GRASSroot movement addresses GR financial crisis

April 4, 2010
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Grand Rapids is in a financial crisis, facing a budget deficit of $9 million in 2010 that is expected to balloon to $27 million in 2011. In response to the city manager’s request for citizen input, the GRASSroot movement (Grand Rapids Advocates for Sensible Spending; grassrootgr.org) was formed.

GRASSroot’s goal is twofold: first, provide information to the citizens regarding the city budget deficit and expenditures so that they may have the data to make an informed decision at voting time; second, present a plan of action aimed at achieving a balanced city budget.

GRASSroot is focusing on three major expenditures that significantly impact the general operating fund — health insurance, unsustainable pension benefits and increasing wages — and has issued the following recommendations to save the city several million dollars.

Health care

The city pays annual health premiums at a blended cost of $15,543 for 1,880 participants: 1,395 active employees and 485 pre-Medicare retirees. The annual cost per active employee is $13,098 and $22,575 per retiree, compared to a national average of $9,286 per active employee and $10,414 per retiree (Mercer National Survey, November 2009). The cost differential is primarily due to the plan paying 100 percent of medical bills except for a $20 co-pay per doctor visit, 10 percent of hospital bills up to a maximum of $500, a $10 co-pay for up to a 90-day supply of generics and a $20 co-pay for up to a 90-day supply of brand name drugs.

A more economical plan, closer to national averages, could save the city up to $11 million annually. A premium reduction of $100 per month for each plan participant would save $2.2 million. Moreover, the strategy of a plan design that shares annual health care increases equally, instead of shifting all increases to the city, will create a more sustainable benefit package.

Prior to 2008, participants made no contribution to their health insurance premium. In 2009, participants began contributing 10 percent of their monthly premium. Negotiations are presently under way to raise the monthly contribution to 20 percent. Nationally, employee contributions are based on the number of family members selected: single, two persons, or family. City employees pay $129.50 per month whether for single, two persons, or family coverage. A tiered approach is recommended so employees can opt out of coverage for working spouses who have insurance available through their own employer, and still cover children.

Furthermore, 110 city employees decline health coverage because they receive it elsewhere, and receive a $226.70 bi-weekly “opt-out” refund (source: Document produced by Freedom of Information Act Request). Most employers do not use this strategy. A few offer a nominal refund. Encouraging working spouses to select their employer plan is commonly more effectively managed by plan design, eligibility rules and tiered contribution strategy. Elimination of the “opt-out” would save an additional $648,362.

Wages

In May 2009, as the deficit was growing, the city approved 7 to 8 percent pay raises for 2008 through 2010, with the next pay increase occurring in June 2010. While the city was agreeing to salary increases, most private employers were freezing or cutting wages and eliminating jobs.

Leadership by example is essential during a financial crisis when asking employees to sacrifice. The mayor, city commissioners, management and 68 non-union employees should voluntarily reduce their wages by 10 percent. Union employees should follow with a 5 percent wage reduction. This strategy would save $6 million annually (source: city manager.)

Pension

Decades after private employers moved to a defined contribution 401(k) or 403(b) retirement plan, the city continues to offer a defined benefit pension plan. Market losses have greatly reduced assets in the two pension funds, requiring additional contributions by the city for at least the next five years. This is seriously impacting the general operating fund and is the major cause of the mounting deficit. In a defined contribution plan, the employee saves a pre-tax dollar amount and assumes investment responsibility. Although the employer may match a percentage of the employee’s savings, several employers have reduced or discontinued matching the employee’s contribution. The city should immediately move to a defined contribution pension plan.

Conclusion

Reducing wages and the costs of health and pension benefits are not aimed at public safety. Rather, they are intended to prevent further reductions in city staff, especially police and fire.

Our city’s finances are symptomatic of years of illness. The city is faced with a systemic disease that continues to spiral downward. The deficit is likely worse than projected as it assumes a 7.5 percent rate of return on remaining pension assets for the next several years. This is too optimistic.

Seven million dollars generated by an income tax increase will not cure the problem; more likely it will drive away people and businesses. We cannot have two classes of citizens: those enjoying rich benefits and those paying for them.

Grand Rapids needs strong leadership by the city manager that is fully supported by the city commission. Hard decisions need to be made in collaboration with unions and non-union employees to resolve the deficit and operate Grand Rapids in a sustainable manner. It is time to acknowledge the elephants in the room. Failure to do so will result in an unmanageable financial crisis.

Rina Sala-Baker is with the GRASSroot Movement, Grand Rapids.

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