Gladstone among cities struggling with cost of retiree benefits
GLADSTONE – Gladstone is just one of the cities in Michigan struggling with the state’s $12.7 billion in unfunded municipal retirement benefits.
“(We’re looking for) any support we can find to show our legislators that they are the ones who can stop this,” said Gladstone City Manager Darla Falcon Wednesday.
Until 2007, municipalities were not required to measure the liability that was being caused by issuing retirement benefits. Now that the information is readily available – and being collected on – many counties, cities, townships, and villages are feeling the strain.
Benefits promised to retirees and earned during their years of service – known as “other post-employment benefits” – typically include health insurance for the retiree and their spouse. However, some municipalities also offer dental, life, or other insurances.
There are two major types of post-employment benefit plans offered by local governmental bodies: defined-contribution plans and defined-benefit plans. Under defined-contribution plans, employers agree to contribute a predetermined dollar amount to a trust account which is then used by the employee after they retire.
In a defined-benefit plan the employer promises a benefit after the employee retires.
Gladstone’s OPEB (other post-employment benefits) plans are offered through the Municipal Employees’ Retirement System of Michigan, a public nonprofit organization which was created by the Michigan Legislature in 1945. MERS offers both defined-contribution and defined-benefit plans.
In 1997, Gladstone closed off Teamster and supervisor groups to defined-benefit plans. The last employee group, the police officers group, was closed to defined-benefit plans in 2001. All new employees hired by the city are now on defined-contribution plans.
Some public employees – such as those that work in law enforcement, firefighting, and public works – may retire as early as age 55. To accommodate this, some cities have created benefit plans including coverage for pre-Medicare retirees. The situation can be further complicated if employees are retired for longer than they were in service.
“For our police officer group, at any age if they have 25 years of service they can retire,” said Falcon, who added there were no special benefits for pre-medicare retirees.
For Teamster employees, the city allows vested employees, those that have served for 10 or more years, the ability to retire at age 60. Teamster employees who have served for 25 years can start collecting full retirement benefits at age 55. Members of the supervisors group can retire after 25 years of service or age 55 with 20 years of service.
Gladstone has a total accrued liability of $11.4 million for OPEB plans. The city has $5.8 million in assets, making the liability 51.5 percent funded. While this may seem insufficient, according to a recent Michigan State University white paper, 53 percent of municipal units in Michigan are completely unfunded. Only 4 percent of units have funded more than 75 percent of their liability.
Despite being ahead of the pre-funding curve, Gladstone is still struggling, and MERS has taken action to reduce the amount of time the city has to pay off the debt.
“They just want to shrink our amortization plan to five years,” said Falcon.
Currently, the city pays $650,000 annually to pay off the debt – a $85,000 increase from last year. However, MERS projected payments suggest the city will be required to pay $800,000 annually by 2017. Preplanning budgets is further complicated because MERS re-evaluates costs annually and the city only has estimates for future years’ payments.
“We didn’t get into this situation in five years. Why should we have to get out of this in five years and be 100 percent funded? That just doesn’t make sense to me,” said Falcon.
To further complicate matters for cities, last October, Public Act 329 was passed, which limits which municipalities can issue bonds to pay off their debts. Under the law, only municipalities with AA or higher credit ratings may issue bonds to pay for their OPEB liability – barring Gladstone from issuing bonds.
“They’re just making it tougher and tougher. Between MERS reducing their amortization schedule and the new EVIP things – I just don’t know how municipalities are going to financially survive,” said Falcon.
The Upper Peninsula represents only 0.4 percent of unfunded OPEB, $51,136,726 of that liability is held by cities. The vast majority, more than 86 percent, of the unfunded liability is in the Southeast region of the lower peninsula. This includes Detroit, which represents 39.1 percent of unfunded OPEB liability alone.