Editor’s note: This investigative report originally ran Dec. 13, 2021. Because many of our readers had lost internet service to the Comcast outage at that time, we are rerunning it to be sure those interested in this issue have an opportunity to see what we found.
East Lansing’s Annual Comprehensive Financial Report (ACFR) for Fiscal Year 2021 came before City Council last Tuesday, Dec. 7, following the completion of a routine and required audit, performed by external consultants from Plante Moran.
While the topline takeaway from Tuesday’s meeting is that the auditors found nothing notably amiss in the City’s report — keeping up the streak of A+ grades for financial reporting by the City’s Finance Department, led by Director Jill Feldpausch — the large cache of financial information offers some insights as to where the City stands in terms of being able to meet its reitree obligations.
With the City of East Lansing under scrutiny by the State for its pension debt problem, the income tax revenue having dropped because of Covid, and the City attempting to catch up by paying into the system almost as much as it takes in on property taxes every year, a lot of people are paying attention.
At Council last week, newly-elected member George Brookover brought a number of questions seeking clarification, while others on Council mostly listened to the latest numbers and discussion with few questions or comment.
What we learned, in the end, is that how close the City is to funding its pension debt depends on which figures you use. While the City seems to be making progress thanks largely to the income tax, there are a lot of uncertain assumptions built in, and Feldpausch warned that some of the numbers are likely to dip in a worse direction in next year’s report.
This ELi Explainer brings you up to speed on the latest information about the City of East Lansing’s retirement obligations, and brings to light just how far off the numbers can really be.
A $10 million change to the City’s reported total pension liability alters the way the forecast looks.
The City of East Lansing’s pensions are serviced through the Municipal Employees’ Retirement System (MERS) of Michigan, which operates the City’s pension fund.
ELi reported in August on an update to the City Council about the pensions and, at that time, City staff referred to a “Spring 2021” report from MERS. In that, Table 7 showed that the “actuarial accrued liabilities” for the City’s pension fund as of Dec. 31, 2020, came to $217,224,424 – or about $217 million.
Based on that, we reported that the unfunded liability had hit $100 million and the City was losing ground.
But now, in the FY2021 ACFR, the “total pension liability” as of the same date is shown as only $207,446,450 – about $10 million lower.
The difference in these figures for what the City owed in total as of Dec. 31, 2020, has significant implications. Using the lower figure in calculations lowers the unfunded gap by the same amount – about $10 million, from about $100 million to about $90 million.
The difference also brings up the “funding ratio” — the percentage that tells us how close the City is to having enough assets to meet its pension obligations – moving it up from about 54% to about 56%.
ELi reached out to MERS last week to get clarification about why the City’s report of total liability as of Dec. 31, 2020, would be stated as $10 million lower than the total liability on Dec. 31, 2020, reported by MERS just a few months ago. We got the following response.
“In short, the numbers used for funding the plan are calculated differently than the numbers used in financial reports,” a spokesperson for MERS wrote.
The answer continued: “Actuarial Accrued Liability, which is referenced in Table 7 of the MERS Annual Actuarial Valuation [which ELi reported in August], is calculated using the actuarial value of assets, or the value of pension plan investments smoothed over a period of 5 years. The smoothing process, which is used by fiscal experts to level out fluctuations, causes the actuarial value of assets to be different than the market value of assets. The market value of assets is used to calculate Net Pension Liability, according to fiscal best practices and industry standards.”
MERS’s spokesperson added that the actuarial accrued liability — the $217 million — is the number used to fund the plan and “therefore is the number used to establish the City’s budget.”
As ELi noted in our August report, the City had $116,858,594 paid into the pension fund as of Dec. 31, 2020. That number has not changed from the spring report to the just-released FY2021 ACFR.
Now let’s look at what the Michigan Treasury Department is watching in terms of East Lansing’s pension health. (Spoiler: Those numbers don’t look as rosy.)
In 2017, Michigan’s Public Act 202 created a threshold of pension funding that municipalities in Michigan must reach by a certain deadline. The goal was to force municipalities like East Lansing to deal with their unfunded pension liabilities and unfunded retiree health obligations.
East Lansing is supposed to reach 60% pension funding three-and-a-half years from now, by June 2025, according to the City’s own Act 202 Corrective Action Plan.
We’re now at the point where the City has been able to submit its latest Act 202 report. That shows that, as of the end of FY2021 (June 30, 2021), the City’s pensions were just 51.1% funded — much lower than what MERS’s promoted calculation shows (about 56%).
That Act 202 funding ratio of 51.1% derives from the “actuarial value of assets using uniform assumptions,” shown as about $113 million, divided by the “actuarial accrued liabilities using uniform assumptions,” now shown as about $221 million.
