For three hours on Monday, Hastings City Council talked about pensions and other post-employment benefits.
And they could have gone on for much longer.
The city owes about $10 million for pensions and another $10 million for unfunded liabilities for other post-employment benefits – and they have to figure out how to pay for it.
The bigger of the issues is pensions, where the city is just about 44-percent funded – down from 68 percent in 2006.
Interim City Manager Gregg Guetschow said the city is not much different from other communities, but it is still one of the lowest-funded in the state.
“[We thought] it was all kind of going to work itself out,” Guetschow said during the meeting. “What we’ve seen here over the last 14 to 15 years is that’s not the case. … The main message is, we need to figure out a way to put more money into the system.”
In 2021, the city is expected to pay $847,000 in pension costs, but, in 20 years, that number will rise to at least $1.5 million. On the other post-employment benefits side, the cost will increase from $400,000 to $600,000.
“'The challenge that we have is that’s a huge increase [with pensions],” Guetschow said in an interview with The Hastings Banner. “And we need to be prudent about where that additional money is going to come from in the budget. We have other things that we want to spend money on. We don’t want to take and spend every last available dime we have only on pension.”
But, first, the council had to learn about the topic in more depth. That’s why a special meeting was scheduled for Monday, dedicated strictly to pensions and other post-employment benefits, which is often referred to as OPEB.
The city brought in a representative from the Municipal Employees' Retirement System of Michigan, Regional Manager Mike Overley, to explain the topic and the city’s dip in funding.
“The primary purpose of that meeting was to answer the council’s question as to how did we get into this situation,” Guetschow said. “We haven’t set aside enough money to pay for these pension obligations that we have. Why have we racked up the deficit in that fund that we have?”
Overley started his presentation by breaking down the details of Hastings’ pension plan:
For 50 years, since 1957, the city offered a defined benefit plan. The plan rewarded longevity by calculating the final average compensation, service credit and a benefit multiplier of 2 or 2.5 percent in determining former employees’ pensions.
About 92 people are still on that plan and make up the bulk of the unfunded accrued liability, he said.
In 2007, the city moved to a hybrid plan – a part defined benefit and part defined contribution plan, similar to a 401(k) – which Overley called the “best of both worlds.” About 69 people are on the hybrid plan and it is 90-percent funded.
The city has 161 who are receiving -- or set to receive -- pension benefits, including 56 active employees, 23 vested former employees and 82 retirees and beneficiaries.
The city cut the OPEB program in the mid-2000s, but there are still employees left on the plan.
City officials must submit a corrective action plan by the end of September, although they have requested a 45-day extension because the city will have a new city manager, Sarah Moyer-Cale, starting Sept. 13.
The plan they submit will detail how they intend to make up the liability they have accrued.
“There’s not an immediate need to pay this off right now, but there is absolutely a need to pay this off over time,” Overley said.
The lack of urgency did not make sense to council member Brenda McNabb-Stange. If a city like Hastings continues to float below the 60-percent funding threshold, the state could come in and take over its finances.
“You seem to be sugarcoating a bad problem at [44 percent] by saying you don't need that money right now,” McNabb-Stange said. “But you just said previously that we should be fully funded. So which is?”
“It’s got to move to 100,” Overley responded. “... Again, I wanted to be transparent with you. I mean, I’ve been in front of council in the past, even working with past administrations. The funding level for the city has dropped. I’m not trying to dodge that, by any means.”
Over the years, the city has met all of the correct payments, even making additional contributions at times, Guetschow said. But, to the frustration of some council members, the city continues to find itself in a ditch of unfunded liability.
“The reasons for our dropping – why?” McNabb-Stange asked. “Why hasn't the amount that you tell us should be contributed every year at least kept us steady?”
There are many factors, Overley said, including the simple fact that people are living longer. But the main reason has to do with return on investments.
The city, Guetschow explained, will pay nearly $800,000 in pension funds this year. That money is then invested by MERS before going back to the city. That return on investment is factored into the city’s final cost. But when MERS calculates the city’s final cost, the return on investment is estimated.
Over the last few years, the returns have fallen short of what was expected. As a result, the city started falling behind and didn’t make up for it.
“When we missed the target on investments, that means we should put in more of the city's money, even though they told us, 'Here’s what you owe,' ” Guetschow said.
The miscalculation investment, Overley said, occurred for a number of reasons, most notably the 2008 recession.
“This last 10-year period, it’s like a perfect storm for pension plans,” he said. “There has never been a time, in MERS' almost 80 years of existence, that there's been a run like that, where the return was below that level.”
Guetschow noted that it was not the city’s fault, but they should have compensated for the miscalculation by contributing additional money.
“What's happened is, over that 14-year period of time, until this past year, [MERS] never made their target,” Guetschow said. “They never met their target. So, every year, we've been below in terms of the amount of money that's coming into the system.
“...We were already in the hole. We’ve gotten further and further in the hole. What we should have been doing in all those years, when we were making additional payments, we should have made more additional payments.”
Now, Guetschow said, they will make those additional payments.
Following Overley’s presentation, Guetschow projected a flow chart that detailed how the city could pay off its pension and OPEB debt in the future.
The city will need millions of dollars and Guetschow advised the council to think about using a combination of methods to make up for the money.
The city could raise employee contributions, for example, but that would only amount to “a drop in the bucket.”
“I’ve laid out a number of different options that are available to you,” he said. “Where you're likely to end up, if you approach this reasonably, is to pick a mixture of these. No one option is likely to be the whole solution.”
On the pension, Guetschow suggested the possibility of cost-cutting through increased employee contributions or benefit restructuring. He also noted that the city could levy a public safety assessment, go to the public for a dedicated millage or, most notably, cut costs on OPEB.
The city could restructure the OPEB contracts currently in place and, for example, offer only part-fee reimbursements for people over the age of 65. It also could offer benefit buyouts, among other options. That would not only help solve the OPEB problem, but make up for some of the unfunded liability on the pension side.
“Some of these, I think you're going to view as being very harsh, very hard on folks,” Guetschow told the council. “And this is something you have to evaluate – how far do you want to go with some of these?”
Council members did not make any decisions on Monday night. Instead, they participated in what was more of a learning session.
But decisions will be coming soon.
And, regardless of what the council members choose to do, they will have to make up the ground they've lost, Guetschow said.
“We’re going to pay our debts,” he assured council members. “We’re going to pay the amount we owe for the pension.
“We don't have any choice but to do that.”