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

East Lansing’s Financial Health Team (FHT) was aware that the City had already changed from defined benefit to hybrid plans for new hires in many employee groups. These new hybrid plans began in 2010 and 2011, and 125 City employees had been enrolled in these plans by December 2016. (This already represents 47% of the total of the 268 current employees who are participants in the City’s retirement system.)

The FHT’s report stated that these new hybrid plans are reducing (though not eliminating) the City’s future pension liabilities.

Five of the ten FHT recommendations about pension plans explored various additional design changes for the City’s pension plans, and the FHT obtained analyses from MERS about the financial implications of several of these options. The FHT recommended against all but one change. Their reasons, presented in this FHT document, are quite technical in some cases. We will not delve into details here.

The FHT did recommend one design change for the City to consider: to close the defined benefit divisions that are still open to new hires and adopt a hybrid plan for new hires only going forward. The only East Lansing pension divisions with defined benefit plans that remain open to new hires are for sworn police officers and firefighters.

In other words, the FHT was recommending that the City make a change to the pension design for police and firefighters parallel to what it had already made for a number of other employee groups. Unlike the City’s other employees, public safety personnel do not receive Social Security for their work in these positions. This change could only happen through negotiations with the police and fire unions, which could end up being decided through arbitration. The unique situation of police and fire retirement regarding both Social Security and arbitration is explained here.

The FHT document stated that this recommended change was contingent on an infusion of significant new revenue to the City that would be used to make a large lump-sum payment into the pension fund in order to increase its funding ratio. No new revenue source was immediately available, and, perhaps for this reason, this recommendation received little attention at the time it was received. Actually, a large payment into the pension system is required in order to convert a defined benefit plan to a hybrid plan for existing employees, but not to close such a plan and offer a hybrid plan to new hires only going forward, which is what this recommendation proposed.

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.