Lansing's UAAL may require selling the BWL
June 25, 2015
UAAL is "unfunded actuarial accrued liability" and it is the reason Mayor Bernero wants to consider selling the Board of Water and Light. Actuarial accrued liability is the amount that needs to be set aside to fund pensions of retired City employees, as calculated by the City's actuary. The UAAL is the amount by which that fund is short.
The City has two completely separate retirement systems, one for police and firefighters called the Police and Fire Retirement System (P&F) and one for other employees called the Employees' Retirement System (ERS). Each has its own board of directors. They use the same actuary, but separate "valuations" are prepared each year. The figures in the chart below are from those annual actuarial valuations. It shows how funding has deteriorated from a $8,977,000 surplus in 2001 to a $247,182,496 deficit as of December 31, 2013.
The 2009-2013 actuarial valuation reports are on the City's website. The UAAL figures for the last 12 years are on page 14 of the 2013 P&F and ERS reports. Those pages also say that the P&F system is 72.2% funded and ERS is 55.1% funded.
The $247,182,496 UAAL is just part of the "structural deficit" we have been hearing about, estimated at $600 million. The rest is the amount that needs to be set aside for health insurance for retirees and their families. Health insurance and any other retiree benefits other than pensions is referred to as OPEB, "other post-employment benefits." According to the March 2013 Report of the Lansing Financial Health Team, OPEB are underfunded by $431 million (page 42). The report says OPEB is based on the most recent actuarial valuations, but doesn't explain how the calculation is done. I can find nothing about OPEB in the valuations except that each system has a "Healthcare Reserve Fund." The 2013 valuations say (on page 4) that as of December 31, 2013 the P&F fund has $23,197,213 and the ERS fund has $20,004,547.
How does the City deal with a $247 million shortfall in pension obligations? It amortizes the amount over 30 years, like a home mortgage. For example, page 7 of the 2013 P&F valuation says the Net City Normal Cost - the amount that would be due even if the fund was 100% funded - is $4,337,355 and the Amortization of Unfunded Actuarial Accrued Liability is $6,390,889 for a total of $10,728,244. Page 6 of the November 2014 P&F board meeting minutes says the City paid the fund $10,700,000 on November 3 with the remainder to be paid on completion of the actuarial valuation.
How did we get into this mess? It is a common outcome for defined benefit pension programs for government employees. Lansing's pension systems go back many years, and they've been "tweaked" many times, almost always enhancing benefits. Just about all these changes are negotiated behind closed doors in bargaining sessions between the City and the unions. Candidates for city offices like to claim the endorsement of unions, and unions expect their support in return. I just got a flyer for a city council candidate that lists endorsements from the Fraternal Order of Police Lodge 141, the International Association of Fire Fighters Local 421 and IBEW 352 (the International Brotherhood of Electrical Workers is the union for Board of Water and Light employees).
It is the mayor, however, who has overall responsibility for labor relations (City Charter, Article 6) and he appoints the chief labor negotiator. As I lamented in this November 9, 2012 story, the city council is obligated by state labor law to rubber-stamp collectively-bargained changes to pension systems. Since Virg Bernero became mayor in 2006, unfunded pension fund liability has ballooned from $72,015,000 to $247,182,496.
It can't all be blamed union greed, either. In 1992, a "voluntary reduction in force" was negotiated in which 144 city employees took bonuses to retire early, including the mayor, the city clerk, the finance director and the budget director (story here). This was 7 years after another early retirement scheme involving some of the same city officials was stopped only when a group of city employees mounted a petition drive against it (story here).
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