Posted by: POLC Staff Posted date: November 21, 2016
Pension showdown possible in lame duck
Justin A. Hinkley , Lansing State Journal
9:09 a.m. EST November 18, 2016
LANSING — Dozens of cities, villages, townships and counties across Michigan are drifting into a perfect storm of flat income and big bills for retiree costs, but some are worried the Legislature could rush reforms this year that end up hurting more than they help.
Statewide, local governments are carrying some $4 billion in unfunded pension debt and $11 billion in unfunded retiree health care costs, according to the Michigan Treasury. That’s putting the squeeze on many local governments whose revenues from property taxes and the state are relatively flat.
This year, when the Municipal Employees’ Retirement System of Michigan(MERS) — which manages eight in 10 local government pension programs — asked municipalities to pay more to catch up, it put many governments in a serious bind.
Communities “are panicked about this issue across the state,” said Port Huron City Manager James Freed, who convened nearly 70 communities in Lansing this fall to discuss the MERS changes. He called it “a clear and present danger” to government services.
Freed said many of the communities represented at that meeting are “on a financial trajectory in the next 3 to 5 years to become insolvent.”
That predicament, coupled with calls this year from major Republican donors to end municipal pensions for new employees, has many local leaders, Democrats and union officials expecting — and some fearing — that the GOP-controlled Legislature will push a pension overhaul in the lame-duck session that begins in earnest on Nov. 29.
State Rep. Andy Schor, D-Lansing, a former lobbyist for the Michigan Municipal League, said he’d heard rumors that dozens of bills could be dropped before New Year’s Eve. Some could force local governments into 401(k) plans, in which retiree benefits are not guaranteed and which have become the norm in the private sector. There are also rumors of a plan to require any new revenue sharing from the state to go toward retiree debt.
“I wouldn’t be surprised,” Schor said. “Anything’s possible in lame duck.”
Republican leaders would not say pension reforms are on the lame-duck agenda, but also did not rule it out. The Associated Press reported this week that reforms to public school teachers’ retirements are a priority for legislative leaders. Reforms to health care for municipal retirees — perhaps providing retirees with a stipend and moving them off municipal health plans and onto the federal health care exchange — have been discussed, but nothing’s been finalized, the AP reported.
In an interview last month with the State Journal, Michigan Treasurer Nick Khouri said he was in talks with lawmakers but refused to say whether reforms were imminent. He said it was his preference to take advantage of the relatively stable economy to address legacy costs, efficiency of services and income simultaneously.
“We’ve got enough time to address the whole three big buckets of fiscal sustainability,” Khouri said. “Where you run into problems is when you try to pull one of the three buckets out and try to address that (alone) … You really have to look at the big picture.”
Some had expected Democrats to pick up seats or even reclaim control of the state House in this month’s election, which could have prompted Republicans to move quickly. Since the GOP maintained its majority on Nov. 8, Republicans have at least two more years to push their agenda.
“The desire, on my part, is to still try and do something in lame duck, if we can, even we can just nibble something off the edges,” said state Rep. Earl Poleski, a Republican who will leave office at year’s end because of term limits. “I’m afraid that there’s a little less urgency.”
‘The political will’
Reform advocates concede there may not be enough time to push a holistic solution in 2016. However, some said municipalities are in enough trouble that it could be worthwhile to get something done quickly and address other issues later.
“If there were a way to do it in my last few weeks, I would try to do that,” Poleski said. “Now, is that practical? I don’t know … I think there’s enough information out there. The question is if there’s the political will to get it done.”
Lame-duck action could elicit a strong reaction from public employees, thousands of whom clogged the Capitol with other union workers to protest right-to-work legislation during the lame-duck session in 2012.
Eric Weber, president of the Lansing firefighters union, noted that he already pays a tenth of his paycheck toward retirement and said unions are cognizant of their employers’ constraints. But he said governments should be mindful of workers’ constraints, too, and lawmakers should remember that employees’ and retirees’ incomes pay taxes and fuel local economies.
