The city of Lansing has a serious problem: it has a $600 million "structural deficit." In other words, the amount the City has set aside to fund pensions and health insurance for City retirees is $600 million short of what's needed. I talked about that in a little more detail in my June 25 story.
Actually, it may be a lot more. As of the end of 2013, pensions were underfunded by $247,182,496 and the last figure I've seen for the health insurance shortfall was $431 million. That was on page 42 of the March 2013 Report of the Lansing Financial Health Team. So the total may be more like $680 million, well over 3 times this year's $196.3 City budget. (Executive Budget Summary, page 8) With 49,505 households in Lansing, $680 million comes to over $13,000 per household.
Last one to leave, turn off the lights.
Paying off the $680 million by selling the Board of Water & Light is being considered. Anyone willing to buy the utility will want to make money, however, so expect your electric bills to go up. And the new owners probably won't agree to make $21 million annual payments to the City as "return on equity." (Executive Budget Summary, page 13) But the best argument against selling the BWL is that it doesn't get at the source of the problem. What is going to keep those unfunded pension obligations from building up again?
The problem is "defined benefit" retirement plans, which means pensions. They are great for those who have them (that includes me), but a nightmare for everyone else, because the cost over the recipient's lifetime often exceeds the amount set aside during his working years. Calculating the amount needed is the job of the actuary, but it is only an estimate. Many factors affect funding, including earnings on invested funds. When the pension fund comes up short, the employer has to make up the difference, and when the employer is government, the taxpayers get stuck with the bill.
We are prevented by Article VI, Section 24 of Michigan's Constitution from cutting pensions:
It is unclear, however, if this applies to other post-employment benefits (OPEB) like health insurance. We could possibly cut off health and other insurances, or shift the cost to the retirees by deducting premiums from monthly pension payments. Retirees over 65 would still have Medicare coverage; others could switch to Obamacare. A baby step in this direction was made in April of last year when Lansing's firefighters union signed a new contract that excludes spouses and dependents from retiree health coverage. That is only for new hires, however.
Although we can't cut pensions for those already receiving them, we could give back the contributions employees have made to the retirement system and switch them to a defined contribution plan. We did that for certain bargaining units back in the early 1990s, but switched them back several years later. Big mistake. There was a good story about that in the Lansing City Pulse in February 2012.
A less drastic step would be to switch the newer employees to defined contribution and allow employees who are over half way to retirement to stay in defined benefit. Or we could put new employees in defined contribution and leave all current employees in defined benefit, as was done for state employees, judges and legislators in 1997. Savings from that would start very low, but increase as years pass. Seventy or so years from now, there would be no more pensions for Lansing taxpayers to fund.
Another possibility would be to increase the rate for employee contributions to the pension system. Lansing has two separate retirement systems, one for police and firefighters - the Police & Fire Retirement System - and one for everyone else, the Employees' Retirement System (ERS). Here are the current Police & Fire rates:
Here are the ERS rates:
Other possibilities for reducing the cost of defined benefit plans include increasing the number of years of service needed to retire, limiting the kinds of compensation included in final average compensation (FAC), and reducing the pension multiplier.
Of course, any of these changes would have to be negotiated with each of the City's nine bargaining units. The bargaining takes place behind closed doors, with the City represented by a chief labor negotiator appointed by the mayor. Lansing citizens and the city council, their elected representatives, have no part in it. That is because of a state law called the Public Employment Relations Act (PERA). Until 1965, there was no forced collective bargaining for local governments in Michigan:
Collective bargaining is ruining this city, and Lansing isn't the only municipality with an underfunded pension system. It is foolish for taxpayers to continue paying public employees after they have retired. The people of Lansing certainly can't afford it. If employees expect to retire before social security age, they should save up for it themselves.
Our state legislature must repeal PERA as quickly as possible. Collective bargaining for public employees is an insult to democracy. It is ridiculous for the people who pay the taxes to be shut out of the process of setting employee compensation. That is why the average Lansing household is on the hook for $13,000.
Member counts and benefit totals for Lansing's two retirement systems for the years 1988-2013 are here.
By the way, here are some underfunded pension systems that all Michigan citizens should be concerned about:
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