Did Council Follow the Financial Health Team’s Pension Recommendations?

ELi readers who are concerned about East Lansing’s large unfunded pension liabilities often ask what the City has done to look into and possibly implement the recommendations made by the City’s specially-appointed Financial Health Review Team (FHT).

ELi recently published a background article explaining the basics about the City’s pension system. This follow-up article explores the FHT’s pension-related recommendations and what has happened since they were made. The bottom line is that City leaders, including Council and the City Manager, have taken the recommendations seriously although some options have yet to play out. We base that conclusion on what you see in this summary article as well as in the more detailed, new “read more” articles linked from this one.

Background

The Financial Health Review Team (FHT) was appointed by the City Council in February 2016 and met throughout 2016. The team gave early priority to the issue of the City’s pension funds and their unfunded liability and produced two detailed documents: Pension Legacy Cost - Summary and Pension Plan Recommendations

Michael Moquin, Chair of the FHT, presented the Team’s recommendations to the City Council on January 17, 2017. Moquin was for 15 years General Counsel of the Municipal Employees’ Retirement System of Michigan (MERS), a non-profit corporation that administers the pension funds of East Lansing and about 800 other local government units in Michigan. (He was also Mayor Mark Meadows’ campaign treasurer for the 2015 election.)

Moquin told ELi in 2016, “There is no magic bullet or magic pill that is going to resolve [the city’s financial situation] … This is like having a 500-piece puzzle. You can’t just put things in any order or think one piece is more important than any other. You have to make it a holistic thing. What you’re trying to create requires all these pieces.”

Even the FHT’s recommendations concerning just the issue of the underfunding of the City’s pensions include quite a number of puzzle pieces. They address four issues: (1) increased employer contributions, (2) new revenue sources to reduce unfunded pension liabilities, (3) design changes for the City’s pension plans, and (4) cost-saving benefit reductions, and increasing employees’ contributions to their pensions.

Increase employer contributions

The FHT urged East Lansing to make additional employer contributions to bring down the approximately $90 million unfunded pension liability. The City has made supplemental contributions of $2 million in Fiscal Year 2016, $1 million in FY 2017, and $1 million thus far in FY 2018; another $1 million is in the proposed FY 2019 budget. These amounts are in addition to the required annual contribution.

Rising underfunded pension liabilities have been on the City’s radar screen since well before the FHT was convened. (The FHT summarized reasons for the rise in these unfunded liabilities in its Pension Legacy Cost - Summary; see the “Commentary” section beginning on page 4.)

The challenge, of course, is where money to make larger payments can come from. For years, the City has faced decreased – not increased – revenue coming into the City's General Fund. In its Revenue Options Recommendations, the FHT called attention to an explanation of this declining income in Michigan’s Great Disinvestment: How State Policies Have Forced Our Communities Into Fiscal Crisis.

New revenue sources

The FHT made three recommendations about possible sources of additional revenue: (a) thoroughly consider the option of issuing bonds, (b) levy a city income tax, and (c) use new financing mechanisms for police and fire services.

Bonding: The FHT recommended that the City Council consider issuing bonds in order to make a lump-sum payment to MERS to reduce the City’s unfunded pension liability. The City Council decided in May 2017 that issuing bonds for this purpose was imprudent. Read more here about the Council’s thinking about bonding. You can also read more here about how consideration of bonding impacted the City’s contract negotiations in 2016.

A new income tax: The FHT’s first recommendation about a new revenue source was an income tax, coupled with a reduction in the property tax millage. The Council put this paired set of proposals on the ballot in November 2017, but the income tax was defeated. Council has now put a differently-structured income tax proposal on the ballot for August 7, 2018. Read more here about what happened in 2017 and what is underway in 2018.

A new financing mechanism for police and fire services: Among nine alternative resolutions the City Council has considered in 2018 is amending the City Charter to create a Fire and Police Department Retirement Pensions and Retirement Board. Creating this Board would allow the City to levy a new property tax millage dedicated to funding the fire and police divisions of the City’s pension system. At this time, Council is not pursuing putting this option to voters, instead asking voters to pass an income tax. 

Design changes

Legal, political, and financial factors complicate public employee pension decisions. Already-promised pensions cannot be taken away; Michigan's Constitution protects workers' accrued pension benefits. Also, the City negotiates changes to salary and pensions with seven unions. Contract negotiations might consider changes to plan design, benefits, and employee contributions, which are sometimes inter-related. Furthermore, some design changes can be implemented only if pension plans are relatively well-funded.

The Financial Health Team considered – and recommended against – multiple options for changing the design of the City’s retirement plans. Only one change was recommended. Read more here about what the FHT considered on this topic.

Benefit reductions, and increased employee contributions to pensions

Regarding reducing pension benefits, some changes were implemented before the FHT was appointed. Read more here about the FHT recommendations on this topic and the City’s response.

Regarding increasing employees’ contributions, read more here about the FHT recommendations and the City’s actions and future plans.

A note on sourcing:  Much of the data about East Lansing’s retirement plans comes from the MERS Annual Actuarial Valuation (AAV) report to East Lansing for the period ending December 2016. Assistance for this investigation was given by East Lansing's Director of Human Resources Shelli Neumann and MERS Communications and Retirement Strategies Director Jennifer Mausolf. We are grateful for their assistance with fact-finding and fact-checking.

You may also be interested in these new articles:

East Lansing’s Council Decided Issuing Bonds to Reduce Pension Liabilities Is Too Risky

Information about East Lansing Contract Negotiations about Pensions in 2016 and 2017

What Has Happened to East Lansing’s FHT’s Recommendation for a New Income Tax?

What Design Changes Did the FHT Recommend for the East Lansing’s Pension Plans?

Can East Lansing Reduce Employees’ Pension Benefit Amounts Further?

Can East Lansing Increase Employee Contributions to Retirement Plans?