How Cities Are Solving Their Pension Problems – and the Bill That Makes It Easier

There’s a saying among those who analyze public sector pension systems: “Pension don’t get funded – they get underfunded.”

That is certainly true around Michigan. A review of the defined benefit pension systems for the 100 largest cities in the state shows that the vast majorities are underfunded – that is, that the municipality has promised more benefits than it has put away money for.

But there is hope. Many cities have begun shifting new employees to a 401k-type, defined-contribution plan. For these plans, workers are given a (usually generous) match of money put into a fund. It is impossible for cities to underfund defined-contribution plans because there are no liabilities – the expense happens upfront.

Jack Hagedorn, the finance director of Allendale Charter Township, credits his township’s solvency to it not having a defined benefit plan.

“A 401k prevents unfunded liabilities,” Hagedorn said. “We have zero liabilities with [our] plan and we would like to keep it that way.”

Commerce Township has always had a 401k-type plan and Treasurer Susan Gross sees positive results.

“[Our defined-contribution plan] prevented any legacy costs,” she said. “We are 100 percent fully funded.”

Having long-time stable retirement plans has freed up resources in many cities to use for firefighting and police protection.

Laurie Lemke is treasurer of Gaines Charter Township which also has zero liabilities. She credited the defined-contribution system with allowing them to invest in firefighting services.

Lemke, Plainfield Township assistant to the superintendent Pricilla Walden, and Genoa Township Clerk Polly Skolarus all said employees were happy with the retirement plans.

“401k…gives employees considerable benefits at the end,” Skolarus said.

The earlier workers are shifted to these plans, the more stable the retirement system is for all past, present and future employees of a city. And the easier it is for local governments to spend money on the important things.

Many municipalities have long had defined-benefit pension plans. And despite huge liabilities, the entrenched interests, most prominently public sector unions, make it difficult to switch plans.

Paul Sincock is the city manager for the city of Plymouth, which is only 49 percent funded – the 4th lowest in the state. They were able to overcome the opposition and begin shifting new employees to a 401k-type plan in 2001. This has allowed the city to put a floor on the liabilities and begin using additional money to pay them off.

“The downside of shifting is that you have to pay off the unfunded liabilities while not adding any new people into the system,” Sincock said. “So we’re funding two retirement systems at the same time. At some point in the future, we will be over that hump. The upside is that somebody sitting in my city manager’s chair off in the future is going to say, ‘Hey, I don’t have any long-term liabilities!’”

He said the elected officials in Plymouth realized the problem and made a conscious decision that shifting retirement plans was paramount.

“Long-term, pensions are not a sustainable program. We aren’t able to provide services because we are paying for people who no longer work here,” Sincock said.

Cathy Vander Meulen is the just-retired city manager for Walker. They have the 10th lowest funded ratios of municipalities in Michigan and are in a similar situation as Plymouth.

“I think Walker was at the forefront when the decision was made in 1998 to give employees the option of switching to a 401k [and] we made it mandatory for all new employees shortly after that,” Vender Meulen said. “The unions went kicking and screaming, [but] slowly through the collective bargaining process, [we] now have only the 401k option. Since we have a closed system, we are now experiencing a sharp increase in the required contribution due to the accelerated amortization period. As the economy has improved, we have a plan to contribute additional amounts to our pension liability. We are making progress, but know that it will be challenging for a few years until we hit that peak.”

After talking to leaders in two dozen municipalities, Capitol Confidential did not find any that regretted switching from a defined-benefit pension program to a defined-contribution.

But making this switch is difficult. The cities who have done so successfully either never had pension systems or have exceptionally strong leadership that is able to overcome entrenched opposition. The unions opposed to changing retiree benefits are lobbying those elected officials who make the decision.

Bob Williams, the president of State Budget Solutions, described the effects of current pension plans. He writes, “Without government action, states, counties, cities, and towns all over America will go bankrupt. That means essential public services must be cut, dedicated government workers laid off, disrupting or eliminating public health, safety and education.”

House Bill 4804 has been proposed in Michigan to help level the playing field. The bill would allow citizens more power in reforming local pension systems – with the hopes that more municipalities can avoid the fate of Detroit.

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