Public pensions in Michigan

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Michigan public pensions
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Pension system
Number of pension systems 7
State pension systems: Legislative Retirement System
State Police Retirement System
State Employees' Retirement System
Public School Employees' Retirement System
Judges' Retirement System
Military Retirement Plan
Municipal Employees' Retirement System
System type: Defined benefit plan
Pension health (2011)[1]
Fund value: $59,934,100,000
Estimated liabilities: $91,005,000,000
Unfunded liabilities : $31,070,900,000
Percent funded: 65.86%
Percent funded change: Decrease.svg12.66%[2][3]
Percent funded rank: 30[4]
Pension fund members (2011)
Total members: 616,594[5]
Active members: 277,223[5]
Other members: 339,371[5]
Other state pension information
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Policypedia
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Pension policy
Public pensions
State public pension plans
Public pension health by state
Michigan public pensions are the state mechanism by which state and many local government employees in Michigan receive retirement benefits. Six state-sponsored systems administer benefits to eligible retirees. These include:[6]
  • Legislative Retirement System (LRS)
  • State Police Retirement System (SPRS)
  • State Employees' Retirement System (SERS)
  • Public School Employees' Retirement System (PSERS)
  • Judges' Retirement System (JRS)
  • Military Retirement Plan (MRP)

In addition, the Municipal Employees' Retirement System (MERS) provides retirement benefits to eligible municipal employees. MERS was created by the state legislature in 1945.[7]

According to the United States Census Bureau, the state has 132 locally-administered pension systems.[8]

A 2012 report from the Pew Center on the States noted that Michigan's pension system was funded at 72 percent at the close of fiscal year 2010, below the 80 precent funding level experts recommend. Consequently, Pew designated the state's pension system as cause for "serious concern."[9]

Taken together, the funding ratio for the state's pension systems decreased from 87.12 percent in fiscal year 2007 to 65.86 percent in fiscal year 2011, a decrease of 21.26 percentage points, or 24.4 percent. Likewise, unfunded liabilities increased from over $9.5 billion in fiscal year 2007 to more than $31 billion in fiscal year 2011.[6][10][11][12][13][14]

Features

Pension plans

According to state and system Comprehensive Annual Financial Reports for fiscal year 2012, Michigan had a total of at least 277,223 active members in its retirement plans as of September 2011. Our membership figures divide plan participants into two broad categories: active and other. Active members are current employees contributing to the pension system. Other members include retirees, beneficiaries and other inactive plan participants (usually terminated employees entitled to benefits but not yet receiving them).[15]

The following data was collected from the state's and systems' Comprehensive Annual Financial Reports. The "percentage funded" is calculated by taking the current value of the fund and dividing by the estimated amount of total liabilities. The assumed rate of return used to calculate fund value varied by system in fiscal year 2012 (see "Rate of return" below for more information). The Government Accountability Office (GAO) and Pew Research Centers cite a percent funded ratio of 80 percent as the minimum threshold for a healthy fund, though the American Academy of Actuaries suggests that all pension systems "have a strategy in place to attain or maintain a funded status of 100 percent or greater."[16][17] The column labeled "SBS figure" refers to a market liability calculation of the fund by the nonprofit organization State Budget Solutions. This analysis uses a rate of return of 3.225 percent, which is based upon the 15-year Treasury bond yield. The organization calls this a "risk-free" rate of return that would make it easier for states to achieve their pension funding requirements in the future. Since 2006, all private sector corporate pension plans have incorporated market costs into their funding schemes.[18]

Basic pension plan information -- Michigan*[5]
Plans Current value Percentage funded Unfunded liabilities Current members
State figure SBS figure[19] State figure SBS figure[19]
Legislative Retirement System[6] $149,900,000 82.0% N/A[20] $31,900,000 N/A[20] Not available
State Police Retirement System[10] $1,138,100,000 69.9% $489,800,000 1,426 active members
State Employees' Retirement System[11] $10,212,000,000 65.5% $5,385,000,000 17,860 active members
Public School Employees' Retirement System[12] $41,038,000,000 64.7% $22,389,000,000 223,769 active members
Judges' Retirement System[13] $245,600,000 98.4% $4,000,000 199 active members
Military Retirement Plan[6] $0 0% $77,300,000 Not available
Municipal Employees' Retirement System[14] $7,150,500,000 72.6% $2,693,900,000 33,969 active members
TOTALS $59,934,100,000 65.86% 34% $31,070,900,000 $118,502,026,000 277,223 active members**
*Most recent valuations for all systems, with the exception of the Judges' Retirement System, are dated September 30, 2011.
**Membership figures were not available for the Legislative Retirement System or the Military Retirement Plan.

