By Tony Wittkowski | Local Government Reporter | The Times Herald
Sharon Evenson is in a unique position when it comes to her retiree benefits.
Evenson retired as a full-time county employee in 2000 while continuing part time as a secretary for St. Clair County Community Mental Health. She also receives a small pension from Port Huron for working as a secretary in the city clerk, treasurer and planning departments.
The Port Huron resident is grateful to have worked when she did, and doesn’t want her pension to be touched.
“In my years working I did not have the ability to put money into a 401(k),” she said. “The loss of my county pension would be devastating because I live alone. I don’t want something given to me, but at the same time I want what I have earned.”
As the need to trim costs for unfunded liabilities in St. Clair County and its cities continues, employers in both the public and private sectors are dealing with a hard truth.
After switching to a 401(k)-type plan in 2008, Port Huron is still feeling the burden from retirees through its former pension plan.
Port Huron is liable for more than $100 million in unfunded liabilities, with annual payments exceeding $7 million.
The Port Huron pension is underfunded by $54.4 million, while the city’s healthcare is underfunded by $47 million.
“It’s called an unfunded liability because there is a deficit,” said Richard Dreyfuss, an actuary and business consultant for the Mackinac Center for Public Policy — a conservative nonprofit that conducts research on public policy issues. “It’s an amount owed from the pension system or the retiree health care system. Those are the two most common forms of unfunded liabilities.”
According to Dreyfuss there are an estimated $4.7 trillion in unfunded pension plan liabilities across the country. These costs are crowding out government services and causing public employees to wonder about their government’s ability to meet financial obligations.
Dreyfuss said there are three main reasons why municipalities and companies that still offer pension plans incur unfunded liabilities.
• Investment rates on assets have not met the expected rate of return within the pension plan.
• Actuary contributions are not being made on a consistent basis.
• Benefits are added that were not planned when the pension first began.
“These pension and retiree health care costs become due and if you don’t have the assets on hand, it can lead to bankruptcy,” Dreyfuss said.
St. Clair County Administrator Bill Kauffman said the county has done much better in comparison to six years ago when the money it had invested was caught up in the crash of Wall Street.
“Our actuary tells us we are in better shape than most municipalities in the state,” Kauffman said. “Anyone who had money invested in Wall Street in 2008, probably lost about a quarter of it in 2009.”
Based on its 2013 valuation, the county’s pension plan is 87.1 percent funded with an unfunded liability of $19.4 million.
The county began closing its defined benefit pension plan and retiree health care plan to new hires in 2009.
New county employees are eligible to participate in a 457 plan — a government version of the 401(k) — where the county matches up to 8 percent of the employee’s contributions.
Community Mental Health and Road Commission employees are also eligible to participate in the county’s plan. However, the two entities are responsible for funding their portion of each plan.
Kauffman said the amount of unfunded liabilities will continue to be a burden for at least the next 30 years as there are still a lot of active employees who are eligible with the original pension plan.
Out of the county’s current full-time employees, 437 are eligible for the defined benefit pension plan that was closed six years ago. Evenson is one of the 442 county retirees who are covered by the previous pension plan.
401(k) versus pension plans
The state of Michigan began shifting new employees off of its pension plan in 1997 under former Gov. John Engler. The move has saved up to $4 billion.
There are still pension systems for teachers and many local municipal workers. The unfunded liability just for teachers is $24.3 billion.
Dreyfuss said using a 401(k) has become the primary retirement plan for incoming employees because it eliminates future liabilities. That’s why more than 70 percent of businesses use this model, which costs an employer 4 to 7 percent of payroll to operate, Dreyfuss said.
“401(k)’s cannot have unfunded liabilities,” he said. “You have to fund your obligation as they are earned. If you agree to match it dollar-for-dollar, then you have to match that in real time.”
A pension, however, is like offering a long-term promise and hoping for the assets to grow, he said.
“Funding a pension system has a low rate of return because there is nothing tangible to point to,” Dreyfuss said. “Very often you have to cut a program or raise taxes in order to meet that commitment.”
Dan Casey, chief executive officer for the St. Clair County Economic Development Authority, said businesses can cancel their pension plans whenever they want to and are not obligated to maintain benefits like the government is.
“That’s why it’s less of a problem with the private sector,” Casey said. “It is protected by the state constitution so the government’s hands are tied.”
David Ladd, spokesperson for IAC — an automotive parts manufacturer in Port Huron and St. Clair — said the business offers a 401(k) because it is more convenient.
“It’s substituted what were traditional pension plans of yesterday for the private sector,” he said. “Huge legacy debts have driven some Fortune 500 companies into bankruptcy. We don’t what that.”
