Working ahead: Marquette pays more than minimum on pension payments

(Journal Graphic by Journal Graphic Designer Selena Hautamaki)

The third in a six-part series on the state of pensions in Michigan

MARQUETTE — The city of Marquette is aiming to pay down its unfunded accrued pension liability sooner rather than later with higher than minimum contributions, officials say.

While the state’s Municipal Employees’ Retirement System offers options for employers to mitigate the latest sharp rise in payments, Marquette will bite the bullet and pay the full contribution, rather than the optional phased-in amount.

That’s an immediate difference of nearly $336,000 more per year. But in the end, all the unfunded liability — which is the total amount of funds needed to cover all employee pensions into the future — has to be paid sooner or later.

“We really aren’t looking at prolonging the problem,” Marquette CFO Gary Simpson said. “We’d kind of like to address it as soon as we can.”

To pay all the unfunded liability today would cost $36 million — that’s over $25 million for MERS and $10.6 million for the police and fire pension.

“It would be more than half of the city’s entire (annual) budget to do that,” Simpson said.

While a 100 percent funded ratio is the ultimate goal, the city will be chipping away at it for a couple more decades.

Unlike the MERS pension pool, the police and fire pension is its own separate pool administered by Wells Fargo and overseen by a local board. Marquette police and firefighters still enjoy a Defined Benefit package, though benefits have been lowered and contributions raised to pay down liability. That plan is currently 74 percent funded.

Most of the MERS pension divisions remain DB plans, but new employees have been linked to a new division with lower benefits since 2012, and salary contributions for all employees are on the rise.

Liability rising

Marquette’s MERS plan is currently funded at 59 percent, down from 63 percent in 2014.

This drop is attributable to the latest round of changes in actuarial assumptions, which are the uncertain projections used to calculate liability. Those same assumptions have also brought the employer contribution requirement up 17 percent from $202,000 per month to nearly $236,000 per month — or $2.8 million per year.

Those payments, based on MERS latest annual actuarial valuation report for December 2015, will take effect in October 2017, the start of the new fiscal year.

MERS actuarial assumptions are recalculated every five years based on the latest data, and that data has led MERS to tighten up its calculations.

In the latest valuation report, the main assumption changes consist of longer lifespans and a smaller investment return. Other actuarial changes were the shortening of the asset smoothing period from 10 years to five years and fixing of the amortization period, which is the amount of time before the liability is paid. Under the new actuarials, the amortization period will continue to decrease for both open and closed divisions until all liability is completely paid off and funded by a specific date in the future.

Meanwhile, asset smoothing is the actuarial tool used to mitigate impacts of market volatility on municipalities.

For instance, that’s why Marquette is still adjusting to the impacts of the Great Recession of 2008, Human Resources Director Susan Bohor explained.

“They spread that loss out over 10 years, so you’re not feeling it all in the year that it occurs,” Bohor said. “So through 2018, … we not only have to meet our investment goals, but we’ll also have to exceed part of the loss that we experienced back in 2008-09. So they figured that was probably too long of a spread, so they switched it to a five-year (smoothing period).”

All of these actuarial changes, along with other smaller ones, have the effect of increasing unfunded liability and, by extension, municipal payments.

If Marquette were to capitalize on MERS’s five-year phase-in option to soften the blow, Marquette’s annual payment would be $208,000 per month or $2.5 million.

But, as Simpson explained, that would only serve to increase the city’s payments in the latter portion of the five-year phase-in period.

And based on other actuarial factors, the city already expects significantly higher payments down the line.

“What we’ve been told is over the next 5 years, the contribution is (going to) go up a quarter million dollars each year, so at the end of five years, you can basically take today’s payment and add $1.25 million to it,” Simpson said. “So we do know that’s coming down the pike.”

The most recently approved city budget includes the full-impact payment, not the phased-in amount.

