Flint Manager Warns of Bankruptcy Over Retiree Cost: Muni Credit

Photographer: Jeff Kowalsky/Bloomberg

More than 80,000 Flint-area residents were employed by GM in 1978. Now, that number is about 7,500, according to a 2011 report by Michigan State University. Close

More than 80,000 Flint-area residents were employed by GM in 1978. Now, that number is... Read More

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Photographer: Jeff Kowalsky/Bloomberg

More than 80,000 Flint-area residents were employed by GM in 1978. Now, that number is about 7,500, according to a 2011 report by Michigan State University.

Flint may be Michigan’s second city to plunge into bankruptcy unless retirees accept cuts in health benefits that threaten to unravel a balanced budget, emergency manager Darnell Earley said.

The specter intensifies the conflict over finances in the city of 100,000, which twice has been under state control. Like Detroit, which in 2013 filed the largest U.S. municipal bankruptcy, Flint has struggled with loss of population, jobs and revenue. The birthplace of General Motors Co. has only half its population of 1960.

“If we have no ability to mitigate the cost of retiree health care, that’s going to make it very difficult for the city to remain financially stable over the next few years,” Earley said in an interview at City Hall. Without changes, retiree pension and health expenses would consume 32 percent of the $55 million general fund.

As Detroit draws worldwide attention for its record $18 billion bankruptcy, Flint demonstrates the plight of U.S. cities where unfunded post-retirement costs rival or exceed pension liabilities. In Michigan alone in 2011, municipalities had nearly $13 billion in health-care liabilities for retirees, compared with about $3 billion for pensions. Flint is among 17 cities and school districts under some form of state control.

Wrong Track

“If Flint were to go to bankruptcy, that would highlight that this legacy-cost problem has to be addressed more globally,” said Eric Scorsone, a Michigan State University economist. “Flint’s at the forefront, but a lot of cities are on the same train, and that train is headed for the cliff.”

Michigan emergency managers have sweeping authority over their municipalities’ finances and structure, with power to reorganize, hire and to change union contracts. If Earley determined the city couldn’t pay for its liabilities and sustain services, he could recommend to Republican Governor Rick Snyder that the city file for court protection.

“Bankruptcy is a point in the law, and it’s my duty to explore that if it appears we’re not going to be able to make it any other way,” he said. “Whether it’s the absolute next step or not, I can’t say. It would have to be explored. It’s in the law for a reason.”

Dwindling Employment

More than 80,000 Flint-area residents were employed by GM in 1978. Now, that number is about 7,500, according to a 2011 report by Michigan State University. In the past two years, the municipal workforce has been cut 20 percent, and employees have taken a 20 percent pay cut.

A federal judge gave city officials a reprieve June 30 when he allowed changes in retiree health coverage that he had stopped in March 2013. While no trial date has been set for the lawsuit challenging the cuts, U.S District Judge Arthur Tarnow in Detroit said that without relief, Flint may have to cut public safety and can’t issue bonds to cover the cost because it has no credit rating.

Flint last issued general-obligation debt in 1997, with the longest portion maturing in November 2006, according to data compiled by Bloomberg. Moody’s Investors Service rated the underlying credit on the bonds Ba1, one step below investment grade, as of February 2006. It hasn’t had any debt outstanding since, the data show.

Demeaning Decisions

The city’s accumulated deficit is $12.9 million, though its budget is balanced through June 30, 2016. Allowing higher insurance co-pays and deductibles for retirees will save $5 million this year, Earley said. That would make retirees’ coverage equal to that of active employees, Earley said.

Retirees already have made wage and pension concessions, and now will pay hundreds of dollars a month for prescriptions and co-pays, their attorney, Alec Gibbs, said in an e-mail. He said retirees on fixed incomes will face life-threatening choices.

“Think of the position that they are putting these guys in: Pay for your health-care costs and starve, or use your fixed and paltry income to eke out a painful, shortened life,” Gibbs said.

Gibbs said Governor Snyder should pursue an aid package for Flint similar to the $816 million pledged for Detroit by foundations and the state as part of its bankruptcy settlement plan. The donated money would reduce cuts to that city’s pensioners in return for shielding the Detroit Institute of Arts collection from creditors.

Beat Cops

The battle over Flint’s finances drags on as its downtown shows signs of revival with restaurants and businesses lining its red-brick main street, anchored by the University of Michigan-Flint campus.

“This is one bright star out of a lot of negatives,” said police Officer Tom Snyder, who patrols the district alone weekdays on a three-wheeled standup vehicle. Two officers are stationed downtown during evenings.

Yet there’s talk of eliminating the police presence to cut costs, a bad idea for the hub of the economic revival, Snyder said.

“It’s very important to support that,” he said.

Without retiree health-care changes, the police force was to be trimmed by 36 officers to 115, and the fire department cut by 19 positions, to 75, under the city’s two-year budget. Those reductions would occur despite a five-year tax increase for public safety that voters approved in 2012.

Residents also pay an annual $163 trash-collection fee and $71 a year for street lights.

State’s Strategy

“The money is there to pay for stuff,” said resident Allen May, a 58-year-old GM retiree, in an interview outside City Hall. “When the emergency manager says we’re going broke, I don’t understand. But it’s out of my control. I would hate to see it happen.”

Blaming retirees is unfair, said U.S. Representative Dan Kildee, a Flint-area Democrat who founded the Center for Community Progress, a Washington-based advocate for urban revitalization. More culpable, he said, are shrinking local revenue and the state’s cumulative $54.9 million reduction in aid to the city since 2003, according to the Michigan Municipal League.

“It’s a conspiracy of bad news,” Kildee said. “The state balanced its budget by unbalancing city budgets.”

Earley, former city manager in Saginaw, Michigan, is Flint’s third emergency leader since it was placed under state control in 2011.

“You can stabilize things by making sure that you’ve got the best systems in place for delivering services,” Earley said. “We haven’t had that in Flint for a number of years. We haven’t had that in Detroit for a number of years.”

To contact the reporter on this story: Chris Christoff in Lansing at cchristoff@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Tannenbaum

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