“I respect the unfunded liability and we always work at the bargaining table to get to an amicable resolution that works for both parties,” he said. “Why do they always want to come after the pensions of these public servants? We’re not going to be able to afford things to keep the economy going.”
Few deny, however, that the retiree costs coming due in the near future are a problem.
‘A disservice to the people’
Statewide, local government pensions are about 78% funded, according to the Treasury. That means that if the typical municipality stopped offering pensions and all employees stopped earning pension benefits, the existing pension system should be able to take care of eight of every 10 workers as they retire.
The industry standard is 80% funded, MERS CEO Chris DeRose said. That’s considered healthy enough that governments could easily make up the remaining 20% by the time all employees retire.
Yet among MERS’ 732 pension-plan members, 61 are half-funded or worse, while more than 500 are below the recommended 80%.
The further behind a government is, the more it needs to pay each year to catch up. Collectively, the hundreds of governments below the 80% benchmark will owe nearly $480 million in the upcoming fiscal year, according to MERS.
Since 2005, MERS has annually lowered the length of time municipalities have to reach 100% funding. That’s a bit like trying to pay off a mortgage quicker, which of course requires bigger annual payments.
The 300 or so municipalities that offer retiree health care are even further behind — 14% funded on average, according to Treasury — because government accounting rules used to allow those costs to be paid from general fund revenue. Only in the last decade have local governments started to treat retiree heath care costs as long-term liabilities that should be prepaid.
Some municipalities would have to contribute almost all of their general fund revenue to retiree health care to catch up, according to Michigan State University researchers.
And some goverment leaders say the pension problem is bigger than the MERS data suggests.
MERS recently lowered its expected long-term investment returns from about 8% to 7.75%, but some local government officials believe even 5.75% might be optimistic. Nationwide, actuaries are debating which numbers and assumptions governments should use to calculate the health of their pension systems. Some argue they should use the performance of the lowest-risk investments — which might bring returns of 2.5% — to calculate fund growth. Lower return means larger annual payments for local governments.
MERS investments have earned 9.1% over the last 40 years and 6.75% over the last five, according to its latest financial report. MERS spokeswoman Jennifer Mausolf said in emails that the agency provides its members various sets of numbers based on different assumptions and communities can make pension payments based on more conservative numbers if they desire. Still, she said MERS’ investments have “consistently outperformed benchmarks and market averages.”
Local governments that are falling behind have few options to keep the legally binding promises they’ve made to their employees
They can raise taxes, but their tax rates are limited by state law and the willingness of voters to pay more. Part of the reason governments are in trouble is because revenue from property taxes and income taxes took a major hit during the Great Recession and has been slow to rebound.
Local government can ask employees to pay more toward their own retirement costs, but layoffs during the Great Recession mean many have fewer active workers paying into the pension systems than there are retirees making withdrawals.
A few communities have tried to cover gaps by selling bonds. Kalamazoo, for example, which is not in MERS but has a pension 129.7% funded, sold $90 million in bonds to manage its unfunded retiree health care liability. City officials believe the bonds, if invested wisely, can pay for themselves and generate extra payments for retiree health care.
Khouri, the state treasurer, said that strategy may make sense in some cases, but pension bonds “have a really long and ugly history.” Municipalities have more control over pension liabilities than they do the long-term costs of bonds sold on the open market, he said.
Meanwhile, the state recently helped pay for a comprehensive study of unfunded liabilities in Lansing, which has one of the highest unfunded retiree health care liabilities in Michigan. The state is “interested” in the study — which examines Lansing’s liabilities and ways to address them — and any insight it provides into the statewide problem, Lansing Finance Director Angela Bennett said.
‘Caused some stir’
If cities can’t get money from residents or employees, they have to cut costs. Advocates of pension reform said it’s needed to protect services such as police, fire and roads.
Several ideas have either been introduced in the Legislature or floated among municipal leaders, such as making it easier for local governments to sell bonds, limiting pension benefits, or making it easier for municipalities to leave MERS and shop for new financial managers.
Pushing new local government employees into 401(k) plans was named the No. 1 priority at this year’s influential West Michigan Policy Forum. That gathering of conservative business leaders and others is backed by the DeVos family, big-league Republican donors who’ve pushed other controversial provisions — including right-to-work — that passed in lame duck.
