City council OKs plan to correct employee pension deficit
ISHPEMING — The Ishpeming City Council voted unanimously to approve corrective action for its pension liability during a special meeting Wednesday.
City staff was required by Public Act 202 — also known as the Protecting Local Government Retirements and Benefits Act — to submit a corrective action plan to the Michigan Department of Treasury prior to March 29 due to the underfunded status of its Municipal Employees’ Retirement System pension.
Under the act, a pension plan is considered to be in an “underfunded status” when it is less than 60 percent funded and if the municipality or organization’s planned contribution is greater than 10 percent of its total revenue.
According to corrective action plan documents, Ishpeming’s $16.3 million pension liability is 51.9 percent funded at about $8.5 million. The city’s annual defined contribution of roughly $565,800 represents 13.3 percent of its $5.6 million yearly budget.
There are 72 participants in the city’s MERS defined benefit pension plan, which provides a fixed, pre-established benefit for employees at retirement. Of those participants, 27 are active employees, four are vested former employees and 41 are retirees and beneficiaries.
“The city of Ishpeming has always funded, and continues to fund, its annual required contribution, which pays the expected cost of all promised benefits for the annual service cost of active employee benefits plus any unfunded actuarial accrued liabilities,” the plan states.
Measures have been taken by city officials to mitigate the unfunded liability in the MERS plan, they include: an additional roughly $26,500 MERS contribution in 2019; removing the city manager position from the defined benefit plan; a proposed letter of agreement sent to the three unions representing city employees closing the MERS defined benefit to new hires; and letters sent to union officials dated Feb. 18 requesting to begin contract negotiations early — existing union contracts expire until Dec. 31.
Finance Director Jim Lampman, who wrote the plan, said the logistics of implementing the corrective action will be new for all parties involved.
“This is new territory. This is, on both sides, kind of figuring this out as we go, “Lampman said. “We are required to have our corrective action plan submitted by March 29. According to the statute, treasury, and actually it’s the Municipal Stabilization Board, has 15 days to review our plan and tell us whether they accept it or deny it.”
Borrowing funds in the form of a pension obligation bond could also rein in the rising cost of the city’s pension obligations, according to the corrective action plan.
PA 575, which became effective on Dec. 28, allows a city to enact an ordinance or resolution, “without the vote of it(‘s) electors,” to issue a bond to pay off 95 percent of its pension liability.
Lampman said bonds are a viable option because it could allow the city to pay a more predictable amount each year.
“The benefit of the bonds would be having an even payment year to year rather than our MERS liability,” Lampman said. “Our MERS payment going up every year, so the benefit of doing a pension obligation bond would be to provide a steady payment.”
The city would have to close the MERS defined benefit plan and change it to a defined contribution plan for new city employees, which allows employees and employers to contribute and invest funds over time to save for retirement rather than a guaranteed payout, in order to meet the criteria for the pension bond option.
The city has met with the union on several occasions in an effort to reduce the MERS unfunded liability, the corrective action plan states, and no agreement could be reached.
Councilman Stu Skauge questioned several aspects of the corrective action plan.
“I don’t feel comfortable with the bonds, I can tell you that,” Skauge said.
Councilman Mike Tonkin agreed.
“Do we want to throw a bond out there, especially one that doesn’t go in front of the people? That just makes the hair on the back of my neck stand on end,” Tonkin said.
Mayor Karl Lehmann said he likes the plan in that it gives the city options.
“We are not committing to every piece of information that’s in there,” he said. “Most of it is contingent upon how we do with union negotiations, with health insurance plans, retirement plans and so on and so-forth. At this point I think we need to keep the horse ahead of the cart, and our first objective is to comply with the date of the 29th to have our plan submitted.”