Annual Required Contribution

Annual Required Contributions (ARC) are calculated annually and are a sum of two different costs. The first component is the "normal cost," or what the employer owes to the system in order to support the liabilities gained in the previous year of service. The second component is an additional payment in order to make up for previous liabilities that have not yet been paid for. According to a report by the Pew Center on the States, in 2010 Michigan paid 86 percent of its annual required contribution.[9][21]

On June 25, 2012, the Government Accounting Standards Board (GASB) approved a plan to reform the accounting rules for state and local pension funds. These revised standards were set to take effect in fiscal years 2013 and 2014.[22] As a result, ARCs were removed as a reporting requirement. Instead, plan administrators and accountants will use an actuarially determined contribution or a statutory contribution for reporting purposes.[23]

ARC historical data
Fiscal year SPRS[10] SERS[11] PSERS[12]
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $52,275,891 77.8% $590,570,637 71.1% $1,744,511,713 83.4%
2011 $47,247,573 81.6% $447,924,105 94.8% $1,418,354,753 81.5%
2010 $41,607,229 91.1% $418,427,738 88.4% $1,182,164,061 84.7%
2009 $36,697,604 96.6% $351,646,663 97.8% $989,150,149 101.1%
2008 $33,669,820 102.1% $308,019,761 115.5% $904,409,331 110.5%
ARC historical data
Fiscal year JRS[13] MERS[14]
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $1,068,484 104.0% $288,000,000 108%
2011 N/A N/A $266,000,000 111%
2010 N/A N/A $264,000,000 110%
2009 N/A N/A $229,000,000 113%
2008 N/A N/A $224,000,000 109%

Historical funding levels

Historical pension plan data - all systems
Year Value of assets Accrued liability Unfunded liability Funded ratio
2007 $64,379,900,000 $73,897,100,000 $9,516,200,000 87.12%
2009 $63,952,600,000 $81,446,600,000 $17,494,000,000 78.52%
Change from 2007-2009 -$427,300,000 $7,549,500,000 $7,977,800,000 -8.60%
*Only years in which each system produced a valuation report are accounted for in this table.

Rate of return

Most of Michigan's pension systems (including SPRS, SERS, PSERS, JRS and MERS) presume an 8 percent return rate on their pension investments.[10][11][12][13][14] LRS and MRP presume 7 percent and 4 percent return rates respectively on their pension investments.[6]

Analysis

Percent funded status of pension plans
in the 50 states as of November 2013
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Note: The data in this map was compiled from state CAFR reports and Actuarial Valuation documents. Figures reflect a combination of all of the state pension plans.
Funded ration of state public pension plans as compiled by State Budget Solutions.

According to a 2012 analysis by the Pew Center for the States, most state pension plans assume an 8 percent rate of return on investments.[25] Critics assert that this assumption is unrealistic, citing changing market conditions and significantly lower investment returns across the board over the past several years.[26] When states lower the rate of return in an effort to accurately predict investment earnings, it increases the current plan liabilities, thereby lowering the percent funded ratio and causing the ARC to increase. This is because future plan liabilities are discounted based on the rate of return, so smaller expected investment returns result in larger actuarially accrued liabilities.[27] For example, on September 21, 2012, the Illinois Teachers Retirement System voted to lower its rate of return from 8.5 percent to 8.0 percent. This change increased the state's fiscal year 2014 ARC from $3.07 billion to $3.36 billion.[28] Similarly, when California's CalPERS reduced its projected annual rate of return from 7.75 percent to 7.5 percent in March 2012, it cost the state an additional $303 million for fiscal year 2013.[29]

The 2008 financial crisis had a devastating effect on pension plans nationwide and has resulted in slower economic growth and increased market volatility. In light of this, some market strategists find the 8 percent assumption to be overly ambitious. Stanford University Finance Professor Joshua Rauh stated that using past investment performance in this economic climate was "dangerously optimistic."[30] Advocates for a lower assumed rate of return argue that the standard assumptions could cause pension fund managers to engage in more risky investments and imprudent stewardship of public funds. Further, if pension plans were using more conservative assumptions, such as the 3 or 4 percent assumed rate of return used in the private sector, and the plans grew more quickly than expected, the fund would have a surplus and smaller future ARCs, which would be preferable to using optimistic assumptions and potentially being caught with larger-than-expected deficits.[31][32][33][34][35]

On the other hand, traditional public pension plan advocates argue that the dip observed in recent years is not sufficient proof of a long-term, downward trend in investment returns. According to Chris Hoene, executive director at the California Budget Project, "The problem with [the market rate] argument is there isn’t significant evidence other than the short term blip during the economic crisis that there’s been that shift. It’s a speculative argument coming out of a very deep recession."[30]

The National Association of State Retirement Administrators compiled data on the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20-, and 25-year periods ending in 2013. While the median annualized rate of return failed to meet the 8 percent assumption that most public pensions assume over the 5- and 10-year periods, it was just shy (7.9 percent) over the 20-year period, and it exceeded 8 percent for the 1-, 3-, and 25-year periods. It is important to note that the NASRA data is reporting the median returns, indicating that even though median annualized returns exceeded 8 percent in the 25-year period, the investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.[36]

In September 2013, the nonprofit organization State Budget Solutions published an analysis of state pension funding levels. In its calculations, State Budget Solutions used a 3.2 percent rate of return, the 15-year Treasury bond yield as of August 21, 2013, to discount plan liabilities.

