Unsustainable: Marquette County looks at options to reduce its unfunded pension liability
The second in a six-part series on the state of pensions in Michigan
MARQUETTE — While Marquette County is one of many municipalities throughout the state struggling to pay off its unfunded pension liability, it has its own unique set of challenges.
At 68 percent funded within the Municipal Employees’ Retirement System, the county’s pension is nearly $34 million short of being 100 percent funded, according to the MERS annual actuarial valuation report dated Dec. 31, 2015.
With computed payments now exceeding $6 million annually and expected to continue growing, the Marquette County Board and officials are actively exploring options that would allow them to fulfill their contribution requirements while also maintaining the quality of services currently provided to its residents.
“I don’t know what’s going to happen,” said Bruce Heikkila, former county board vice chair. “There’s going to be many changes that have to be made. This is not sustainable, period.”
In 2016, the county’s $4,395,684 payment to MERS equated to nearly 17 percent of its $26 million general fund budget.
And that figure, said the county’s Finance Manager Sue Vercoe, does not include the health department and medical care facility’s portion, which come from separately managed funds.
In 2017, the minimum required payment from the general fund to MERS was expected to increase by about $400,000, she said, although the county has budgeted for the same amount as paid in 2016. The increase from 2016 to 2017 was more than $700,000 for all county budgets, said County Administrator Scott Erbisch.
Overall for the county, according to the 2015 valuation report, the minimum required payment to MERS for 2017 is $6,560,952 for a phased-in employer contribution based on the new 7.75 percent assumption — including the health department and medical care facility. By 2020, that number could balloon up to nearly $10 million before dropping back down below $5 million the following year.
If the investment rate of return fluctuates below MERS’ assumed return rate of investment, the payment could significantly increase.
Although the county’s MERS payment is the largest item in its more than $26 million general fund budget, other factors have made preparing the 2017 fiscal year budget a challenge.
Rising health insurance costs, flat Ad Valorem tax revenue, dark store repayments and an anticipated reduction of about $450,000 to the specific ore tax revenue, among other things, are all factors forcing county staff to take a closer look at services and personnel.
Erbisch said the changes made by MERS — lowering the assumed annual rate of investment from 8 percent to 7.75 percent and adjusting the mortality table to reflect longer lifetimes — were significant when paired with the county’s other financial challenges.
“It’s gotten to a point that is unsustainable,” said Erbisch. “We don’t have an answer yet as to what’s the best approach, but we’re looking at all available options.”
Heikkila, whose term ended Dec. 31, said something has got to give.
The pending closure of the Presque Isle Power Plant is expected to be yet another significant loss of revenue to the county, and its airport stabilization fund is dwindling.
“I don’t know what’s going to happen, there could be a millage or cuts to services or personnel,” Heikkila said. “You have to raise revenue or cut expenses.”
The county has already made significant reductions to its staff, said Erbisch, reducing it by about 20 percent through attrition between 2002 and 2012.
Last year, that number of cuts continued to grow with the closure of the Marquette County Youth Home, which had 13 regular and 13 irregular employees.
“Every department has had to look at their budgets very seriously,” said Heikkila.
Paying the price
The county’s controversial retire-rehire program, which allowed workers to retire and then return to work after a 30-day severance period — collecting both a paycheck and a pension — has made matters even worse.
Although the county voted to rescind the program in 2010, participants were paid out about $6.5 million in benefits while still working, according to Heikkila, who cited data provided by MERS.
Members of the County Board were recently made aware of this figure, which is approximate through the end of 2016.
“It’s a huge number and a large part of (the county’s) budget,” Heikkila said. “If these payments weren’t taken out, our MERS payment would be significantly less.”
Before the program was shut down, Heikkila said county commissioners did not know or understand the potential impacts it could have on the county’s unfunded liabilities.
A Mining Journal article published in February 2010 states the county commissioned an analysis to determine whether the program was saving or costing the county money, but the results were “unquantifiable,” according to the former County Administrator Steve Powers.
Of the 34 participants that were either part of the original “opt-out” program or the modified version that required a 30-day severance period, two are still active employees drawing from the pension fund.
Amounts paid to individuals during their rehire period ranged from about $7,000 to more than $750,000, according to county documents.
“The board recognized there were some issues with the program, and took the steps to stop it and curb it for the future,” Erbisch said.
Heikkila said the effects will eventually trickle down to taxpayers, who will likely end up footing the bill.
“One way or another, the taxpayers are going to have to pay for it,” he said.
Another factor adding to the unfunded liability, said Heikkila, is the annual cost-of-living adjustment guaranteed to most retirees under the county’s defined benefit plan.
Erbisch said retirees who negotiated a COLA, as well as current employees in the defined benefit plan upon retirement, receive an annual adjustment of 2.5 percent of their wages.
In 2016, the COLA added about $88,000 to the county’s pension liability. By 2020, that number could be five-times as large, at more than $400,000 annually, according to a memo provided by Heikkila to the County Board at a recent meeting.
“It’s a contractual obligation that has been negotiated,” said Heikkila. “There’s no way out of it.”
Closing the system
Although the current outlook may seem bleak, the county could be in lot worse of a position, said County Board Chairman Gerald Corkin.
