Whatever happened to the SERS and MPSERS 13th check?

Originally posted, December 21, 2013; updated February 11, 2014

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[See Detroit Free Press reporter Paul Egan's April 27, 2014 story and April 26 Lansing State Journal editorial.]

 

The phenomenon of the 13th check goes back at least to the early 1980s. It is a clever idea for siphoning off money from pension funds. It works like this: In years when pension fund earnings are higher than, say, 8%, the excess earnings are divided up and distributed to the pension recipients. This is from a report of an investigation into the causes of the Detroit bankruptcy by Detroit Free Press reporters Nathan Bomey and John Gallagher:

Pension officials handed out about $1 billion in bonuses from the city’s two pension funds to retirees and active city workers from 1985 to 2008. That money — mostly in the form of so-called 13th checks — could have shored up the funds and possibly prevented the city from filing for bankruptcy. If that money had been saved, it would have been worth more than $1.9 billion today to the city and pension funds, by one expert’s estimate.

It's a crazy idea. Pensioners get a bonus when a strong stock market results in big gains for the pension fund, but they don't suffer when stocks are down. It is a great deal for them, not so great for the taxpayers who are forced to make up the difference when those pension funds are short.

 

Wayne County also has a 13th check provision. Here's what county executive Robert Ficano said about it in a June 24, 2012 letter to the Detroit Free Press:

The impact of the 13th checks [on Wayne County's pension fund] has been severe. The annual bonus payouts alone have drained the fund of $391.9 million since 1986, and $91.5 million since I took office in 2003. The pension fund's actuarial service, Gabriel Roeder Smith & Co., wrote in September of 2010: "We estimate that the Wayne County Employees Retirement System would be approximately 90% funded on a funding value basis as of the last actuarial valuation (Sept 30, 2009) if there had never been a 13th check program."

Bay City has a 13th check program, although no distributions are made unless pensions are 100% funded:

Started in 1999 and discontinued in 2006, the 13th check program cost the Bay City police and fire pension system at least $2 million in distributions and lost interest earnings, according to Bay City's Chief Accountant Cathy Szostak. The pension fund is not 100 percent funded now, partly as a result of that. (MLive.com, September 15, 2013)

So does St. Clair County. And it is not just a Michigan thing. San Diego's program has been in the news recently.

 

The State of Michigan has a 13th check provision for its public school employees (MPSERS) and state employees (SERS) retirement systems. Nearly $900 million has been distributed since 1982, but none after 2002. (Notes on the sources of data for the following table are here.)

 

School Employees (MPSERS)

   

State Employees (SERS)

 

Investment

Earnings %

Total  Payout

Number of Retirees

Av. Payout per Retiree

 

 

Investment

Earnings %

Total Payout

Number of Retirees

Av. Payout per Retiree

1982

10.18

20,181,937

55,257

365.24  

1982

10.16

8,799,963

16,867

521.73

1983

13.04

27,635,519

57,854

477.68  

1983

13.32

11,701,708

17,788

657.84

1984

10.20

18,812,744

60,435

311.29  

1984

10.32

9,550,868

19,423

491.73

1985

9.72

12,402,714

63,184

196.30  

1985

9.84

11,045,319

20,869

529.27

1986

12.85

173,791,208

69,001

2,518.68  

1986

12.75

65,006,434

21,271

3,056.11

1987

16.5

236,993,278

73,316 3,232.49  

1987

15.8

75,214,272

21,873

3,438.60

1988

7.1   76,111    

1988

8.1  

23,008

 

1989

9.8

28,088,593

79,917 351.47  

1989

10.1

15,488,627

24,187

640.37

1990

8.3

1,224,050

83,286 14.70  

1990

8.4

134,184

24,863

5.40

1991

7.4   86,253    

1991

7.2  

25,566

 

1992

5.8   90,201    

1992

5.9  

28,856

 

1993

7.1   93,574    

1993

7.1  

29,175

 

1994

6.1   97,989    

1994

6.1  

29,962

 

1995

7.4   103,151    

1995

7.5  

30,562

 

1996

8.9

58,800,478

107,465 547.16  

1996

8.9

15,234,884

31,093

489.98

1997

23.6

6,228,619

111,842 55.69  

1997

23.2

24,832,674

36,123

687.45

1998

8.3

5,992,263

116,620 51.38  

1998

8.2

 

36,185

 

1999

16.1

9,406,311

120,913 77.79  

1999

16.3

678,314

36,346

18.66

2000

14.5

11,464,638

126,115 90.91  

2000

14.8

435,904

36,705

11.88

2001

(11.5)

13,799,341

130,790 105.51  

2001

(11.5)

378,467

37,111

10.20

2002

(10.5)

16,574,185

135,277 122.52  

2002

(10.3)

 

39,666

 

2003

14.8   139,814    

2003

14.7

 

