Pension pool problems

ISHPEMING – The city of Ishpeming has more than $7.1 million in unfunded liability between its two pension funds for public employees, reflecting a growing controversy seen around the country – and perhaps best typified in bankrupt Detroit – of municipalities struggling to find ways to adequately fund their employees’ retirements in the future.

According to materials provided by the city, Ishpeming’s biggest pension liability is the $5.1 million unfunded in the city’s Municipal Employees’ Retirement System fund, as of the end of 2012.

The city’s Act 345 fund for its police and fire department retirees is just less than $2 million unfunded – an amount that should be gradually eliminated after the city council voted in November to increase the Act 345 millage from .8960 mills to 2.2112 mills.

“With the tax increase … over time the (Act) 345 underfunding will be corrected, because now all of that new tax revenue is going directly into that retirement account,” City Manager Mark Slown said.

Slown also said it was important to understand what the numbers and terms like unfunded liability actually mean.

On the MERS retirement plan, for example, the actuarial accrued liability of benefits for current retirees – essentially a mathematical guess of what the city will owe in the future – is about $9.7 million. That means of what Slown said are approximately 90 retired city employees drawing from their pensions, the best guess for what it will cost to pay their benefits for the remainder of their lives is $9.7 million. The city has $8 million. When you factor in the estimated cost to pay the retirement benefits of all current employees, of which Slown said there are about 50, you get about $13.2 million – which is where the estimated $5 million deficit comes from.

“They’re not actually saying what you’ve got to pay today for today’s obligations,” Slown said. “They’re saying if you stop right now and went bankrupt, what would you have to pay to pay all future obligations? That’s assuming you’re no longer making any contributions.”

The biggest problem with public pensions is the same problem with other financial instruments – they’re invested in equity and other investment vehicles in the stock market and are subject to market volatility. The biggest losses came with the financial crisis of 2008. The city’s police and fire pension fund, for example, was 101 percent funded a little more than nine years ago, at the end of 2004. In only one year, however, from 2007 to 2008, the value of the fund’s assets compared to its liability – the amount of money the fund is expected to have versus the amount of money it needs to have at some future point to pay out full benefits – dropped from 94 percent to 84 percent.

Ishpeming is not alone. At the end of 2012, Negaunee had a combined liability, between its pensions and other post-employee benefits, of more than $4 million, according to the website, to which Negaunee City Manager Jeff Thornton referred The Mining Journal for the city’s pension information.

And according to the city of Marquette’s annual audit, the city’s MERS fund was about $16 million unfunded at the end of 2011, the last year included in the 2012 audit. Marquette’s MERS pension fund is about 67 percent funded, which is in the same range as the funding ratios of Ishpeming and Negaunee.

Examining financial statements from the end of 2013, the value of Marquette’s Act 345 Fire-Police Retirement System trust fund assets were about $26.5 million with an estimated actuarial liability of $36.2 million at the end of 2012 – meaning the city’s police and fire pension fund has about a $9.7 million unfunded liability. The trust was 100 percent funded as recently as 2005 and, like Ishpeming’s Act 345 plan, suffered its biggest losses between 2007 and 2008 – dropping from 98 percent funded to 87 percent.

These financial shortfalls are not the fault of the cities. They make an annual required contribution as determined by the pension fund, their employees make their contributions – which in the case of police and fire pensions is 5 percent of their salaries – and the rest is up to the fund managers. The amount the municipality is expected to contribute is based, again, on the mathematical estimate determined by actuarial studies, most of which presume a 7 percent or 8 percent annual return on the fund’s investments.

“What’s important to note is, every year the city has made the payment, the minimum payment due that the pension fund has asked us to make,” Slown said. “It’s fully funded every year. And what they do is they adjust that payment over time, they’ll increase it to try to keep you from getting further behind, but they also know that we have limited abilities to make it up all at once.”

Slown said there are a number of other identifiable factors also putting pressure on the retirement funds – most notably that people are living much longer than they were expected to when these funds were started.

“Yes, we are underfunded. It’s not a good situation to be in, but in order to fully fund the pension obligations, we’d have to come up with a lot of money that we never would have thought we needed years ago when people were only expected to live 65, 70 years and now they’re living 90 plus years,” Slown said. “This has taken place over time and it’s kind of put everybody in a bind. It’s not just cities, it’s most pension plans for any employees.”

Another factor is that city governments are much smaller than they used to be, so there are less employees paying into the fund than are drawing from it.

“When we cut a position, the amount of dollars that go into the pension fund is being reduced if we don’t replace that position,” Slown said. “But yet the number of retirees that are out there that are being funded by the pension plan are still the same.”

Zach Jay can be reached at 906-486-4401.