Michigan's Underfunded Pensions: A Tale of Two Counties

The state’s largest 100 municipalities owe more than $4.2 billion in unfunded pension benefits to their employees, and Michigan’s 83 counties add another $2.5 billion to the total. Wayne County’s experience shows how this underfunding arose, while Oakland County shows the way out.

Most Wayne County communities run a defined benefit pension plan for their employees, and most of them are significantly underfunded. Detroit was allowed to keep enrolling new employees in a smaller defined benefit plan after it left bankruptcy court and received a state bailout.

Foreseeing such problems, in 1994 Oakland County closed its defined benefit pensions to new hires, instead giving these workers contributions to their own retirement accounts. The legacy pension system that serves county employees hired before that date is well-funded. The pension systems of most cities in the county, meanwhile, are in much better shape than their counterparts in Wayne County.

At the end of 2015 fiscal year, Oakland County’s closed pension system held 98 percent of the assets it needed to pay retirees. It has only $13 million worth of unfunded promises. To put that in perspective, the county’s annual budget is more than $850 million.

Make that 100 percent now, says Laurie VanPelt, Oakland County's director of management and budget. She reports that thanks to good returns on its pension investments, the system is now fully funded.

It’s a different story south of the border in Wayne County, however. There, the employee pensions are only 49 percent funded. Employees have been promised $1.66 billion in pension benefits. But the county has just $815 million of what it should have to pay them, potentially leaving taxpayers on the hook for $845 million in unfunded liabilities.

And that’s just the county government. The 34 cities in the county are carrying another $2.4 billion in unfunded pension liabilities.

Due to its size, Detroit skews the numbers to the bad side, meaning the average city in the county is less underwater than the countywide average suggests. Without Detroit, Wayne County's cities carry $827 million in unfunded liabilities, with retirement systems that are 70 percent funded on average.

Better yet, the systems in Livonia, Gibraltar, Grosse Pointe, and Grosse Pointe Farms are fully funded. Six out of the county's 34 cities have closed their defined benefit plans to new hires. Another nine have closed parts of their defined benefit plan or switched to a system that generally pairs a smaller defined benefit plan with employer contributions to employees’ 401(k)-type accounts. Politicians often call the latter arrangement a hybrid system.

On the flip side, the city of Highland Park has set aside just 3 percent of what is needed to fund retiree pensions, leaving a $40 million hole to fill.

Once again, the situation is happier for taxpayers in cities on the north side of the Wayne-Oakland border. Oakland County has 29 cities, whose pensions are 95 percent funded on average. Altogether, they are carrying $114 million in unfunded liabilities.

The high points in the country are Troy at 115 percent funded and Pontiac at 142 percent funded.

In Oakland County, 19 cities never had a defined benefit plan or have closed ones that existed. They now offer a defined contribution plan.

But some other cities have a different story to tell. Hazel Park is just 55 percent funded and Walled Lake is only 36 percent funded. These two cities owe $27 million and $8 million, respectively, to their systems.

Troy is one city that closed its plan. City Manager Brian Kischnick said the switch to a defined contribution plan has created stability in how much it must contribute each year to fund its legacy system. That system was closed in the late 1990s but covers many workers still on the payroll.

“The real issue is to manage the funds that you put away,” Kischnick said. “We have a board that helps us to make sure our returns are good. We have low assumptions – a 6 percent assumed rate of return. We use smoothing, and financial advisors. You can’t play games when you want to be fiscally responsible.”

Kischnick said the fully funded pension plan allows the city government to have money to spend in other areas.

“We’re 100 percent funded and the contributions are lower, so we can put more into police, fire, and roads,” Kischnick said.

A similar pattern is seen at the township level. Oakland County has 21 townships but only seven offer employees a defined benefit plan. These townships are 93 percent funded on average. The other 14 townships have either closed their defined benefit plan or never had one and are now offering defined contribution benefits. Wayne County's townships are 67 percent funded on average and will have to pay $136 million to pay for benefits earned by employees and retirees.

If all the unfunded liabilities for county, city and township governments are added, the sum for Wayne County is $3.4 billion. The sum for Oakland County is $167 million.

The good news for taxpayers in these counties and communities is that many officials have seen the handwriting on the wall and taken steps to get ahead of the problem of underfunded pension systems. The bad news is that too many have not.