East Lansing Contract Negotiations about Pensions in 2016 and 2017

While East Lansing’s Financial Health Team and City Council were considering the wisdom of the City issuing bonds for the purpose of making a large payment into the pension system to address unfunded liabilities, the City also was negotiating the next contract with its unions. These contracts expired on June 30, 2016. (A previous article describes the role of unions in this process.)

I asked Shelli Neumann, East Lansing’s Human Resources Director, whether the City had brought up changes to pension benefits during negotiations in 2016, while the City’s Financial Health Team (FHT) met, and in 2017, after the FHT made its recommendations. Specifically, I asked whether the City had put on the table changing the benefit formula by reducing the final average compensation (or FAC), as the FHT recommended. (Types of retirement plans and the benefit formula ([FAC] x [length of service] x [benefit multiplier]) are explained here.) Neumann told me that they had not, and she volunteered to explain why this was the case.

Issuing bonds can only be done for pension groups that have a defined contribution (DC) retirement plan for new hires, and all of the City’s pension groups currently had either defined benefit (DB) or hybrid plans (with both DB and DC components). Therefore, the City Council would only be able to issue bonds if at least some unions agreed to offer DC plans to new hires moving forward.

Offering only a DC plan to new hires was a big “ask,” because DC plans place entirely on employees the risk of a future recession during which earnings on investment accounts could decline. Therefore, moving to a DC plan for new hires was the main item concerning pension benefits that was on the negotiating table in the spring and summer of 2016.

The outcome of these negotiations, according to Neumann, was that all the unions except the firefighters’ union agreed to activate a defined contribution plan for new hires if the City Council voted to issue bonds for the unfunded portion of pension obligation. Then, in May 2017, the Council decided against the bonding option, saying it was too financially risky (read more), so the contract language regarding a change to a DC plan for new hires contingent on bonds being issued to pay into the pension system was not triggered.

By June 30, 2017, when the next set of contracts were to expire, the Council had decided both against bonding and for placing an income tax proposal on the November 2017 ballot. During this period of uncertainty, no further changes to pension provisions were agreed to in the new, two-year contracts.

Something else was going on in 2017 that East Lansing officials were watching closely. Meridian Township and its Police Officers Association of Michigan (POAM) filed for arbitration in March 2017 over six issues on which they had reached an impasse in their contract negotiations. Three of the issues involved changes to the pension plan: the multiplier, the FAC, and placing new hires into a hybrid plan. A hearing was held in September 2017, and, in December 2017, the arbitrator found for the union. The arbitrator’s decision is final; therefore, no changes were made to the Meridian Township POAM's DB pension benefit.

Arbitration over wages or pension benefits often results in a finding for either one side or the other, rather than a compromise position in between, according to Neumann. State law prohibits police from going out on strike and, therefore, requires an arbitration process to resolve contract disputes.

The East Lansing FHT made recommendations for police and fire pension plans addressing all three of the items that were at issue in Meridian Township in 2017. The outcome of the arbitration in Meridian Township on these issues could signal what might happen in the next contract negotiations in 2019 between East Lansing and its POAM.

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.