There is growing concern in the community about the city’s severely underfunded pension plan.  The city manager raised the alarm in 2017 and again in 2021.  City council made a commitment in early 2021 to act on the problem during 2021/2022.  2021 is about over with no sign of progress.  That leaves 2022 as the year for action.  Below are some of the issues that trouble the community.  Please make this matter a highest priority for city council until it is fixed.

This is a very big and important issue to city staff and the community.  Please keep the public informed and involved.  The town hall meeting format is a meaningful way to engage the public.  It works better when everybody is involved from the outset.  The community wants to know and wants to help.  Please find a way to accomplish that.

Fast Facts

The city has a defined benefit pension plan that covers three employee groups.

1. Non-union employees
2. DPW union employees
3. Public safety union employees

This table shows employee and city contribution rates since 2017.  For example, in 2017 both non-union staff and the city contributed 13.31%; a 50/50 split.  By 2021 those rates were 17.00% and 27.18%, respectively.  Similarly, in 2017 both public safety staff and the city contributed 16.85%; again shared 50/50.  However, by 2021 those rates were 17.00% and 34.17%, respectively; no longer a 50/50 split.  Contribution rates for 2022 are relatively steady for non-union and DPW (albeit not a 50/50 split), but the city’s rate continues to significantly increase for its portion of the public safety contribution.

Non-Union Staff				DPW Staff				Public Safety Staff
Year	EE Rate	ER Rate		Year	EE Rate	ER Rate		Year	EE Rate	ER Rate
2017	13.31%	13.31%		2017	15.11%	15.11%		2017	16.85%	16.85%
2018	14.70%	14.70%		2018	14.92%	14.92%		2018	17.00%	20.41%
2019	15.35%	15.35%		2019	16.48%	16.48%		2019	17.00%	23.45%
2020	15.25%	25.35%		2020	14.77%	19.77%		2020	17.00%	27.54%
2021	17.00%	27.18%		2021	17.00%	21.85%		2021	17.00%	34.17%
2022	17.00%	26.23%		2022	17.00%	21.50%		2022	17.00%	40.41%

There is an often-mentioned claim by city leaders that staff and the city share 50/50 in the pension costs.  That is a half-truth.  Up to 17% each, yes, they share.  However, beyond 17% each, the city picks up 100% of the extra cost.  The table illustrates that half-truth.  Before 2018, the 50/50 claim was true.  Since 2017, the 50/50 claim is false.  The claims and conversation must be careful and clear.

The union contracts for both DPW and Public Safety call for staff and the city to share 50/50 in the contributions up to 34% (17% by each).  Any funding requirements above 34% (17% cap for union staff) must be paid 100% by the city.  While non-union staff do not have a contract, the table suggests the 17% cap rule is used for them, as well.

How does the 17% cap rule play out?  Take 2021, for example.  The table shows DPW staff paid their 17.00%, however, funding made the city pay 21.85% instead of the17%, 50/50 split.  The table shows similar mismatched funding in 2021 for non-union and public safety staff.  In each case the city paid its 50% up to 17% each, plus the extra over and above to satisfy funding requirements for the year.  Each plan year since 2017 shows a growing extra payment by the city.  Planned funding for 2022 shows public safety as the most lopsided mismatch to date.  In 2022 public safety staff will contribute their 17% while the city must pay 40.41%.  That means for every $1.00 of wage paid, the city must also pay an extra $0.40 into the pension plan.

The plan has been underfunded since 2008 when the global economies and stock markets crashed.  Despite the increasing payments shown in the table, the shortfalls keep getting worse.

• The 2016 plan was valued at $79 million, with a $25 million shortfall.
• The 2020 plan was valued at $99 million, with a $35 million shortfall.
• In those 5 years the plan got 40% worse, $10 million deeper in the hole.
• Estimates say the plan can return to being fully funded by 2040; 20 years out.

How are Retirement Benefits Calculated?

Retirement benefits are calculated by a formula using pay rate, years of service, and a mathematical multiplier.  Non-union and DPW staff use a 1.75% multiplier.  Because public safety staff do not pay into the social security system or receive social security benefits upon retirement, their staff use a blended multiplier; 3% before July 2013, and 2.5% since then.

An example of a retirement benefit calculation might be as follows.  Say an employee’s average final year of pay was $60,000.  They retire after 25 years working for the city.  They work for the DPW, so their multiplier is 1.75%.  The calculation would be:

Multiplier x Years of Service x Average Final Compensation = Annual Pension Benefit

1.75% x 25 x $60,000 = $26,250 per year during retirement until death.

