Can East Lansing Reduce Employees’ Pension Benefit Amounts Further?

Among the East Lansing Financial Health Team (FHT) pension recommendations was that East Lansing “continue to negotiate overtime and personal leave limits in FAC, and work towards a 240 hour (or less) maximum of final payouts in FAC.”

“Final average compensation” (FAC) is one of the factors in the calculation of an employee’s defined benefit (DB) pension benefit. (How much an employee is paid from a DB pension is based on a formula of [final average compensation (FAC)] x [years of employment] x [benefit multiplier], as explained here and here.)

The FAC can include not only salary, but also accumulated leave (such as for vacations and holidays) and overtime. MERS, which administers 800+ pension plans in Michigan, found that many local public employee pension plans had higher-than-expected FACs due to these types of payouts at the time of termination.

In order to improve their estimate of future accrued liabilities, MERS calculates a “load” of 0% to 12% that is factored into the annual required contribution. MERS reviews the load amount every five years as part of its broad Experience Study for each pension plan. MERS’ last Experience Study, in 2015, set the load for East Lansing at 5%. The FHT noted that capping additions to the FAC at 240 hours could reduce this higher annual required payment.

Human Resources Director Shelli Neumann pointed out to ELi that police and fire service employees are the main categories of City employees that have significant overtime. These departments schedule more officers than usual on MSU home football game days and St. Patrick’s Day, for example. The hours of police overtime have actually increased in the last year, ELPD Chief Sparkes told the City Council in April, because the standard number of officers on a shift has been reduced from five to four (in addition to a supervisor) due to budget cuts leading to staffing reductions.

City Manager George Lahanas wrote to City residents before the November 2017 vote on the income tax about what the City had done in response to the FHT recommendations. On the topic of benefits, he said, "The City will pursue FAC caps during the next round of negotiations." The next negotiations are expected in the spring and summer of 2019.

The FHT’s recommendation about capping the FAC could be applied to many of the City’s defined benefit plans (most of which are closed to new hires) as well as hybrid plans, according to Neumann. East Lansing’s police and fire employees hired after July 1, 2011 already have a defined benefit plan “that complies with what the FHT is recommending,” she said.

A City proposal to police and fire unions to alter the pension plan, for example by reducing the FAC for personnel hired before 2011, could be discussed in contract negotiations, which could end in arbitration under terms of Michigan Public Act 312, as happened in Meridian Township in 2017. Police and fire personnel receive higher benefits than other personnel partly because they are not covered by Social Security.

The FHT did not make any recommendation about reducing the multiplier factor in the pension benefit formula. The multiplier has already been reduced in the hybrid plans in which more than 115 staff have been enrolled who were hired since 2011.

This article is part of a larger investigation of East Lansing's government’s response to the Financial Health Team’s recommendations about pension plans; click here to read the lead article for that investigation.