Lansing’s pension and retiree health care systems caused a $2 million deficit in each of the past two fiscal years, and city officials say it’s time to re-examine how those systems are funded.
The stock market decline four years ago, along with double-digit inflation in health care, means the city has had to dip into the General Fund to cover increased costs.
Randy Hannan, chief of staff for Mayor Virg Bernero, said while “time will tell” if the city’s pension and retiree health care systems are unsustainable, “everything is on the table” when asked about reconfiguring those systems to look more like the private sector.
That could include moving the city from a defined benefits program to defined contributions, which it did along with the state under the Hollister administration, only to go back to defined benefits for most plans under former Mayor Tony Benavides. But union leaders are resistant to such a change, saying the systems are “solvent” over the long term.
A defined benefits pension plan establishes a set amount retirees are paid after employment, based on length of employment, age and salary. Defined contributions are more like a 401K, where employees contribute a set amount from paychecks that is then invested. The gist with defined benefit plans is that they’re more reliable for employees yet more costly for employers.
“In light of the city’s ongoing budget challenges, we have no choice but to consider a variety of cost-saving measures, including the possibility of moving back to a defined contribution retirement system, in order to reduce the city’s long-term pension costs,” Hannan wrote in a follow-up email. “However, any such changes must be negotiated through the collective bargaining process.”
Benavides said in an interview last week that if he were in office today, he’d try to go back to defined contributions, citing the poor economy and the need to balance a budget. In the short-term, the administration needs to find solutions for balancing a fiscal year budget, projected at about $7.5 million even with the help of a property tax increase.
“It definitely poses a significant challenge,” interim Lansing Finance Director Angela Bennett said. “That’s very significant when balancing our budget. It’s an obligation the city has to pay with our resources.”
While Bennett expects the amount Lansing pays into the pension and health care systems to level off as the stock market rebounds, the elephant in the room is the double-digit inflation of health care costs.
“When health care was first put in, it was a cheap benefit. We never perceived at that time it would cost what we see now,” Bennett said. “We’ve seen pension be a very big challenge since 2008. That has come into play in balancing our budget — we have to be able to meet those obligations.” And, she added, as health and pension costs increase, property tax revenues continue to decline.
“The possibility of moving back to a defined contribution system is under consideration, but we are not yet in a position to make a specific proposal to our bargaining units,” Hannan added in his email.
Hannan said the city is yet to conduct a “detailed analysis” of potential savings for the city under defined contribution plans. “However, based on the experience of the State of Michigan and other public employers, we would anticipate substantial long-term savings from a switch to defined contributions.”
The Employees’ Retirement System defined benefit pension plan includes full-time city employees and 54A District Court personnel, but does not include elected officials or police officers and firefighters. As of Dec. 31, 2009, 861 retirees and beneficiaries received benefits from the plan compared to 570 active members, according to the city’s latest Comprehensive Annual Financial Report. Active members contributed between 1.7 percent and 7.25 percent of wages, based on separate union contracts.
The Police and Fire Retirement System includes 650 retirees and beneficiaries who received benefits as of Dec. 31, 2009, compared to 458 active members. Fire personnel contribute 7.58 percent of their salary to the plan, while police supervisors contribute 9.52 percent and non-supervisors 8 1/2 percent.
The defined contribution plan for elected officials includes eight individuals as of June 30 of last year. Other plans are the Voluntary Employees Beneficiary Association and also “other post employment benefits,” or OPEB, plans for the ERS and police and fire.
During former Mayor David Hollister’s administration in the 1990s, the city went to defined contributions, but reverted to defined benefits under Benavides in 2003 for most of its systems. Today, only elected officials are eligible for a defined contribution option. Defined contribution plans are far more prevalent in the private sector.
“The demand for resources posed by defined benefit systems is the reason that the city moved to a defined contribution system back then, as have many employers, including the State of Michigan,” Bennett wrote in a follow-up email.
Benavides in an interview cited “savings to the city” for changing plans when he was in office, but couldn’t recall how much the city has saved in that time. “We knew that the defined benefits plan was one that not only saved the city money, but also gave big benefits to the employees.”
While he sticks with his decision of the time, Benavides said last week he would “definitely go for defined contributions” today. Why? “I would say the economy has a lot to do with it.”
Benavides denied rumors that he switched back to defined benefits in exchange for a union endorsement in his 2003 mayoral race against Bernero. “We did it on merit and on consultation with the Finance Department,” Benavides said.
More than 700 state municipalities are on defined benefits plans, according to the Municipal Employees’ Retirement System, a Lansing-based nonprofit organization that offers retirement plans that municipalities can adopt. Its members include more than 750 municipalities — including Lansing — and more than 86,000 individuals as of June 2010.
Scott Dedic, chairman of the city’s Employee Retirement System Board and also an international service representative for the UAW, said the system in place is “solvent.”
“As far as I’m aware, we’re meeting the required benchmarks,” he said. “It’s interesting to have everyone out blaming the defined benefits plans as some type of dinosaur and no longer a viable source. It’s solvent, doing well. It’s managed professionally and realistically.”
Brad St. Aubin, chairman of the city Police and Fire Retirement System Board, could not be reached for comment. However, St. Aubin told MLive.com in a September story about the $2 million in retirement benefits paid out that the police and fire pension system is “solvent.”
Dedic, who has served on the ERS board for 12 to 15 years, said: “The defined benefit plan basically puts you at a benefit level that is guaranteed and volatility is spread out through several years. In a down economy, you could retire out at the same as a good economy. You don’t see the ebbs an flows as you would in a 401K or contribution plan.” He called defined benefits the “security option.”
One of his biggest concerns is “people reacting too quick to headlines. Going to defined contributions and not looking at what that’s going to do for defined benefits plans. It’s easy to say you’ll save $1 million by switching, but they don’t see the impact on the actuaries as they exist, they’re reacting to the economic situation.”
Anthony Minghine, associate executive director and chief operating officer of the Michigan Municipal League, said there are arguments for both options.
“Defined benefit isn’t inherently bad,” he said. “If managed properly and funded properly, they can still be good systems.”
In a defined benefits system, the volatility of stock market affects the city more than employees, Minghine said.
It’s also difficult to switch between systems, Minghine said, due to state rules for doing so. “It should be much simpler for communities to make adjustments they want to make without great difficulty in terms of rules out there.”