The good news is that even when using the uniform assumptions method the State requires, the funding ratio is up from about 48% according to the City’s report from last year to 51.1% this year. Using uniform assumptions, the unfunded liability went down, from about $111 million to about $108 million.
There are a number of factors that play into when and if the City will reach the point of having its pensions fully (100%) funded.
For one, there is the issue of how much the City’s pension liability continues to grow. The City continues to offer defined benefits (pensions) including in “hybird” plans to at least some new employees, which causes the City’s liability to keep increasing.
Additionally, the built-in assumptions (like average age of death and return on investments) could turn out to be wrong for any number of reasons.
The errors can be big. The ACFR presented last Tuesday shows that MERS’s “expected versus actual experience” for the City’s liability was off by $4.3 million in the most recent year, in the bad direction (found on page 82 of this PDF):
The amount of that one-year error is nearly as much as the income tax added to the pension payments in one year.
Additionally, a special “note” in the latest report similarly explains the “sensitivity of the net pension liability to changes in the discount rate,” one assumption used to calculate the debt. A decrease of just one percentage point in the discount rate, from 7.6% to 6.6%, would increase the total unfunded liability by about $23 million (taken from page 84 of this PDF):
Feldpausch noted this huge variable to Council in the discussion.
Aside from the question of whether the City is adding more employees to the pension system or renegotiating the benefit levels for current employees, one significant variable the City has direct control over is how much gets paid into the fund on an annual basis.
Currently, MERS is requiring an annual payment of approximately $9 million (see page 100 of this PDF).
The City has needed to supplement the required payment with millions more per year to try to gain ground. This past fiscal year, the City made $7.6 million in supplemental payments, including funds saved up from two years of income tax revenue.
ELi obtained recent “ballpark estimates” from MERS, sent to the City in October. We used the Freedom of Information Act (FOIA) to get these documents, because the estimates were never given to the public. (See them here.)
Those show that for the City to get to full funding around the time the income tax stops being in effect (voters only approved the income tax for 12 years), the City will need to maintain an annual payment into the pension fund of at least $15.5 million total.
That $15.5 million would include what comes from the income tax plus money pulled out of the City’s General Fund in an attempt to catch up.
At last Tuesday’s meeting, newly-elected Council member George Brookover brought most of the questions.
Brookover asked his questions during the presentation on the ACFR and the audit, made by Tyler Luce and Alisha Watkins of Plante Moran, the auditing firm.
Initially, Brookover went back and forth with Luce with questions about General Fund expenditures before honing in on the pensions. Brookover then asked Watkins and Luce if they were aware of any database to see where East Lansing stands relative to other municipalities in regard to paying down pension debt.
“Is there some State [web]site, or easily obtainable site that will show these comparisons to other municipalities?” Brookover asked.
Watkins said she wasn’t familiar with any singular database or website, but noted all the information is publicly available.
In fact, the Michigan Department of Treasury offers an online community financial database, which includes basic information about unfunded pension debt. That shows that the City of East Lansing ranks in the lowest 15th percentile in the state in terms of “Pension Health,” ranking 204th out of 241.
The same database also provides information on the Governmental Net Position Ratio, defined as measuring “long-term solvency or the ability of a local government to manage long-term debt obligations.”
East Lansing ranks in the lowest 16th percentile, coming in 232nd of 276 municipalities in the state.
At last Tuesday’s meeting, Council member Lisa Babcock asked the Plante Moran consultants how many years it would take before the City reached the 60% funding ratio required under Act 202.
Watkins answered that the City is “almost there – you’re really close.” But that claim is based on MERS’s calculations (about 56%), not the number the State Treasury Department actually uses (currently about 51%) in determining whether a pension system is underfunded and requires greater State scrutiny.
Babcock also asked whether the plan would ever be fully funded. Watkins answered that MERS is looking at having it funded by 2041 or 2042. But Lahanas noted that the big supplemental payments are aimed at being fully funded around the time the income tax expires – about 10 years from now.
During the discussion, Mayor Ron Bacon asked one brief clarifying question regarding a calendar date, and Mayor Pro Tem Jessy Gregg and Council member Dana Watson did not participate in the discussion, other than listening.
The City is in a better position in regard to Other Postemployment Benefits (OPEB).
East Lansing’s OPEB provides healthcare and vision benefits for retirees and their dependents, and is currently funded at 48.2% using uniform assumptions, according to the Act 202 report for FY2021.
This ratio well exceeds the requisite level of funding as mandated by the State, and is a sizable increase in funding level from FY2020. According to the Act 202 report for FY2020, the OPEB plan was only 38% funded using uniform assumptions.
Unlike the pension debt, which needs to be funded at 60%, the OPEB plan only needs to be funded at a 40% ratio to avoid special scrutiny from the State under Act 202.
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