The research found that in all states combined, state public employee pension plans have only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. According to the report, Michigan's public pension plans were 34% funded, making it the 30th most funded state.[37]

Moody's report on adjusted pension liabilities

On June 27, 2013, Moody's Investor Service released its report on adjusted pension liabilities in the states. The Moody's report ranked states "based on ratios measuring the size of their adjusted net pension liabilities (ANPL) relative to several measures of economic capacity." In its calculations of net pension liabilities, Moody's employed market-determined discount rates (5.14 percent for Michigan) instead of the state-reported assumed rates of return (8.00 percent for Michigan's largest plan as of July 1, 2011).[38]

The report's authors found that adjusted net pension liabilities varied dramatically from state to state, from 6.8 percent (Nebraska) to 241 percent (Illinois) of governmental revenues in fiscal year 2011.[38]

The adjusted net pension liability for SERS in fiscal year 2011 was ranked the 16th highest in the nation.[38] The following table presents key state-specific findings from the Moody's report, as well as the state's national rank with respect to each indicator.

Adjusted net pension liabilities (ANPL) relative to key economic indicators - Michigan
Governmental revenue* Personal income State GDP Per capita
State findings 25.4% 3.4% 3.1% $1,228
National ranking 39th 34th 32nd 35th
*Moody's uses governmental revenues as reported in each state's consolidated annual financial reports; this includes not only state-generated revenue, but federal funds, as well.[38]

Pension fund management fees

See also: Public pension fund management fees

In July 2013, the Maryland Public Policy Institute (MPPI) and the Maryland Tax Education Foundation released a report detailing the fees paid for the management of state pension systems. According to MPPI, the 10 state pension funds that paid the most in management fees relative to net assets experienced lower returns over a five-year period than the 10 state pension funds that paid the least in management fees. For example, in fiscal year 2012 South Carolina's pension system paid approximately $296.1 million in total management fees (1.31 percent of total net assets at the beginning of the fiscal year) and its five-year rate of return was 1.46 percent. By contrast, Alabama's pension system paid roughly $13.3 million in management fees (0.05 percent of total net assets) and its five-year rate of return was 7.53 percent.[39]

The table below presents the information collected by MPPI for Michigan and surrounding states. For each state's pension system, total net assets are listed (both for the beginning and end of the fiscal year in question), as well as the total amount paid in management fees. In addition, the rates of return for the pension systems are presented. Compared to surrounding states, Michigan had the second lowest total net assets and total management fees.

Public pension fund management fees, 2011-2012
State Fiscal year Total net assets at the beginning of the year Total net assets at the end of the year Total management fees Management fees as a percentage of total net assets at the beginning of the year Five-year rate of return for the pension fund
Michigan 2012 $46,106,071,669 $50,540,016,325 $190,537,882 0.41% 1.50%
Illinois 2012 $57,424,347,944 $57,821,599,899 $313,400,624 0.55% 0.70%
Indiana 2012 $25,755,673,000 $25,564,126,000 $106,484,000 0.41% 0.20%
Ohio 2012; 2011 $165,091,688,276 $159,507,551,615 $528,693,965 0.32% 1.56%
Wisconsin 2012 $82,485,576,190 $80,271,452,828 $253,704,610 0.31% 2.10%
1"Three states— Hawaii, Nevada and Rhode Island—were excluded because they hadn’t published CAFRs for fiscal years ending December 31, 2011 or later. West Virginia was excluded because its June 30, 2012 CAFR lacked sufficient disclosure."[39]
Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013

Reforms

Enacted reforms

2012

S.B. 1040

On September 4, 2012, Governor Rick Snyder signed into law significant reforms to the Public School Employees Retirement System, which were expected to reduce the system's unfunded liability from $45 billion to 30 billion (including pension and OPEB liabilities).[40] According to The Detroit Free Press, S.B. 1040 (enacted as Public Act 300 of 2012) "offered many school employees the option of making larger pension contributions or receiving reduced pensions, and required most employees to pay 20 percent of their health insurance costs."[41] The legislation further mandated that new school employees would receive $2,000 deposited into a health reimbursement account and up to 2 percent in matching contributions to a 401(k) account (funds from the latter of which could be used for retiree health care costs or any other purpose). The legislation also closed the system's defined benefit plan to new employees hired on or after September 4, 2012.[42][43]

