Steps Taken to Address Legacy Costs Over the Years
As a part of the community engagement process earlier this year regarding the City of East Lansing’s ongoing financial challenges, a number of community members expressed an interest in learning more about the steps the City has taken over the years to address pension and healthcare obligations.
Steps to Address Pension Obligations
The City’s efforts to address rising pension costs date back to 1999, when new/current City employees, with the exception of police and fire personnel, were moved from defined benefit plans to defined contribution plans. Following this, in 2010, new and current non-public safety employees had the option of moving to a Hybrid Plan (a combination defined contribution and defined benefit plan), which was identified by the State of Michigan as a cost-controlling plan under the Economic Vitality Incentive Program (EVIP). The following year, in 2011, the defined benefit plan for all police and fire new hires was significantly reduced, including a decrease in the plan multiplier from 2.75X to 2.25X, changes to overtime pay and vacation/leave time for final average compensation (FAC) and raising the retirement age from 50 to 55. Defined benefit plans for public safety employees, while significantly reduced over the years, have been maintained for a number of reasons:
Due to the physical nature of public safety careers, police officers and firefighter/paramedics need the option of retiring at age 55 or younger.
Police officers’ and firefighter/paramedics’ earnings from their jobs are not covered under Social Security.
Defined Benefit plans for public safety remain in place in the majority of other Michigan communities. Offering defined benefit plans helps the City to remain competitive in attracting and retaining high-caliber public safety professionals who provide important life safety services to the community.
In addition to the reforms listed above, it's important to note that several employee groups have had employee pension contributions in place since the 1990's and many of those contributions have increased over the years. The City also has made $4 million in supplemental pension payments over the last three years (in addition to annual required contributions) in an effort to begin closing the gap on rising pension costs. These costs have continued to increase over the years due in large part to the recession and below-average market returns. It should be noted that the City’s pension plan was 80% funded in 2003 and is 50% funded today.
It’s also important to note that MERS (the Municipal Employees’ Retirement System) has shortened the amortization period for the City of East Lansing, requiring that the pension plan be 100% funded in approximately 22 years. In other words, the City of East Lansing does not have a choice in whether it makes its pension payments and there is a deadline, at which point the plan must be fully funded.
Steps to Address Healthcare Obligations
The City’s efforts to address healthcare costs date back to 1993, when retiree healthcare was eliminated for the majority of new hires. In its place, a healthcare savings account was implemented. Additionally, a Healthcare Task Force was created in 2000 and remains active today. This group, consisting of both union and non-union employees, works together to keep rising healthcare costs at a minimum (under the State’s hard caps) by engaging in a competitive bidding process with healthcare providers each year.