East Lansing Submits Plan to Fund Pension Liability

Monday, September 17, 2018, 8:31 am
By: 
Chris Root

Above: The Michigan Treasury's offices in Lansing. Photo by Kepler Domurat-Sousa.

East Lansing’s City Council has approved a plan to reduce the underfunded status of the City’s pension system. The State of Michigan’s Municipal Stability Board is expected to decide in mid-November whether to accept or reject it.

The State Treasurer found the City of East Lansing’s pension system to be underfunded in March, under terms of PA 202, the “Protecting Local Government Retirement and Benefits Act” adopted by the legislature on December 17, 2017.

This law creates a reporting and monitoring system to encourage local jurisdictions to reduce the gap between what they will owe retirees for pensions and healthcare benefits and the funding needed to meet these future obligations.

East Lansing’s pension plan was determined to be underfunded because it is currently less than 60% funded and the annual required contribution to the fund is more than 10% of the City’s revenue. (East Lansing’s retiree health system did not trigger underfunded status.)

Local government units with an underfunded pension system or retiree health system must file with the State a Corrective Action Plan (CAP). The CAP must be formally approved by the local governing body. East Lansing’s Council approved the East Lansing’s CAP on September 4, and the City will submit the plan when Council approves minutes of that meeting tomorrow night at its regularly scheduled meeting.

The centerpiece of the City’s CAP is to increase supplemental payments into the pension plan, which is administered by the Municipal Employees’ Retirement System (MERS).

The East Lasing income tax that will start January 1 will give the City a new source of revenue to make these payments. The ballot language for the income tax that voters adopted mandates that 60% of the net new revenue from the income tax be dedicated to “supplemental payments for unfunded pension liabilities for retired city employees.”

The City has made $5.6 million in supplemental payments from Fiscal Year (FY) 2016 to FY 2018. The City’s CAP says, “The City of East Lansing's most recent MERS actuarial report shows that we have stopped the decline in our funding ratio and have flattened out.”

MERS’ latest estimated funding ratio (the ratio of how much is saved up to how much is owed) was 54%. This estimate did not take into account the latest $1.5 million supplemental payment in FY 2018.

The finding of whether local jurisdictions’ CAP plans are acceptable is made by a three-person Municipal Stability Board that was appointed by Governor Snyder in April. The Board is chaired by Senior Deputy State Treasurer Eric Scorsone.

Scorsone, who is on leave from MSU’s Extension Center for Local Government Finance and Policy, was a member of East Lansing’s Financial Health Review Team until he was appointed to the Treasury Department position. The two other members are Daryl Delabbio, recently retired Kent County administrator and controller (representing local government officials), and Barry Howard, a mediator and arbitrator from Bloomfield Hills (representing employees and retirees).

The Municipal Stability Board (MSB) adopted criteria for approving Corrective Action Plans at its meeting on September 12. There are four criteria:

  1. The retirement system will reach a 60% funded ratio OR the annual required contribution to the pension fund will be less than 10% of general fund operating revenues;
  2. conditions in #1 will be achieved within a reasonable timeframe;
  3. the plan is reasonable and feasible and has been approved by the governing body; and
  4. the plan is affordable.

East Lansing’s CAP application addresses all four criteria. It includes an estimate from MERS showing that the City’s pension system is expected to reach a 60% funding ratio as of FY 2025, based on making the $3 million annual supplemental payments from revenue from the new income tax.

East Lansing is one of about 150 local jurisdictions that are expected to submit Corrective Action Plans for pension systems and/or retiree health plans that are considered underfunded.

About 90 of these jurisdictions are “primary units,” defined as a county, township, city, or village. Kevin Kubacki, who is staffing the MSB, estimated at the Board’s July meeting that 15-20% of public pension funds in the state have triggered underfunded status.

The state board will likely formally receive East Lansing’s CAP at its October meeting. PA 202 give the Board only 45 days to act on CAPs, so it must decide at its next monthly meeting, on November 14, whether to accept or reject East Lansing’s plan.

Getting to 60% funding of the pension plan in a reasonable timeframe, as required by PA 202, is actually a lower bar for the City to meet than the MERS requirement that the City’s pension system be fully funded (i.e., have a 100% funding ratio) by 2040. The requirement to reach full funding by 2040, which is used by MERS to set the annual required contribution for each year, poses a much bigger challenge for the City.

MERS’ “ballpark projections” show the City’s pension system becoming fully funded by FY 2040 if $3 million supplemental payments are made through FY 2036, or for about 18 years. The MERS projections show these supplemental payments stabilizing required annual contributions, which would otherwise balloon in future years.

The income tax that was just adopted is limited to 12 years, so it is not clear where revenue would come from to continue supplemental payments after that. City staff stated clearly before the income tax vote that the new tax would not solve all the City’s financial challenges.

East Lansing, like cities all over Michigan, continues to struggle in part because state-level policies have, in the words of the Michigan Municipal League, “forced [local] communities into fiscal crisis.”

 

To see the materials submitted by the City of East Lansing, go to the September 4 City Council agenda and scroll down to item 13.