Three years after voters in East Lansing passed a 12-year municipal income tax chiefly to deal with the City’s pension debt problem, the latest figures show that the gap between the City’s pension liability and assets is continuing to grow, not shrink. The unfunded debt has now hit about $100 million.
In response to the latest figures, former Mayor Mark Meadows – the mayor who shepherded through the income tax ballot initiative – tells ELi that City Council should ask the voters to make the income tax permanent. Meadows also says that the City should move to cease offering pensions to employees in order to stop the debt from growing more.
According to the latest figures from MERS (the Municipal Employees’ Retirement System of Michigan), East Lansing’s pension liability – how much has been promised to employees – is now estimated to total more than $217 million. Meanwhile, the City’s pension assets – what the City has “in the bank” to pay for the pensions – is estimated to stand now at about $117 million. This means that East Lansing’s unfunded pension liability has now grown to around $100 million.
ELi graphed out the numbers provided in the latest report from MERS:
In 2020, East Lansing’s pension liability went up by almost $13 million, while the assets went up by only $10.6 million, adding about $2.4 million to the unfunded debt.
In other words, the gap between what is owed to retirees and what is “in the bank” just keeps getting bigger, despite the institution of the municipal income tax.
Looking at these numbers, City Manager George Lahanas told City Council that, “Overall, I think the pension report is good news.”
Lahanas became the City’s Director of Human Resources in 1999 and was promoted to City Manager by Council in 2012, and in his latest report on Aug. 10, Lahanas focused Council’s attention on the “funding ratio.” That’s the number that tells us the ratio between the liabilities (the blue line in the graph above) and the assets (the orange line). A funding ratio of 100% would mean that the City has “in the bank” enough to meet its obligations.
Paradoxically, in spite of East Lansing’s unfunded pension liability gap getting bigger (getting worse), the funding ratio went up about two points in the last reported year, from 52% to 54% (seemingly better).
But that number doesn’t tell the real story. The funding ratio went up last year only because the City’s position was so poor to begin with; it went up because things were a little less worse last year than the year before in terms of the gap widening.
The fact is that the gap between the City’s pension assets and pension liability has gotten bigger every year since at least 2006. And, at $100 million, that unfunded gap is now larger and harder to overcome than ever before.
Part of the challenge the City faces is that the number of retirees in the system is still growing, life expectancy for the City’s retirees is generally increasing, the City continues to offer pensions to some new hires, and estimates for investment return are dropping. All that makes the City’s position tougher and tougher.
In the last two years, MERS has lowered the assumption of investment from 7.75% per year to 7.35%, and also adjusted the numbers to reflect that retirees are living on average 2 years longer than the previous estimate. Lahanas suggested this is like running towards the goal line as the goal posts get farther away.
So, what needs to be done?
Shown the latest numbers and graphs by ELi, Meadows said he thinks that “Council should try to remove the sunset on the income tax,” to convince voters to make the tax permanent. He is of the opinion “that Council needs to make that an issue by discussing it now and looking to get it on the ballot about two years from now.”
Meadows also thinks it’s time for the City to stop offering pensions to new employees, because as long as more pensions are promised, the liability will keep growing.
Many other public employers have shifted completely away from pensions, which are also called “defined benefit” programs, because they promise a certain level of pay-outs to retirees. The move in many public and private sectors has been toward offering either no employer-paid retirement benefits (relying on social security and personal retirement savings) or offering “defined contribution” retirement benefits.
In a defined contribution retirement system, the employer promises to pay in a certain amount (a contribution) to an employee’s retirement savings, without promising how much will be paid out (which is what a pension does).
Defined contributions are much more cost-predictable for employers than defined benefits (pensions), because the employer’s financial obligation to retirement costs is not liable to grow suddenly when retirees live longer or there are drops in the stock market.
Yet East Lansing is still offering pensions (defined benefits) along with defined contributions to some employees in what are called “hybrid plans.”
In his remarks to Council on Aug. 10, Lahanas said he believes that continuing to offer some form of pensions in “hybrid plans” is necessary for recruitment and retention of employees in the City of East Lansing.
By contrast, Meadows notes that Michigan State University gave up pensions over 50 years ago, while the State of Michigan ceased offering pensions 24 years ago. Meadows’ view is that “the argument that a DC [defined contribution] system will not attract employees is just not true.”
But responding to questions from Council on Aug. 10, Lahanas said he saw no reason to change the benefit programs offered to employees at this time.
In his presentation to Council, Lahanas focused, as he has in the past, not on the growing debt, but on the growing payments being made into the City’s pension system.
Lahanas noted that, from calendar year 2015 through what is budgeted for Fiscal Year 2022, the City will have put about $25 million in supplemental contributions into the pensions – that’s money over and above what the City has been required by MERS to put in at those moments.
Without the extra payments being made, Lahanas told Council, the pension system would be at only about 47% funding right now. The funding ratio for the City’s retiree health promises also went up last year, from about 38% to about 48%.
Lahanas told Council they should see the situation as “a very positive move in the right direction.” He said the City faces “challenges” but is “out of the danger zone” of having the pensions below 50% funded. East Lansing remains under scrutiny at the state level because of its unfunded pension liability.
But what Lahanas didn’t talk about on Aug. 10 is that, in spite of payments going up, the unfunded debt hasn’t stopped growing and is bigger than ever.
The numbers provided by MERS’s latest report show that, from 2006 through 2020, the City’s pension assets went up by about $22 million, while during the same period, the liability went up by almost four times that amount – by about $86 million.
Looking specifically at the period during which Lahanas has been City Manager, the City’s pension assets went up by $19.3 million while the liability went up by $52.7 million.
In response to the presentation on Aug. 10, four City Council members asked questions.
Mayor Aaron Stephens, serving his last day on the Council before resignation, asked Lahanas when citizens would see serious progress toward getting the pensions fully funded.
Lahanas said he could not specify that, but thought it “reasonable to assume” that the system will be 90% funded in ten years, when the income tax expires. (He did not explain how that would be possible.)
Mayor Pro Tem (now Mayor) Jessy Gregg asked why there are funds sitting in the retiree health system not being used, even though obligations currently exist in terms of retiree health insurance.
In response, Finance Director Jill Feldpausch explained that the City is using a “pay as you go” system for funding retiree health while also putting money into the system to get that separate obligation fully funded. At the point when retiree health is fully funded, the City can stop diverting funds from the General Fund to pay for retiree health and pay those obligations only from the savings. She said at that point, there will be about $2 million per year in the General Fund that can be used for something other than ongoing retiree health obligations.
Council member Lisa Babcock said she was worried that the City is not doing enough to deal with “the chasm that is opening” between the pension liabilities and assets. Lahanas responded that, in 2015,“flashing alerts went off” that the pension system was in trouble. He said that since then, there had been “pretty aggressive steps” to stop the problem from getting even worse and said he thinks the City is “on the right track.”
Babcock asked if the City is “going to make it” to the point of being fully funded, and Lahanas said he thinks this will happen by approximately 2040. He said the goal had been to try to keep required MERS payments from getting “unsustainable” – so big that the City has to cut back dramatically on services.
In response, Stephen asked for an estimate of how big required payments into the system are expected to be in ten years, referring to the matter as an issue for voters. (Voters will elect a new Council on Nov. 2, 2021.) Feldpausch answered that she would request estimates from MERS.
Council member Ron Bacon asked where the City is on the curve of number of retirees, and when that number will hit its peak. Lahanas replied that that number is “still on the upswing” and said the City hasn’t yet “gone over the hump.”
Council member (now Mayor Pro Tem) Dana Watson did not ask questions during the discussion.