Port Huron City Manager James Freed said the amount of unfunded liabilities has gradually increased in the last decade despite switching to a 401(k) format.
Freed said it is one of the reason’s Port Huron is trying to cut $1 million in its next budget.
Port Huron’s proposed budget would also provide an additional $500,000 down payment from its fringe benefits fund, on top of what it already pays toward unfunded liabilities. The additional payment would increase the city’s percentage funded, which currently sits at 62 percent.
“(Our pension) is outpacing our growth revenue because our taxable value has dropped,” Freed said. “For every dollar I pay an employee, I have to put 70 cents toward legacy costs.”
Port Huron, like the county, has active employees who have yet to retire who fall under the previous pension plan. Port Huron’s pension troubles can also be traced to its decrease in city employees from 421 in 2002 to 239 in 2014.
With fewer employees to help cover retiree costs, the city becomes more underfunded.
“Our employees have been paying a tremendous amount for health care and pension costs,” Freed said. “Their wages have been frozen. It’s not the employees we have today that are the problem.”
Dreyfuss said the pension model forces cities to become reliant on new hires to pay for old debts.
“Some retirees may have been underfunded while they were working,” Dreyfuss said. “When they pass away, they are no longer collecting any more benefits — unless their spouse does — and the cycle can end.”
A municipal breakdown
Municipalities meet with their actuaries to determine how much they should be distributing toward unfunded liabilities based on the current market value.
Dreyfuss said if a municipality reaches a point where it is unable to make payments, they are required to change the benefits or change the way the program is funded.
Anthony Minghine, associate executive director for the Michigan Municipal League, said local governments statewide have had to make changes to their pension plans because of the dramatic decline in property values and federal funding.
He said business owners can generate revenue by selling more or increasing prices. The government does not have the same ability.
Minghine said the challenge for local government is that change can be very slow, so any existing problem with legacy costs will be around for a while.
“Change is hard for local government because the only management tool they have is to cut services. Every time you cut services, you make the community a somewhat less desirable place to live,” Minghine said. “Residents move away, which has a negative effect on property values and decreases funding. You go into this death spiral.”
Kimball Township, Port Huron Township and Yale never offered retiree health-care or pension plans.
Port Huron Township Treasurer Nancy Collins said the township uses a defined contribution plan because the township does not have many retirees.
“When you have more retirees than those who are working, a pension can get pretty big,” Collins said. “We did not want that huge debt hanging over our heads.”
Marine City and Marysville closed their pension plans in 2011 and 2013, respectively, to incoming employees and now offer a 457 plan.
Fort Gratiot and St. Clair still provide pension plans to its employees but have made changes to their plans to accommodate growing expenses.
St. Clair has 74 total participants in its pension plan — 26 are still active, 40 are retired and the other eight are vested former members.
Superintendent Mike Booth said the city has considered making the switch to a 401(k) plan and will continue to look at ways of addressing its pension obligation.
“We have an obligation and have to see where we can make changes to the plan itself to bring down the liability,” Booth said. “We’ve made some changes — the new hires brought in still receive a pension, but it is a lesser plan.”
Fort Gratiot Clerk Robert Crawford said the township pays up to 9 percent into its employees’ pension plan.
The township has made an effort to decrease its amount of unfunded liabilities through reductions in healthcare costs to current retirees.
“At one point it was a 40/60 split for health care costs between the employee and the township,” Crawford said. “Now it is just a $250 reimbursement each month for employees who purchase a Medicare supplement policy for themselves and their spouse.”
This benefit is offered only to those hired prior to 2012. Crawford said the switch lowered Fort Gratiot’s other post-employment benefits obligation from $3.1 million a year to about $634,000.
Port Huron resident Betty Kline receives retirement benefits from the county because her husband, Frank, worked as a maintenance worker for a county children shelter.
One month after Frank retired, he passed away. However, 20 years later his pension and other retiree benefits still go to Kline.
At 82 years old, Kline said she would not be able to keep her home if she had to pay out-of-pocket for her health insurance.
“As far as prescriptions, I am thankful for what I’m getting as a retiree spouse,” she said. “I’m on a fixed income with my pension and social security. If I didn’t have it, I don’t know what I would do. I wouldn’t be able to pay my bills.”
Evenson said she too wishes her health-care coverage was better, but is still appreciative of the money she receives.
“I know there are more out-of-pocket expenses now,” she said. “I just had surgery and paid almost $1,000. While I wish there was a cost of living adjustment in the pension, I have to be grateful.”
(Author’s Note: This article was originally published on May 9, 2015)