The forum “caused some stir,” said Mark Docherty, president of the Michigan Professional Fire Fighters Union. “Of course, when (Doug DeVos) says something, that causes the Legislature to talk about it.”
Amber McCann, spokeswoman for Senate Majority Leader Arlan Meekhof, R-West Olive, said in an email to the State Journal that she “would expect to see a lot of more local issues moving back and forth between the House and Senate chambers in lame duck,” but did not answer specific questions about timing for possible reforms.
Likewise, Gideon D’Assandro, spokesman for House Speaker Kevin Cotter, R-Mount Pleasant, did not respond to specific questions about timing. He said in an emailed statement that “everyone agrees that Michigan cities are carrying far too much debt and that several local governments are in danger of falling even further behind … We are still collecting ideas and looking for the best way to help local governments stay up and running.”
D’Assandro had earlier referred questions to Poleski, who said he didn’t know if any bills were in the works but moving to 401(k) plans is “what local units of government ought to be doing.”
Doing so creates its own problems, however. It stops pension costs from growing but does nothing to eliminate the cost of benefits employees have already earned.
“You still have a funding problem no matter what,” Poleski said, “but you have to stem the outflow of money, you know. You have to build the dam.”
Newly hired state employees were put into 401(k) plans beginning in 1997. The remaining pensions of older employees are only about 62% funded.
‘They’re the ones … in trouble’
MERS’ DeRose said that approach could end up hurting some local governments more than it helps.
DeRose noted that only a small number of pension plans that account for most of the unfunded liabilities.
More than 200 governments in MERS are at or above the recommended 80% funding level on pensions, including more than 60 that are fully funded or over-funded.
DeRose said roughly three-quarters have taken steps to reduce their pension burden, either by chipping in more themselves, asking more of employees, reducing benefits or some other method. Many governments below the 80% benchmark are moving in the right direction, he said.
Instead of forced statewide reform, DeRose recommended to Gov. Rick Snyder that the state develop a list of warning signs that would trigger intervention only where problems exist. If more than a quarter of a government’s budget is going toward pensions and retiree health care, for example, that should raise a red flag. DeRose said the state should then ask other questions — Is the city’s population growing or slowing? Is its tax base waxing or waning? Has it negotiated a sustainable plan with its employees? — before deciding to get involved.
“It is a smaller number of cities, counties, townships that have the problem and they’re the ones that are going to be in trouble,” DeRose told the State Journal last month. “Let’s not have a one-size-fits-all solution.”
Khouri, the treasurer, said conversations are happening with all stakeholders and offered few clues to how the administration might respond to lame-duck action by the Legislature.
“We want to work with the legislative leadership and timing is in their hands as much as it is or more than ours,” Khouri said. “What I’m proposing, at least, is that we take some time and address it broadly, but we want to work with the legislature and what their timing is, too.”
Contact Justin A. Hinkley at (517) 377-1195 or firstname.lastname@example.org. Follow him on Twitter @JustinHinkley. Sign up for his email newsletter, SoM Weekly, at on.lsj.com/somsignup. Reporter Beth LeBlanc contributed to this report.
Michigan municipal pension, by the numbers
78%: The average pension funding level for all Michigan municipalities that offer pensions; the industry standard is 80%
84%: The share of Michigan municipalities that participate in the Municipal Employees’ Retirement System of Michigan (MERS)
61: The number of MERS members whose pension liabilities are 50% funded or less
504: The number of MERS members who are below the 80% recommendation
63: The number of MERS members whose pensions are fully funded or better
283: The number of Michigan municipalities that offer retiree health care
14%: The average funding level of municipal retiree health care plans
59.1%:The share of the City of Flint’s entire budget that would have to go retiree health care if the city had made the required payment toward fully funding its liabilities; few cities do so
396: The number MERS members who took steps to cut long-term pension costs this year; most simply paid more than required
Sources:The Municipal Employees’ Retirement System of Michigan, the Michigan Treasury, Michigan State University