What Will Cities Do To Solve Their Pension Problems?

As pension funding crowds out important functions of local governments like police and fire protection, roads and even streetlights, many municipalities have begun shifting towards 401k-type accounts for new employees.

But other cities have not.

Capitol Confidential has examined the most recent Comprehensive Annual Financial Reports (CAFR) of Michigan’s 100 largest municipalities. Of the 10 municipalities with the lowest funding ratios for their pension systems, only two of them have begun shifting employees away from the defined benefit pension system.

Lincoln Park has only put away 32 cents on the dollar for its pension obligations. It began offering the option of a defined-contribution plan or a hybrid pension plan to new employees in 2004. The city now operates under an emergency manager and representatives declined to comment.

According to the reports, Burton (39 percent), Romulus (45 percent), Norton Shores (54 percent), Hamtramck (54 percent and has an emergency manager), Genesee Township (55 percent) and Jackson (55 percent) still have an open defined-benefit system. Bloomfield Hills (51 percent) is attempting to close its system to new employees and issue bonds to pay down its debt.

The city of Walker, which is 57 percent funded, closed its system to new employees in 2005 and is paying down its debt. Plymouth closed its plan around 2001 and shifted employees to a generous 401k – it has a funded ratio of 49 percent, but is making payments and paying down liabilities.

Others are struggling to find a way out.

Suzanne Moreno, treasurer for the city of Romulus, said they have shifted new hires outside of public safety officers to a defined-contribution plan. The city also trimmed benefits for pension plan members.

“We have put contract initiatives in place for new hires going forward for both pension and retiree health care, effective January 1, 2012,” Moreno said. “Employee contribution amounts have increased, multipliers have been reduced and eligible wages for calculating final average compensation exclude overtime.”

Patrick Burtch, city manager for Jackson, said the upfront costs have delayed them shifting.

“For example, closing plans with higher than average benefit levels or instituting hybrid plans only serves to increase the amount of funds the city needs to subsidize from general operating funds,” he said. “That, coupled with a reduction in work force, means we will have significant short term complications.”

These “transition costs” happen only after cities rack up unfunded liabilities. Proponents of shifting employees to a new plan argue that they can be taken care of in a fiscally responsible way and that leaving the system open allows for new liabilities.

James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, said this shows the importance of shifting employees before the problem becomes too big.

“The cost of a pension system includes uncertainty about the future,” Hohman said. “That some cities have only saved 50 cents for every dollar of benefits promised to members speaks to the danger of keeping these plans open.”

The state has attempted to incentivize cities, villages and townships to address their unfunded liabilities. One of the criteria for extra state revenue sharing is to create an “unfunded accrued liability plan,” listing what liabilities exist in the local unit, what the unit has done and what it plans on doing to address these liabilities.

A 401k, defined-contribution plan is a pay-as-you-go system and retirement plans cannot be underfunded. In contrast, defined-benefit pension systems have routinely racked up unfunded liabilities in Michigan and around the country.

There is proposed legislation in the Michigan State House that would help with this shift. House Bill 4804 would, according to MichiganVotes.org, "establish that counties and local governments may adopt an ordinance that prohibits granting employees a conventional 'defined benefit' pension (rather than a 401k), and if such an ordinance is adopted, prohibit government employee unions from making this issue a subject of collective bargaining."

Part 2 of an analysis of local municipal retiree systems in Michigan. Click here for part 1 and here for part 3.