Lansing's "structural deficit" may exceed $13,000 $16,000 per household

Originally posted July 9, 2015; updated September 2, 2015

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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.

September 2, 2015: I now have more recent figures for the unfunded actuarial accrued liability (UAAL) for retiree health care. Through a FOIA request, I obtained the actuarial valuation reports for retiree health care for the Employees Retirement System (ERS) and the Police & Fire Retirement System (P&F). The figures come from the Executive Summary on page 1 of each report. UAAL is $210.8 million for ERS and $341.7 million for P&F, for a total of $552.5 million. Add that to $247.2 UAAL for pensions for the two systems and we get $799.7 million. Divide that by 49,505, the number of Lansing households, and we get $16,154.

 

The reports were issued in February 2015 and are based on information provided by the City as of December 31, 2013.

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:

24 Public pension plans and retirement systems, obligation.

    Sec. 24. The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

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:

Firefighters hired after April 29, 2014 7.00%  
Firefighters hired  on or before April 29, 2014 10.00%  
Police, Supervisor 9.52%  
Police, Non-supervisor 8.50%  

Here are the ERS rates:

Group

Old Plan

New Plan

   

UAW

2.95%

3.00%

   

Teamsters 2014

3.75%

6.50%

 (5.00% if hired after September 2012

 

Teamsters 580

3.50%

6.35%

 

 

District Court Teamsters

3.50%

5.50%

 

 

District Court Exempt

4.50%

5.50%

 

 

Exempt

3.75%

6.50%

 

 

Executive Pay Plan

3.75%

6.50%

 

 

Elected Officials

3.25%

No defined benefit plan

 

 

 

Note: For a definition of Old Plan and New Plan, read the last two paragraphs on page 1 of the May 23, 2013 minutes of the Employees' Retirement System board meeting.

 

Except for firefighters, the above contribution rates came from the 2013 actuarial valuation reports. Firefighter rates are from the April 29, 2014 Tentative Agreement between the City and the International Association of Firefighters (IAFF).

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:

In the 1964 election, President Lyndon Johnson won in a landslide, and his coattails helped many other Democratic candidates. Michigan Democrats won large majorities in both houses of the state legislature in the 1964 election, their first majorities in either chamber since 1937-1938, and enactment of a prounion public sector bargaining law was one of the consequences of those majorities. On July 23, 1965 Governor George Romney, a liberal Republican, signed the Public Employment Relations Act (PERA) . . . (source, page 108)

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:

 

Retirement System

$UAAL

% Funded

Source

Active members

Retirees

Source

 

 

State Employees (SERS)*

6,210,000,000

60.3

Page 91

15,881

57,615

Page 96  

 

Public School Employees (MPSERS)

25,796,000,000

59.6

Page 98

210,777

204,512

Page 104  
 

State Police

654,900,000

62.0

Page 93

1,603

2,953

Page 99  
  *State employees hired after March 30, 1997 are in a defined contribution plan rather than a defined benefit plan.

 

Send comments to stevenrharry@gmail.com.

 

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