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!
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.