In 1999, the board voted to do away with defined benefit pension plans.
As of Jan. 1, 2000, all newly hired county employees became part of the defined contribution benefit plan — a 401a plan funded by employer contributions, employee contributions and investment returns.
Jennifer Mausolf, MERS director, said 401a plans are similar to 401k plans, but have some key differences.
“After May 6, 1986, state and local governments are not eligible to adopt 401k plans by law,” said Mausolf. “Instead, they may adopt either a 401a Money Purchase Plan or 457b Deferred Compensation plan.”
According to Erbisch, the county contributes 10 to 12 percent of wages for employees in the 401a plan, with workers providing a co-pay of 2 percent.
“That’s going to be very helpful here in the future because there’s no liability building up for the county,” Corkin said.
In the defined benefit program, employees pay in 2-3 percent, said Erbisch, and the county pays a portion that varies by bargaining unit and group. Employee contributions to the unfunded liability are not included in the county’s annual payment to MERS from its general fund.
As of November 2016, Erbisch said there were 226 regular active employees in the county. Of that, 48 are part of the defined benefit plan and 176 are in the defined contribution plan. Two individuals, as noted before, are simultaneously receiving a paycheck and drawing from the pension.
At the end of 2016, Erbisch said there were about 220 retirees on the defined benefit plan. Defined contribution employees are not tracked upon retirement since they pose no additional cost to the county, said Erbisch.
“It obviously is a challenge for us,” he said. “One of the downsides of a closed system is in time, you have fewer people paying into that. We’re paying at an accelerated rate to make up that.”
Having served about 30 years on the County Board, Corkin said he’s played a part in making a lot of difficult decisions that he believes has placed the county in a more fiscally sound position.
Efficiency through technology and reductions in benefits are among cost-saving measures the county has taken in addition to staff cuts, said Erbisch.
“The county’s taken steps to continue to curb some of these legacy costs and it’s going to take some time to catch up,” said Erbisch. “The light is at the end of the tunnel, although it’s temporarily a little further for us to reach right now.”
Corkin said he is not too worried about the looming pension payments, adding that overall, he feels confident about Marquette County’s financial position.
“There’s always challenges. There’s positives happening and there’s negatives, it’s just a matter of dealing with it. We can’t just close the county down because someone says they want so much money,” Corkin said. “We’re paying our bills and we’re reducing our unfunded liability substantially. It takes time, but because of the changes that occurred, we’re going to be OK long-term.”
Options moving forward
As many municipalities throughout the state are struggling to accomodate the increased payments, MERS has offered a few options to help lessen the blow.
“Based on feedback from our customers, we recognize that some municipalities may need additional time in adhering to our shorter amortization periods,” said Mausolf. “While we strongly suggest groups use the funding policy in place, at their request, we will provide a sustainability analysis to determine if a one-time extension of the amortization schedule for existing (unfunded accrued liability) is possible.”
The amortization reflects the period of time payments are made to a municipality’s unfunded liability, with the goal of bringing the plan to a fully funded status by a specific date in the future.
The analysis, she said, is performed to ensure there are enough assets in the plan to pay for the accrued benefits. It uses several criteria including the funded ratio of the employer and the projected funded status over time, demographic attributes of the plan, employer reserve cash flow projections and sensitivity to market shock.
Currently, Marquette County is looking into having its amortization schedule — which varies between its different bargaining units and groups — adjusted.
“It’s a really bad comparison, but it’s kind of like saying you’re extending your mortgage from a 15- to a 30-year,” Erbisch said. “You pay more by doing that, but … it might allow you to keep the home that you love.”
The process can be lengthy, he said, so the county may not know for a while whether it has been approved.
Using a five-year phase in for increases, which were caused largely by the changes in the assumed rate of return and the mortality table, can also help smooth out the shock, said Mausolf.
“Based on our most recent Experience Study, a municipality may have received an increase of 10 percent,” she said. “Rather than requiring the municipality to pay the entire increase in 2017, we allow them to spread the increase over the next five years.”
County officials are also looking into “Option B,” which Mausolf said accelerates a municipality’s amortization period by two years, until the plan reaches 15 years.
“Then the amortization period decreases by one year each year,” said Mausolf, noting that by extending the amortization period, the cost of the plan is not lowered. “It only extends the amount of time payments are being financed.”
Currently, the county is operating under “Option A,” said Mausolf, which it entered after closing its defined pension plan. Under Option A, the amortization period accerlates by two years each year after reaching 15 years.
“So, Option B could be a contribution savings for them,” she said.
Erbisch said the county is working to explore all options.
“We need to go through and look at what these alternatives are and what they mean in the long term,” Erbisch said.
“For now, we’re comfortable with the amount we have budgeted for 2017,” added Vercoe.
Kelsie Thompson can be reached at 906-228-2500, ext. 206. Her email address is email@example.com.
Mining Journal series on pension liabilities
This six-part series tackles the complex subject of unfunded pension liability and how local municipalities are dealing with it. Each story will provide an overview of the problems individual entities are facing. The rest of the week will cover the following:
• City of Marquette,
• Negaunee and Ishpeming,
• Public schools, and
• Legislative solutions.