How Does the Pension Plan Hamstring City Operations?

As of 2021, the pension costs are eating up 12% of the city’s general fund revenues.  It devours almost 2.5 mills of an operating millage of less than 10 mills.  That’s about 25% of our city operating money just to feed the pension beast.  Such high costs put needed operations and capital projects in jeopardy. 

Is that what our city government has come to?  When a city’s normal operations and capital projects must take a back seat to its pension plan, something is wrong.  It seems a bit backwards.  Why is city council letting the tail wag the dog at city hall?  This isn’t how a city is supposed to run.  This pension funding problem has fester since 2008, over 10 years, far too long.  Healthy city governments don’t function this way.

In early 2021 city hall suggested solutions to city council that are unacceptable and off target.

1. Cut staff and services through attrition for public safety, public works, and administration.
2. Cut capital projects such as road resurfacing, infrastructure, and parks improvements.
3. Sell off city public land to private investors and use the cash to pay down pension shortfalls.
4. Add new millage to pay down pension shortfalls.
5. Add new milage earmarked to pay down the public safety piece of the pension shortfall.

None of these suggestions address the problem.  They tiptoe around it.  They all focus on the symptom, not the disease itself.  They are an easy way out; throw more money at it.  They don’t show leadership; they show capitulation.  Our city hall finance, human resource and management leadership must do better.  City hall owes city council and the community a better a more thoughtful solution to the problem, not just rubbing more salve on the wound like we’ve been doing for the last 10 years.  City hall needs to recommend solutions to city council that cure the disease.  That’s what leadership is.

Clouds Have Been Forming on the Horizon Since 2008

The economic collapse of 2008 was a bellwether for defined benefit pension plans, including our city’s plan.  The bottom fell out of the market, and in turn the bottom fell out of defined benefit plans.  Suddenly, overnight, the city’s healthy pension plan got sick.  It became seriously underfunded in the blink of an eye.  By 2017 the plan had a $25 million shortfall when city council considered whether to freeze the plan and transition to a defined contribution plan (known as 403(b) or 457(b) plans), something most cities had already done 10-20 years earlier.  Instead, the city plowed on with the old plan believing it would cost more to switch to a new 403(b) than slug through the underfunded old plan.  Actuarial projections say if the city can weather the storm to 2040 then the old plan should work its way back to fully funded status.  A dangerous, risky journey of over 20 years.

Fast forward to 2020 when a new blow hit the city’s already seriously underfunded pension plan.  MERS revised its actuarial assumptions and underfunding increased to $35 million.  So, in the last five years the unfunded pension liability hole the city is trying to dig out of has sunk deeper; from $25 million in 2016 to $35 million in 2020.  That’s 40% worse, $10 million deeper in the hole.  So much for weathering the 20-year storm to 2040.

How can city taxpayers feel comfortable with this approach given the worsening trend?  City council might be willing to ride this out for the next 20 years to 2040.  But the community has grave concerns.

Why is the city determined to perpetuate the risk and volatility of our defined benefit plan?  By design it has proven to be essentially a Ponzi Scheme; a death spiral that most cities saw and got off long ago.  But the city insists on riding it out for the next 20 years.  We see the risk.  We see the volatility.  We see the disruption to the budgeting process.  What is it about “STOP” that city government doesn’t understand?  The approach we’ve taken since 2008 is to put our head in the sand, our shoulder to the wheel, and hope for better days ahead.  Now more than 10 years in, that strategy hasn’t worked for us.  This is a big mess that keeps getting worse.

City hall is not looking at all the workout solutions; certainly not the right ones.  We can’t rewind the clock and switch to a 403(b) the way we should have over 10 years ago; but we certainly can stop repeating the same mistake year after year from here to 2040.  Our actuarial crystal ball tells us all will be fine by 2040.  Cities can’t govern with crystal balls.  We must govern with wisdom, discernment, and resolve on this pension mess.

Solutions to Consider

The current pension plan cannot be sustained.  It cannot continue.  It’s the only way to stop the hemorrhaging on the plan.

1. Freeze pension plan for all employee groups as soon as possible, but no later than June 30, 2022.  DPW and public safety contracts must be revised to allow this.

