoids the potential of layoffs or similar harsh measures to cover these costs.
Without the provisions provided by Colbeck’s bill, the costs to Northville would skyrocket. It is estimated that the annual cost to the city to meet pension obligations will rise from $663,972 in 2012 to $980,000 in 2016.
“As we look to turn our state’s economy around, we are encouraging local units of government to find ways to reduce spending without reducing services,” Colbeck said. “We need to give local governments the tools they need to make these changes successfully. Expanding a local government’s bonding authority to include coverage of costs associated with pension plan changes is one very important tool.”
SB 1129 is now before the full Senate Appropriations Committee for further consideration.