Despite New Law, Some Cities Digging Deeper Pension Holes

Many Michigan municipal pension systems are inching toward solvency after the battering they took during the Great Recession — and after years of public employers failing to adequately fund those systems.

But a few local governments are falling even deeper into a pension-debt hole. The pattern has brought greater legislative scrutiny amid concerns that pension debt will swamp the ability of municipalities to deliver basic services and keep the promises they made to their employees.

That’s the conclusion of a new analysis of the health of pension systems in the state’s 100 largest municipalities. The analysis by the Mackinac Center for Public Policy, which covers the progress in pension funding between 2016 and 2019, found that the financial health of 37 systems improved. It also found that 46 had less than they should have.

James Hohman, director of fiscal policy at the Mackinac Center, said the new review shows that “even in the economic recovery, with low unemployment and strong market gains, too many are still losing ground.”

A 2017 state report on unfunded liabilities estimated that Michigan counties, cities and townships had $7.46 billion in unfunded pension obligations. Those obligations are a serious concern because the state constitution makes them inviolable. Short of a local government declaring bankruptcy (as Detroit did in 2013), government pension systems cannot be changed to pay out less to their current beneficiaries. In Detroit, retirees lost up to 4.5% of their pension payouts, as well as cost-of-living increases.

After the 2017 report came out, the Michigan Legislature increased its oversight of municipal pensions and enacted new rules on the assumptions pension managers could make about their investments.

Those measures may have contributed to the large number of systems that, on paper, lost ground over the last three years, said Craig Thiel, research director at the Citizens Research Council of Michigan. “That may be a good thing,” he said.

“It may make the problem look larger. But reality hasn’t changed.”

Thiel suggested it will take longer to determine if measures taken to rein in pension debt are working.

Jennifer Mausolf is the communications director for the Municipal Employees’ Retirement System of Michigan, which oversees more than 700 pension systems. She said legislative reforms have increased transparency and discipline by pension fund managers.

“We look at the progress of a plan over time,” Mausolf said. “It’s clear that many actions have been taken over the last five years to stabilize (pensions).”

Still, the Mackinac Center analysis shows how far some local pension systems have to go.

Some that were already well below a state benchmark of being at least 60% percent funded in 2016 fell further behind.

Financially strapped Flint went from 47% to 36%; Hamtramck, from 53% to 44%; Eastpointe, from 59% to 50%; and Mt. Morris, from 58% to 51%.

Others, however, made significant progress.

Ypsilanti’s pension systems (one for general employees, one for police and fire employees) went from 58% funded in 2016 to 75% in 2019.