What has East Lansing already done to reduce the cost of pensions?

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Sunday, April 29, 2018, 12:38 pm
By: 
Chris Root

What has East Lansing already done to reduce the cost to the City for employees’ pensions?

The City can bring down pension costs borne by the General Fund by negotiating with unions to: (1) reduce pension obligations by changing (a) the design of the plans or (b) the benefits of the plans, and (2) increase funding from employees’ contributions. (Increasing funding from other sources – such as going to voters with some formulation of a new City income tax or with an additional property tax millage – is also being considered by the Council.) East Lansing has made some cost-saving changes of all these types, as summarized below.

East Lansing has made some changes to retirement plan designs:

Starting in 1999, all new, non-public-safety hires in East Lansing were enrolled in a defined contribution (DC) plan instead of a defined benefit (DB) plan. At the same time, non-union employees were given the option of switching from DB to DC retirement plans, and some employees chose to make this change.

In 2010, all new, non-public-safety hires were put in hybrid plans; employees not in union positions were allowed to switch from DC to hybrid, and most did so.

Since 2011, the balance in the number of current employees on DB and hybrid plans has changed considerably, as employees hired before 2011 with DB plans have left and employees hired since then have been enrolled in hybrid plans. As of December 2016, 125 active employees are in hybrid plans, and 143 employees are in defined benefit plans. The FHT recommendations document confirms that the City’s projected future pension liabilities have declined as a result of the switch from DB to hybrid plans.

For hybrid plans, the City’s annual contribution, which is split between DB and DC components, is capped at either 10% or 10.5% of employees’ pay. The City has been paying the equivalent of between 8% and 10% of employees’ pay into the DB part of the plan and depositing the remainder into a defined contribution 401(a) account. The total required contribution to the hybrid plan is calculated using many factors, including member data, actuarial assumptions, and projected investment earnings.

In addition to the employer contribution, the employee deposits 3.5% of pay into the DC retirement account and may deposit more into a supplemental 457 account. The employer has no future liability for the DC portion of the retirement benefit.

There have also been changes to benefits:

How much difference does it make for some employee groups to have a hybrid instead of defined benefit plan? The two issues are closely linked; changing to a hybrid plan has reduced benefits for East Lansing’s retirement plans.

MERS’ menu of options for the DB part of a hybrid plan has lower caps on maximum benefits that an employer can offer, compared to the menu of options for DB-only plans. For example, the maximum multiplier for the DB portion of a hybrid plan is 1.5%, compared to 2.5%, for the DB-only plan. (However, the DB multiplier can be as high as 2.0% for employee groups that do not receive social security benefits.)

The difference between a 2.5% or 1.5% multiplier is significant. Take, for example, a person with a FAC of $50,000 and 30 years of service whose multiplier is 1.5% (in a hybrid plan) instead of 2.5% (in a DB-only plan). The annual retirement benefit of a person in the hybrid plan will be $15,000 less than a person in a DB plan. ($50,000 x 30 x 0.025 = $37,500 and $50,000 x 30 x 0.015 = $22,500). For the employee, this means $15,000 less income in each year of retirement. For the City, $15,000 times the actuarially-estimated number of years of retirement - for 125 employees hired since 2010 who are in hybrid instead of DB plans - leads to a reduction in future pension liability and, therefore, in the required annual payments into the pension plan to cover that liability.

For the employee, having a defined contribution retirement account as a second part of the hybrid plan will make up some of this difference in their anticipated retirement income. The City also contributes to that account while the employee works for the City, but it incurs no future liability for the retirement account.

City Manager George Lahanas said at the February 27, 2018, City Council meeting that the cost of the pension benefit for fire and police personnel hired after 2011 “is about 60% of the cost of the former benefit – about 60% of the cost in terms of what it actually pays out over a person’s life.” He explained the reduction in benefit in “Steps Taken to Address Legacy Costs,” which was posted on the City’s website on April 24, 2018:

"[I]n 2010, new and current non-public safety employees had the option of moving to a Hybrid Plan (a combination defined contribution and defined benefit plan), which was identified by the State of Michigan as a cost-controlling plan under the Economic Vitality Incentive Program (EVIP). The following year, in 2011, the defined benefit plan for all police and fire new hires was significantly reduced, including a decrease in the plan multiplier from 2.75% to 2.25%, changes to overtime pay and vacation/leave time for final average compensation (FAC) and raising the retirement age from 50 to 55."

Looking to the future, Lahanas wrote in a letter to residents in October 2017 that “The City will pursue FAC caps [to reduce the size of the pension benefit] during the next round of negotiations.” The next round of negotiations are set to happen in 2019

And there have been changes in employees’ required contributions:

For employees hired before 2011 who still have DB plans, the City has negotiated new or higher employee contributions. A group of Department of Public Works employees with DB pension plans began making contributions in the 1990s, and their contribution rate of 6.7% of their pay is the highest of any group. Increased employee contributions to DB plans for some other employee groups went into effect in 2011, 2012, and 2014, and those contributions range from 1% to 5%. Total East Lansing employee contributions made in FY 2017 amounted to $212,530, according to Finance Director Jill Feldpausch.

Lahanas summarized employee contribution increases on February 27: “[W]e went to older employees and increased their contribution. Contributions went up 2 to 3 [percentage points of salary], depending on their position, depending on their pay, depending on their bargaining unit. So there has been that ratcheting up [of employee contributions] over the past 5 to 6 years. That is something we plan to continue.”

Senior, non-public-safety employees with defined benefit plans:

About 30 other, non-public-safety employees in East Lansing still have defined benefit plans, and these people will receive Social Security benefits as well as pension payments when they retire. According to Human Resources Director Shelli Neumann, these 30 people are among the most senior employees (in both union and non-union positions) who were offered defined benefit plans when they were hired and who have not chosen to convert their plans. The pension groups they are part of are closed to new hires, and so the number of people in this category will go down as they leave or retire.

Click here to read more about the retirement plans in East Lansing for public safety employees, including why they do not get Social Security benefits.

 

This article is part of a larger investigation of East Lansing's pension plans; click here to read the lead article for that investigation.

 

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