City's Pension Problem Triggers Preliminary Review by State

Monday, March 5, 2018, 4:27 pm
By: 
Chris Root

Above: The dome of the Michigan Capitol Building.

City Manager George Lahanas today announced that, on March 1, East Lansing was notified by the Michigan Treasury Department that the City’s public employee pension plan "has triggered a preliminary review of underfunded status" by the State. The State is concerned with pension plans that are well below the amount of funding needed to meet pension obligations.

Today’s City’s press release indicated that this notification from the State was not unexpected. It is occurring because of a new law that went into effect on December 20, 2017, namely PA 202 of 2017, the “Protecting Local Government Retirement and Benefits Act.”

This law establishes close State oversight of local retiree pension and health plans that are underfunded and requires governments with such plans to implement annual action plans for improving their financial status.

Under PA 202, local governments were required to report their pension funds' and retiree health funds' assets and liabilities by January 31, 2018.

If, according to this report, a pension plan is less than 60% funded and the annual required contribution to the fund is more than 10% of the City’s revenue, then that meets the trigger for having “underfunded status.” East Lansing’s pension fund meets this trigger because it’s pension fund is currently 50% funded and its contributions are 13.7% of City revenues.

East Lansing’s retiree health system is not considered underfunded because East Lansing’s annual required contributions are 9% of annual revenue, less than the 12% trigger for health plans.

PA 202 establishes a series of steps required of local governments with pension funds that are “underfunded.” The first step, which East Lansing must complete within 45 days of the March 1 notice of this status, is to apply for a Waiver and Plan. The City’s application must be approved by the City Council before it is submitted.

The waiver application states that, to be successful, it should include things “your local unit has already done” and “prospective solutions will not be granted merit.” Many of the suggested actions that would be favorably considered are changes to the structure of the pension system or to employee contributions to the system, matters that are negotiated between the City of East Lansing and its employee unions. The contracts with East Lansing’s seven bargaining units all expire in June 2019.

The waiver application may also include “prior actions that have already been implemented to adequately address its underfunded status.” The City press release describes some recent changes: “The City has implemented numerous cost-controlling measures over the years to address the legacy cost challenges, including, but not limited to: restructuring new hire benefits in 2010, increasing premium contributions from existing employees and making an additional $4 million in payments to the pension plan over the last three years.”

If the waiver and plan are not accepted by the State, the next step is to develop a “corrective action plan” in consultation with a three-person Municipal Stability Board, which has not yet been appointed by the State. The Board will then monitor the local government for compliance and implementation with the plan that is established.

PA 202 states that “the local unit of government shall determine the components of the corrective action plan.” The plan must be “certified” by the Board at least every two years.

The package of bills that were adopted in a 15-hour legislative session starting on December 6, 2017, while Police and Firefighter union members rallied outside the Capitol, represented a compromise. The bill that came to the Senate from the Committee on Michigan Competitiveness allowed the State Treasurer to declare a financial emergency and to appoint “a financial management team to be created as the emergency manager.” The emergency manager provision of the bill was dropped in order to get it through the Senate and House.

The law that was enacted follows closely the recommendations of the Governor’s Responsible Retirement Reform for Local Government Task Force, which included union representatives among its members.

The Task Force report, too, was a compromise document. As MLive reported at the time, Rep. Andy Schor, a member of the Task Force who is now Mayor of Lansing, “wanted to see included … a discussion of infusing State money into local communities that have been hurt by cuts to State revenue sharing. But the report notes that fell outside of the task force's purview.”

The problem of pension fund and retiree health plans that are underfunded is widespread in Michigan. The Task Force report said that approximately 180 units of government have pension plans with a funded ratio below 60 percent.

 

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