Staff is in the process of preparing recommendations for the Marquette City Commission related to funding health care liabilities, part of Other Post-employment Benefits or OPEB, which have been capped. OPEB was closed to all new management staff in 2005 and all new employee hires in 2012, Bohor said.

Paying more

Marquette will actually be paying more than the full impact payment, due to rising employee contributions.

Typically, MERS calculates municipal contributions by taking the full amount needed to sustain the pool and subtracting whatever the employees have agreed to contribute.

In the latest round of union contracts, the city negotiated to increase employee contributions to the DB pool from 5 percent to 6 percent, meaning that MERS would normally lower the city’s contribution. But the city has pledged not to reduce it.

Bohor said it’s like paying more on your mortgage.

“So (the city is) paying the same while the employees are paying a little bit more, so overall the city is sending more money to MERS than we are required to,” Bohor said. “We’re hoping with the additional contribution from our employees, that that will help with our future evaluations. And when we put the new division in for new hires (in 2012), over time that’s (going to) significantly affect our unfunded accrued liabilities too by bringing them down, because they’re not as rich a plan as the current employees have. … So we’ve planned for this and I think we’ve put in just about as many steps as we’re (going to) be able to get in there.”

Bohor said she doesn’t expect the city to close its DB plan, based on these efforts.

Uncertainties

According to the MERS actuarial valuation report, if the city wanted to accelerate its payments to 100 percent funding levels in 10 years, it would cost almost $4 million per year; in 20 years, almost $3 million per year.

When looking at unfunded liability, it’s important to note that actuarial assumptions will not match the real experience of the plan, except by coincidence, because they are meant to be long-term projections, the report says. Additionally, actuarial valuations don’t affect the ultimate cost of the plan, only the timing of the contributions.

The report shows what Marquette’s funding ratio would be if the actuarials were slightly different. For instance, if 2015 valuations were based on current market value instead of the smoothed value, then Marquette’s MERS plans would be just 52 percent funded instead of 59 percent funded, and total annual employer contribution would be $3.2 million instead of $2.8 million.

Similarly, if the annual return rate were one point higher than assumed at 8.75 percent, then Marquette would be considered 66 percent funded. If the return were assumed at 5.75 percent, it would be just 47 percent funded.

Over the years, the funding ratio has dropped due to these actuarial changes, with an 87 percent funded ratio in 2001.

Workforce

Director of the Department for Public Works Curt Goodman said due to liabilities and other financial pressures, all municipal departments have been challenged in recent years to do more with less, and that includes looking at benefits.

When he started with the city as an entry-level wastewater treatment operator 37 years ago, the workforce was bigger, he said.

“We’ve reduced our workforce over the last 10 years,” Goodman said. “Again, we’re being tasked with doing more with less, so you really need to find ways to be more efficient to get the same amount of work done.”

There’s an impact on morale, but he tries to be positive, he said. He doesn’t think lower benefits or stagnating wages will have a major affect on the quality of employees, because the public sector remains a stable option for workers, he said.

He did note the DPW is losing many experienced long-term employees to retirement as the workforce is shrinking.

“Bringing in new employees, there’s a learning curve too,” Goodman said.

Bohor said city-wide, the total number of current employees is about 172, which is down from a peak 190 employees in 2002, but about the same as her earliest data, which was 174 employees in 1983.

Of those, 153 current employees are on the DB plan and are contributing to the pool compared to 172 total retirees.

Breaking those down further, 57 of those employees are active police and fire employees, compared to 65 police and fire retirees. And 96 are full-time active MERS employees, compared to 107 retirees. Eighteen employees, all in upper and middle management divisions, are currently paying into Defined Contribution plans instead of the pool.

Mary Wardell can be reached at 906-228-2500, ext. 248. Her email address is mwardell@miningjournal.net.

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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:

• Negaunee and Ishpeming,

• Public schools, and

• Legislative solutions.

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City officials discuss individual versus pooled pension systems