45,491

 

2004

12.6   145,378    

2004

12.4

 

45,619

 

2005

12.8   151,706    

2005

12.8

 

45,801

 

2006

12.8   157,163    

2006

12.8

 

45,980

 

2007

17.2   162,844    

2007

17.2

 

46,886

 

2008

(12.3)   167,265    

2008

(12.5)

 

48,078

 

2009

(6.1)   171,922    

2009

(6.3)

 

49,029

 

2010

8.8   187,722    

2010

8.5

 

50,462

 

2011

6.6

 

192,435

   

2011

6.5

 

55,648

 

2012

13.5

 

196,661

 

 

2012

13.4

 

56,288

 

2013

12.5

 

 

   

2013

11.4

 

 

 

Total Payout:

$641,395,878

     

Total Payout:

$238,501,631

   

For the table, I calculated average payout per recipient by dividing total payout by number of retirees, but recipients don't all get the same amount. Each recipient's share is determined by the number of "units" he has. He gets one unit for each year of service he had at retirement and one unit for each year he's been retired. So while the average payout for SERS retirees in 1987 was $3,438.60, some got a lot more and others got a lot less.

The 13th check provision is state law. For state employees, it is Section 38.20g of the State Employees' Retirement Act, Act 240 of 1943. For public school employees, it is Section 38.1404a of the Public School Employees Retirement Act of 1979, Act 300 of 1980. I've attempted to read those sections in an attempt to understand the current status of the 13th check, but I just can't do it. That stuff is too complicated for me. I've also attempted to get answers from state officials, with little success. But I did find brief explanations in the 2012 Comprehensive Annual Financial Reports (CAFR) for the two systems. Here is what it says in the SERS CAFR (page 82):

Post-Retirement Cost-of-Living Adjustments

One-time upward adjustments have been made in 1972, 1974, 1976, 1977 and 1987. Beginning in 1983, some benefit recipients share in a distribution of a portion of investment income earned in excess of 8% annually (supplemental payment). Beginning in 1988, all benefit recipients are eligible for automatic 3% annual (non-compounded) benefit increases, with a maximum $300 annual increase. Eligibility for the above benefits:

Retired before October 1, 1987

Greater of supplemental payment or the combination of the 1987 one-time adjustment and the automatic increases.

Retired on or after October 1, 1987

Automatic increases only.

Here is what it says in the MPSERS CAFR (page 88):

Post-Retirement Cost-of-Living Adjustments

One-time upward adjustments have been made in 1972, 1974, 1976 and 1977 for members retired on or after July 1, 1956, and prior to July 1, 1976, who were eligible for Social Security benefits. For members who retired prior to July 1, 1956, and not eligible for Social Security benefits based upon membership service, the minimum base pension was increased in 1965, 1971, 1972, 1974 and 1981, and in 1976 and 1977 one-time upward adjustments were made.

Beginning in 1983, eligible recipients received an annual distribution of investment earnings in excess of 8% (supplemental payment). On January 1, 1986, all members who retired prior to January 1, 1986, were given a permanent 8% increase. On January 1, 1990, a one-time upward adjustment for members who retired prior to October 1, 1981, was made.

Currently members receive annual increases based on the following schedule:

Retired before January 1, 1987 - Greater of Supplemental payment or automatic 3% increase
Retired on or after January 1, 1987 under MIP - Automatic 3% increase only
Retired on or after January 1, 1987 not under MIP - Supplemental payment only

The above explanations make it clear that the 13th check ("supplemental payment") goes to only part of the retiree population, so the averages I calculated in the table above are misleading. Fewer recipients means individual payouts would be higher.

What I would like to know is why there have been no 13th checks issued since 2002. Earnings on pension funds have been well above 8% for some of those years, and although the COLA ("automatic") increases eat up part of the excess, some retirees - like the MPSERS retirees who retired on or after January 1, 1987 and are not in the Member Investment Program (MIP) - aren't eligible for COLA increases.

And if it is just a matter of insufficient earnings on pension funds, what happens if they have a really big year? The S&P 500 is expected to grow by 25% this year, and with the salary increases recently received by investment officials in the state Department of Treasury, we can certainly expect pension fund earnings to beat the S&P 500:

Jon Braeutigam, the state’s chief investment officer, got a 90% pay raise to $333,000 a year from $175,000, department spokesman Terry Stanton confirmed Friday. Treasury’s two senior directors of investment — Robert Brackenbury and Greg Parker — received 82% pay increases, boosting them from $128,000 to $233,000 a year. (Detroit Free Press, November 24, 2013)

I finally did get a genuine attempt at explaining the situation from the Office of Retirement Systems. In a letter dated January 16, Steve Crippen of ORS assures us that no further 13th checks are likely to be issued - ever. I'm afraid I still don't understand how this all works, but I guess it doesn't matter.