Expensive Plans

Ann Arbor Employees' Retirement System

The Ann Arbor Employees' Retirement System covers substantially all full time City employees.  As of June 30, 2009, the plan's assets were valued at $426.3 million, with an unfunded liability of $28.9 million.  Considering  the economy and the size of the plan, Ann Arbor's level of funding is not bad compared to many other cities' plans across the state.  However, staying at this level of funding has been very expensive, requiring $6.9 million or 13.5% of payroll in 2009.  That averages to over $150 per Ann Arbor household, and the cost of the retirement system is continually rising.  It only required $1.0 million in 2005, and it is expected to consume almost $22 million in 2019 in order to meet its required obligations!  Certainly the plan is in need of great change in order to keep city and taxpayer costs under control.

When the Ann Arbor Employees' retirement system is evaluated more closely, it's easy to see how it has become so costly.  General employees receive a 2.5% multiplier and can retire at age 60 with five years of service or age 50 with 25 years.  In order to support a retiree with five years of service, contributions of at least 18-26% need to be made during employment depending on age.  Police and Fire retirees receive a 2.75% accrual rate, and contributions of as much as 30% are needed to fund benefits for a retiree with minimum retirement eligibility.  Retirees make a flat 5% contribution each year, leaving the City to pick up the rest of the tab.

This problem is further exacerbated by pension spiking.  A recent Ann Arbor retiree had a listed salary of around $82,000, yet earned over $126,000 in her final year of employment.  This will end up costing the City much more than the $44,000 extra she earned her final year, as it greatly increased her yearly pension.

One way Ann Arbor is keeping up with these increasing costs is by cutting jobs.  Since 2001 the  City has gone from over 1,000 to around 800 full-time employees, while annual covered payroll has increased over the same period.  In other words, Ann Arbor citizens are paying more for less, due to the rapid growth of retirement benefit costs.

If Ann Arbor adapted their retirement system be more like our model plan, the City could get its pension costs under control.  The millions of dollars the government would save each year could be spent on replacing its retirees with workers and providing even more quality services to the residents of the city. Today the city is forced to seek to early retire employees to reduce payroll and to not replace many of them!

Ann Arbor ERS

YearValue of Assets (millions)
Unfunded Liability
Funded Ratio
Required Contribution
 2005 $399 ($14.3) 103.7% $1.04
 2006 $398 $9.0 97.8% $2.87
 2007 $414 ($0.2) 100.1% $5.04
 2008 $429 $1.7 99.6% $7.52
 2009 $426 $28.9 93.6% $6.89

Lansing Employees' Retirement System

The Lansing Employees' Retirement System (LERS) covers all City of Lansing employees other than elected officials and police and fire employees.   Most recently, the plans assets were valued at $209 million with and unfunded liability of $46 million.  The plan is only 82% funded and has been steadily decreasing since the end of 2003.  Even with a continually decreasing funding status, the City of Lansing has contributed more each year since that time.  In 2003 the City contributed $3.499 million, while in 2008 the city contributed $6.142 million.  This averages to $124 per Lansing household just to pay for City employees' retirement benefits.

Retirement eligibility in LERS varies according to position, although most members can retire at age 50 with 25 years of service or age 58 with 8 years of service.  Accrual rates also vary considerably, from 1.6% to 2.8% due to individual labor agreements among different groups of employees.  Final average compensation is a member's highest 2 consecutive years during their last 10 years of employment.  Much like the Ann Arbor plan, allowing such early retirements in combination with generous accrual rates quickly becomes very expensive.  Also, using only two years to calculate final average compensation makes pension spiking very powerful.

When contributions to the plan are investigated, it is easy to see that they are far from equal.  In fiscal year 2008 active members paid 4.2% of their wages to the plan while the city paid 18.9%.  The Lansing government is paying over four times as much as their employees and nearly one-fifth of payroll in order to fund pensions alone.  This is hardly a shared burden between the employer and employees.  Additionally, if the plans' liability is broken down, $62.9 million is for the 627 active employees while $170.7 million is for the 779 retirees currently receiving benefits.  This means just over half of the plan members account for two-thirds of the cost, and that half is not even contributing to the plan!  Taxpayers and current employees are paying for retiree benefits that were never funded in the first place.

If a plan like our model was adopted, the City would contribute much less while most employees would have to contribute only a small percentage more to keep the plan funded.  Additionally, the burden would be better shared between employers, employees, and retirees.

Information on the Lansing Police and Fire retirement system, which is in a very similar situation to LERS, can be found here.

Lansing ERS

 Year Value of Assets (millions)
 Unfunded Liability (millions)
 Funded Ratio
 Required Contribution (millions)
 $199 $21.8 90.2% $3.57
 2004 $206 25.2 89.1% $3.47
 2005 $207 37.4 84.8% $4.68
 2006 $209 42.7 83.0% $4.90
 2007 $209 45.8 82.0% $5.23

Philip Hiltner,
Jun 23, 2010, 2:11 PM