East Lansing Applies for State Waiver of Underfunded Pension Status

Monday, April 16, 2018, 7:28 am
By: 
Chris Root

Above: The Michigan Capitol Building on a winter night.

City Council has approved East Lansing’s application to the State to waive the “underfunded status” of the City’s pension system. Now, the City will wait to see whether the State Treasurer grants a waiver or becomes more involved in overseeing the East Lansing’s pension systems.

Approval of the City’s application at the April 10 Council meeting was the next step following the determination by the Michigan Treasurer on March 1 that East Lansing’s pension triggered “underfunded status” under PA 202. This is the law entitled “Protecting Local Government Retirement and Benefits Act,” enacted by the State legislature in December 2017.

Under the law, what triggers “underfunded status” is a municipality having pensions funded below 60% of total pension liabilities and having its required annual payment to the pension fund exceed 10% of the municipality’s annual revenue. East Lansing’s pension obligation for the year ending December 2016 was funded at about 50%. Its required annual payment amounts to 13.7% of revenue. (East Lansing’s retiree health care plan, which also is covered by PA 202, was not found to be underfunded.)

In the first round of reports from around the State under PA 202, according to the Treasury Department, more than 110 out of more than 490 local units of government were preliminarily identified as having an underfunded pension plan or retirement health care plan, or both. (Not all municipalities have submitted reports to the Treasury; the reporting schedule depends on the governing unit’s fiscal year.) Elsewhere in Ingham County, the City of Lansing triggered underfunded status of both its pension and retiree health care plans.

The waiver application asks a municipality to address three topics: (1) system design changes that have been undertaken to improve the funding status of the pensions, (2) funding improvements, and (3) other considerations that could affect the determination of underfunded status.

Regarding pension design changes, the City’s waiver application notes that new/current non-public safety employees were moved to cost-controlling hybrid retirement plans, effective November 1, 2010. New/current East Lansing public safety employees, effective July 1, 2011, are in a lower, cost-controlling defined benefit pension plan. Also, some employee contributions to defined benefit plans have increased. (Look for a comprehensive ELi report coming soon about East Lansing’s employee pension systems.)

Regarding funding improvements, the application notes that East Lansing made lump-sum payments to the pension plan of $2 million in Fiscal Year 2016, $1 million in FY 2017, and $1 million thus far in FY 2018. These supplemental payments are in addition to the required annual payments calculated by the Municipal Employees’ Retirement System (MERS), which administers the City’s pension plans.

Regarding “other considerations,” East Lansing’s application explains that “9% of our net pension liabilities are attributable to employees within our enterprise divisions …, yet, we could not include enterprise revenue as part of our governmental funds.” The ratio of required pension payments to annual revenue would have been 9.5% – and thus would not have triggered the “underfunded status” finding of exceeding 10% – except that employees in the City’s “enterprise” divisions (the Parking System, Building Authority, Water Supply, and Sewage Disposal) are included in the pension system but revenues from these enterprise systems could not be included in revenue under the definition of revenue for this application.

If the State Treasurer determines that the underfunded status is not being adequately addressed by actions described in East Lansing’s application, a Municipal Stability Board to be created under PA 202 will request a “corrective action plan” and the Treasurer will “undertake an individualized and comprehensive internal review” of the City’s retirement system.

PA 202 identifies the types of actions the State will want to see in corrective action plans for retirement systems. These include “(i) Closing the current defined benefit plan. (ii) Implementing a multiplier limit. (iii) Reducing or eliminating new accrued benefits. (iv) Implementing final average compensation standards.”

Local governments will have six months to develop a corrective action plan. Then the Municipal Stability Board must “certify” both the action plan and that the local government has started to implement it. However, PA 202 contains no consequence or enforcement action if a local unit does not submit a corrective action plan or if a plan is not certified or implemented.

It’s difficult to anticipate what will happen next for East Lansing, because the law is so new and there are not precedents for waiver applications or corrective action plans that are deemed acceptable.

Asked by ELi, a spokesperson for the Treasury Department could provide no estimate of how long it will take to respond to waiver applications. The Municipal Stability Board has not yet been appointed. The Treasury Department says it hopes the Board will hold its first meeting in May.

 

Related ELi reporting:

City’s Pension Problem Triggers Preliminary Review by State

Facing “Staggering” Pension Costs, East Lansing Approaches Major Financial Crisis

Council Member Says City Headed for Bankruptcy Without New Revenue

Council Indicates Continued Support for Pension Credit Purchases

East Lansing Council Discusses New Tax Options

 

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