• Open a new 403(b) (and perhaps also a 457(b)) defined contribution plan for all city employees (with at least one year of service) no later than July 01, 2022.

• City contribute 3% of staff base pay to the 403(b); plus additional match of $0.25 for each $1.00 deferred by staff, up to 5% of staff pay.  Have 5-year vesting for city contributions.

• Public safety staff should receive the 3% base contribution, plus the social security employer tax rate (adjusted annually) because they do not pay into, nor receive social security benefits at retirement.  For example, the additional contribution for 2021 would be 6.2%, the social security employer tax rate for that year.

The city should sketch out a 403(b) framework such as the above example and ask MERS to calculate the annual cost to the city compared to our current pension plan costs.  A 403(b) plan like the above will be more stable, easier to budget, better for employees, and far more cost manageable for the city.

City Workers can be Protected in the Process

City staff can have a better retirement plan because a 403(b) lets them defer much more than in the current pension plan.  Staff nearing retirement can even defer more with the catch-up provisions.  And none of it breaks the city bank.  If done wisely the city can survive and workers can do better.

The following is some background what pension plans are and how the work.  They are important but can be complicated.  This might help.

What is a Defined Benefits Pension Plan

A retirement pension is basically an annuity that starts paying you monthly benefits once you retire and continues paying them until you die based on how much you or your employer (or both) paid into the plan during your working years.  How long you work, how much you make, and how much is paid into the plan during employment years, determines your monthly benefit at retirement.   In simple terms, it’s like you trying to calculate how much money you must set aside each month for the next 30 years to have saved enough for an annuity that starts paying you at a certain age (say at age 60 for example) at a monthly rate (say for example $3,000/month) until you die.  You expand that concept by adding many employees with many different ages and wage rates, and you start to see how hard it is to value defined benefit pension plans.

Defined benefit retirement plans are risky because they depend on younger workers contributing to the plan to help fund the retirement benefits of older workers once they retire.  Defined benefit retirement plans are also risky, and very uncertain, because the retirement payouts are generated in part by the pool money being invested in stocks and securities that fluctuate up and down with global markets.  In good markets with lots of new workers joining, the plans are great.  But in bad markets, or when hiring freezes, the plans are a serious problem.  They are volatile and unpredictable, at best.  For that reason, during the 1980’s, 1990’s, and early 2000’s most private and public sector organizations got out of defined benefit retirement plans and offered defined contribution plans for their employees, such as 401(k)’s and 403(b)’s.  It was a way to avoid risk and give employees a voice in planning their retirement.

How is Grand Haven’s Defined Benefit Retirement Plan Managed?

The city’s defined benefit pension plan is part of a pool run by the Municipal Employees’ Retirement System (MERS).  Other municipalities are in the pool with Grand Haven.  Each municipality has its own account in the pool so funds cannot get commingled.  The city and employees make contributions each month, and MERS does the rest.  MERS moves the contributions into investments, sets up retiree payouts, and provides financial information needed for actuarial valuations to see if the pension plan is over or under funded at any given time.  MERS does not calculate the valuation; it only provides the information needed to do it.  The valuation is done by a separate, independent third party (GRS Consulting).  It is just one of many such firms that do this type of pension valuation work.  GRS uses a sophisticated actuarial formula and a lot of information to calculate the city’s pension plan annual valuation.  The information used includes contributions, benefits paid, financial transactions, plan provisions, active members, terminated members, retirees, beneficiaries, etc.  The pension plan is valued annually, and the valuation report is given to the city.

If the plan is overfunded, it means the plan assets are more than needed if all plan participants were to suddenly retire.  If the plan is underfunded, it means the plan assets are less than needed if all plan participants were to suddenly retire.  In theory, it’s possible that everybody might suddenly retire, but not practical.  However, the underfunding and overfunding valuation is a marker to determine the health of the pension plan and what funding is required by employees and the city in the future.  Funding levels are adjusted each year based on the plan valuation.  The city includes those funding requirements in its annual budget.  It’s an up and down process that can whipsaw the city budget depending on the pension valuation each year.  Cities dislike the process because of the uncertainties.

Keep the Public Informed and Involved

This is a very big and important issue to city staff and the community.  Please keep the public informed and involved.  The town hall meeting format used with recent issues is a meaningful way to engage the public.  It works better when everybody is involved from the outset.  The community wants to know and wants to help.  Please find a way to accomplish that.

Thank you.  Brent Clark