With Over 20% of Revenue Going to Retiree Expenditures, State Approves East Lansing's Financial Plan

Thursday, November 29, 2018, 9:37 am
By: 
Chris Root

Above: The State Treasury building during warmer days.

The Michigan Municipal Stability Board has approved East Lansing’s Corrective Action Plan, a plan designed to reduce the underfunded status of the City’s pension plans. The Board’s approval took into account that East Lansing is channeling more than 20% of its government operating revenues to pension and retiree health expenditures.

The Board’s acceptance of the City’s Corrective Action Plan (CAP) on November 14 means East Lansing’s name will not appear on a public list of local jurisdictions that have pension or retiree health care systems that are inadequately funded without a plan for improvement. Such a list will appear soon on the Treasury Department’s website, according to Kevin Kubacki of the Department’s Community Engagement and Finance Division.

Nevertheless, the City still faces more than a dozen years when more than 20% of its annual government operating revenues will likely be spent on payments into the pension funds and retiree health program. These payments are needed to cover normal plan costs plus to pay for unfunded liabilities of pension costs earned by previous employees whose retirement benefits are protected by the Michigan constitution.

The City has been working for several years, including with a Financial Health Team, to manage what both its current and previous Finance Directors have called a "staggering" pension debt.

The City submitted its CAP on September 4, 2018, right after the August 7 vote enacting a new, 12-year City of East Lansing income tax of 1% on residents and 0.5% for non-residents who work in East Lansing. That new income tax will start on January 1, 2019.

A previously-passed ballot measure specifies that property taxes will be reduced during the period of the income tax (effectively reducing East Lansing property tax bills by about 10%). The income tax ballot question, which was approved by a vote of 51% to 39%, specified that 60% of the net new revenue (new income minus the property tax reduction) must be spent on supplemental payments to reduce the unfunded liabilities of the pension funds. 

Adopting the new income tax is what made the difference in the City’s CAP being accepted. Eric Scorsone, the Municipal Stability Board’s chair, confirmed before the vote that the requirement that 60% of new net revenue for this purpose was contained in the language adopted by voters.

The Municipal Stability Board (MSB) set four criteria for judging the 195 CAPs it had received by October 12 and others that will come later. The criteria for pension systems are:

  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.

The Municipal Stability Board accepted the Treasury Department staff recommendation to approve East Lansing’s plan on the grounds that the City’s plan met criteria 1 through 3 and “partially” met criterion 4 that the plan be affordable.

The Treasury staff recommendation found that the City’s CAP “demonstrates the local unit reaches the PA 202 established funding level of 60% within a reasonable timeframe (2025).”

The City’s CAP also said that, since its report to the Treasury Department in January, the estimated funding ratio of the pension system has gone up from 50% to an estimated 54%, based on preliminary estimates from MERS. (MERS administers the pension plans of East Lansing and many other Michigan municipalities.)

The reason for the finding that East Lansing’s plan is only “partially” affordable is that 22.7% of its annual general fund operating budget is projected to be spent on annual Actuarially Determined Contributions (ADC) for both pensions (13.7%) and retiree health care (9.0%). The affordability criterion sets 22.0% as the target for the maximum percentage of annual revenue that will be needed to fund both these systems.

These percentages are based on information supplied by the City from the 2017 fiscal year. The actual percentages starting in 2019 could be lower, since the new income tax goes into effect in that year. Treasury staff did not take into account any projected additional revenues when it reviewed the City’s plan. Indeed, it is too soon to have a good estimate about how much new net revenue the income tax actually will bring in.

Affordability of pension and retire health plans is a major challenge for many municipalities. The Michigan Municipal League’s Chris Hackbarth commented to the Municipal Stability Board at its July meeting that PA 202, the “Protecting Local Government Retirement and Benefits Act,” fails to provide any answers to how cities and townships that have large unfunded pension systems can afford to continue to pay for both pension obligations and current services.

More than 50 CAP plans from local jurisdictions with underfunded pension or health care plans will come before the Board at its December meeting, and some municipalities are not filing plans at all. Some of these local jurisdictions have deeper financial problems than does East Lansing.

PA 202, adopted by the Michigan legislature at the end of 2017, authorizes the Treasury Department to perform closer monitoring and provide greater transparency of the financial status of local government units’ pension funds and retiree health systems (also known as Other Postemployment Benefits, or OPEB).

East Lansing is one of about 245 local jurisdictions (28%) that were initially found to have an underfunded pension or OPEB system. East Lansing’s pension system was found to be underfunded, while its OPEB met the criteria for adequate funding.

 

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