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Original article URL: http://bridgemi.com/2012/05/pension-costs-burn-through-city-budgets/

Public sector

Pension costs burn through city budgets

Lansing’s taxpayers were doused with some difficult news last week: The city’s pension fund for police and fire retirees could use a nearly $2 million boost from the city’s general fund. And the city’s already fighting a budget deficit.

Big-city fire departments across Michigan continue to wrestle with the legacy costs of public safety pensions, benefits earned during times of relative prosperity.

Eric Lupher of the Citizens Research Council of Michigan notes that legacy pension obligations are a key problem in cities such as Pontiac, Benton Harbor and Flintthat have been placed in the hands of emergency managers under Michigan’s controversial Public Act 4.

And a study by the Center for Community Progress, a nonprofit community development advocacy group, found that 40 percent of Flint’s 2010 budget went to benefits and pension costs. Saginaw spent nearly 30 percent of its budget for pension obligations, spending that did not cover an accumulated $215 million in unfunded retiree health benefit obligations.

In Grand Rapids, a retired fire chief topped the city’s annual pensions in 2010 at $97,124. A fire lieutenant earned $71,672. The city’s fiscal director warned that annual employee pension obligations could reach $26 million by 2015.

Pension obligations accounted for 42 percent of the city’s payroll in 2010, six times greater than the 7 percent of payroll in 1980.

Union officials counter that the pensions were a trade-off for years of sacrifice in pay and benefits.

Given the risk and physical demands of firefighting, CRC’s Lupher said generous pensions are often “with good cause. But the question is whether they can be sustained? We are starting to see the answer to that.”

As firefighter contracts come up, Lupher believes many municipalities must move from defined benefit pensions to individual retirement accounts, if they are to avoid fiscal calamity.

“Legacy costs are a huge part of the problem,” he said.

Mark Docherty, president of the Michigan Professional Fire Fighters Union, says he is mindful of the fiscal picture facing many communities, but is opposed to shifts to IRAs

“We have dangerous jobs. We get hurt. In many cases, there is loss of life. We have a responsibility to take care of them,” he argued.

Docherty cited the case of a Sterling Heights police officer, killed in the line of duty at the age of 28. With an IRA, he might have had $8,000 saved, Docherty said. By contrast, his traditional pension benefits were enough to support his widow until she could find work, he explained.

Ted Roelofs worked for the Grand Rapids Press for 30 years, where he covered everything from politics to social services to military affairs. He has earned numerous awards, including for work in Albania during the 1999 Kosovo refugee crisis.

5 comments from Bridge readers.Add mine!

  1. Rich

    It is going to be very difficult to change the mindset that affects public safety pensions. They typically can retire early with full pensions, they typically require fewer years to obtain a full pension, and they retire with a larger percentage of their pay as a pension benefit. All these are very important factors in the annuity calculation, which is what a defined benefit pension is. Cities must have a very rational discussion with employees rather than just going in and saying “we are going to cut.”

    Regarding the statement about the person who died in the line of duty at age 28, life/disability insurance is designed to cover that sort of event. Here is where the State could step in and allow some sort of pooled buying to decrease the costs from what would be required by every city or town buying their own policy.

    Looking back on my career, which was not public safety, I would have fared better with a defined contribution pension than a defined benefit pension. I would also have fared better with a personal investment than being in the Social Security plan. But hindsight is always better than foresight, and it does dictate that personal savings must come off the top of income rather than being what is left over.

  2. Steve Harry

    Great series of articles. Thanks!

    I’ve been looking at salaries and pensions of Lansing public safety workers for several months. They can retire after only 25 years, which may not be unusual, but the pension multiplier is 3.2% compared to 1.5% for state employees. Pensions average over 91% of salaries. See http://www.steveharrypublicpolicy.com/CityEmployees/Pensions.htm.

  3. John Hargenrader

    The simple answer is to cut pension benefits. If public sector pensions are out of step with the pension funds, restructuing benefits is no different than what would happen with private pensions handed over to PBGC.

  4. William C. Plumpe

    I agree John. When the economy in Michigan was driven forward by the auto industry in the glory days of “Generous Motors” and all the overtime on the line you wanted at time and a half—everyone could come to the trough and slurp it up—the auto companies, the unions and the employees. But now the auto industry has scaled back significantly and will probably never return to the “glory days of yesteryear”. I think that current promises should be kept for existing employees unless they are way out of line. But for new employees and those who haven’t vested I’m afraid it’s a defined contribution plan plus health insurance with MAYBE a 1.5 X employee contributions rate by the municipality. I just think that’s economic reality. Enough said.

  5. Sean Murray

    The question is how did these pensions become underfunded. I have first hand knowledge of a micro situation. Perhaps it can be expanded to Macro.
    In the early 1990’s Grand Rapids won an arbitration ruling in a dispute with its police/fire unions. GR was permitted to pay nothing into the P/F pension fund as long as it was funded at >110%. The employees still had to pay in, but on a sliding scale based on how well it was funded. So, from 1994-2009, the city of GR paid a total of $1.45 million into its P/F pension fund. Meanwhile, the employees paid in approximately $26 million. When the market crashed in 2008, GR suddenly faced a problem. They were on the hook for big coin, as the fund plunged from 130% of fully funded to just under 90% of fully funded. The solution they proposed, which the P/F unions accepted in order to give the city breathing room, was a calming period. The city would pay based on a 5 year average funding level. This let them off of the hook for the whole amount and allowed the market to work its way back up.
    This coming fiscal year is the last where 2008 counts toward the 5 year average. In the latest contracts, P/F have increased their contributions significantly, while the city agreed to always pay at least 3% of payroll into the pension fund (virtually the only concession they made, I might add)
    The problem here is not greedy public safety employees. We always paid in and we always held up our end of the bargain and played by the rules the city laid out. The problem, as per usual, is at the management level. Just as GM went bankrupt not because of greedy unions but because of inept management that didn’t realized that the only thing that mattered was the product (Aztek? Ion? Cobalt? Really?), whatever pension issues GR has is due to choices made by Kurt Kimball and the city commission when things were going well to not fund the pension and instead spend the money on speed bumps and decorative lighting.

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