Council Delves Into Pension Recommendations, including Bond Possibilities

At a special discussion-only meeting Tuesday night (8/9/16), East Lansing’s City Council began to dig into the first set of recommendations from the Financial Health Review Team (FHT), which focus on funding of the City’s pension programs. Discussion included the possibility of issuing new bonds to pay for some of the debt.

For the meeting, the FHT submitted two detailed documents to the Council, one summarizing the City’s pension legacy costs and the other with recommendations about how to address the unfunded liability, which currently stands at more than $81 million.

FHT Chair Michael Moquin, a lawyer who has worked for about 25 years on pension systems in Michigan, summarized for Council the recommendations that the FHT unanimously approved at its meeting on July 20. (The Council meeting, including Moquin’s presentation, can be viewed here.)

The discussion that followed among Mayor Mark Meadows, Councilmembers Erik Altmann and Shanna Draheim, City Manager George Lahanas, and City Finance Director Mary Haskell mostly addressed the possibility of issuing bonds to pay down some part of the unfunded pension liability. Under the Michigan Constitution, the City cannot reduce its pension obligations to people for periods of work that have already been completed.

The FHT’s reports explain how the City could be able to issue bonds for this purpose. State law (2012 PA 329) provides that bonds can be issued for unfunded liabilities of pension plans if new employees are offered only Defined Contribution (DC) plans and not Defined Benefit (DB) plans or a hybrid plan that combines DC and DB components. (Only DB plans can accrue unfunded liabilities that must be paid by the employer; DC plans do not make the employer liable for the amount of pension payments.)

The FHT recommendations report that the Michigan Department of Treasury communicated in July that the City has the option of issuing bonds to pay some or all of the unfunded liability of pension plans negotiated with some of the City’s 21 groups (or divisions) of employees – those for which new hires have only DC pension plans – even if there are other divisions that have DB or Hybrid plans. Among East Lansing’s 21 divisions, four divisions of police and fire employees have DB plans that currently are open to new employees, and other divisions have hybrid plans open to new employees.

Therefore, the City Council may consider bonding for part of its unfunded pension liability, but for only those divisions that close any DB plan to new hires. And the FHT suggests that the Council consider doing so: “FHT believes pension bonding of a significant portion of unfunded liabilities under PA 329 may be both desirable and necessary, unless other substantial funding options through new revenues exist.”

Nevertheless, the FHT recommends that the City consult with finance analysis and bond counsel before deciding on bonding and that the Council not pursue this option until it can consider all the FHT recommendations, which will include handling other major expenditures such as infrastructure costs as well as reviewing possible sources of new revenue.

Draheim asked for information about the competitiveness of East Lansing’s compensation package for police and fire personnel, including pensions and retiree health care, in order to analyze how ending DB pensions might affect recruitment and retention. Meadows expressed the importance of retaining these employees. Altmann pointed out that the public safety divisions account for a large part of the City’s unfunded pension liabilities (62%, according to the FHT summary).

Bonding might be a more likely option for other categories of employees, if their unions would agree to close all DB pensions to new hires. If bonding were used for this purpose, the larger part of unfunded liabilities for other staff groups would have to be addressed in some other way.

The Council is far from deciding whether to issue bonds to help meet some of the City’s pension unfunded liabilities. The City currently can issue up to $58 million in bonds, and Draheim and other members of Council expressed caution about using a substantial portion of this for paying pension liabilities. In addition, Finance Director Haskell said she has been told that issuing significant bonds for paying pension liabilities would lower the City’s credit rating, making all borrowing more expensive.

City Manager Lahanas said that he and Finance Director Haskell have “legitimate concerns about the bonding issue,” but that Council certainly can ask for more information from experts. Meadows urged that the City begin to obtain more analysis of various bonding options that would help the Council make a decision.

The FHT expects to complete its recommendations to Council by December 15, including about infrastructure replacement and repair, development incentives, possible changes in service delivery, and potential new sources of revenue.

Meetings of the FHT and its work groups are listed here. All are open to the public.

For our report on the regular meeting of Council on Tuesday, click here. As a reminder, you can speak to Council during the “public comment” portion of its meetings or write to Council at council@cityofeastlansing.com on any issue.

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