On the same day Snyder signed the bill into law, Ingham County Circuit Court Judge Rosemarie Aquilina issued a temporary order to block the law from taking effect. Snyder pledged to take the case up with the state supreme court, which subsequently denied the governor's request to bypass the normal appeals process.[41] As of April 12, 2013, the case was progressing through the state's court system.[44]

Local public pensions

See also: Local government public pensions

According to the United States Census Bureau, the state has 132 locally-administered pension systems.[8]

Transparency

See also: Public pension disclosure and Governmental Accounting Standards Board
  • Following a 2005 court ruling, the names of recipients and amounts disbursed have been available to the public.[45]
  • Fund performance data information is available in each system's CAFR.[6][10][11][12][13][14]
  • A State Integrity Investigation report gave Michigan an "F" for state pension fund management.[46] State law requires public disclosure of annual reports and audits of the pension system, but lacks rules governing conflicts of interest of pension fund managers.[47]

Recent news

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All stories may not be relevant to this page due to the nature of the search engine.

Michigan Public Pensions News Feed

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See also

Additional reading

External links

References

  1. Figures below are compiled by adding up all state pension plans
  2. This number was calculated by comparing data from 2011 with data from 2009.
  3. This figure is derived by calculating the percent difference between the current year's funding level and the system's percent funded from the prior year.
  4. Rank is relative to the 50 state pension programs. "1" refers to the healthiest pension plan while "50" would be the least well-funded plan.
  5. 5.0 5.1 5.2 5.3 These totals do not include figures for the Legislative Retirement System or the Military Retirement Plan, as membership numbers for these systems could not be found.
  6. 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 State of Michigan, "Comprehensive Annual Financial Report, Fiscal Year Ended September 30, 2012," accessed November 13, 2013
  7. Municipal Employees' Retirement System of Michigan, "Who We Are," accessed November 13, 2013
  8. 8.0 8.1 United States Census Bureau, "Public Employee Retirement Systems State- and Locally-Administered Pensions Summary Report: 2010," April 30, 2012
  9. 9.0 9.1 Pew Center on the States, "Widening Gap Update: Michigan," June 18, 2012
  10. 10.0 10.1 10.2 10.3 10.4 10.5 Michigan Judges' Retirement System, "Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2012," accessed November 13, 2013
  11. 11.0 11.1 11.2 11.3 11.4 11.5 Michigan State Employees' Retirement System, "Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2012," accessed November 13, 2013
  12. 12.0 12.1 12.2 12.3 12.4 12.5 Michigan Public School Employees' Retirement System, "Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2012," accessed November 13, 2013
  13. 13.0 13.1 13.2 13.3 13.4 13.5 Michigan Judges' Retirement System, "Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2012," accessed November 13, 2013
  14. 14.0 14.1 14.2 14.3 14.4 14.5 Municipal Employees' Retirement System of Michigan, "2012 Comprehensive Annual Financial Report, Financial Section," accessed November 13, 2013
  15. Organisation for Economic Co-operation and Development, "Pensions Glossary," accessed November 27, 2013
  16. United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "State and Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs," September 2007. accessed October 23, 2013
  17. American Academy of Actuaries, "Issue Brief: The 80% Pension Funding Standard Myth," July 2012. accessed October 23, 2013
  18. Governing Magazine, " Is There a Plot Against Pensions?" October 14, 2013
  19. 19.0 19.1 State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  20. 20.0 20.1 Analysis only available for system totals and not individual funds.
  21. Government Accounting Standards Board, "Annual Required Contribution (ARC)," accessed October 17, 2013
  22. Reuters, "Little-known U.S. board stokes hot pension debate," July 10, 2012
  23. State Budget Solutions, "GASB's ineffective public pension reporting standards set to take effect," June 5, 2013
  24. State of Michigan, "Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2009," accessed November 13, 2013
  25. "The Widening Gap Update,” Pew Center on the States, accessed October 17, 2013
  26. The New York Times "Public Pensions Faulted for Bets on Rosy Returns," May 27, 2012
  27. Benefits Magazine "Public Pension Funding 101: Key Terms and Concepts," April 2013. accessed October 23, 2013
  28. Crain's Chicago Business "State teachers pension board lowers expected rate of return," September 21, 2013. accessed October 23, 2013
  29. Huffington Post "California Pension Funds Expect Lower Investment Return," March 14, 2012. accessed October 23, 2013
  30. 30.0 30.1 Governing "Expert: Governments Are Masking Their Pension Liabilities ," October 25, 2013. accessed October 25, 2013
  31. The Washington Post "Kansas’s pension funding gap just grew by $1 billion," September 6, 2013. accessed October 25, 2013
  32. Topeka Capital-Journal "KPERS' unfunded liability rises to $10.2B," September 4, 2013. accessed October 25, 2013
  33. Wall Street Journal "Pensions Wrestle With Return Rates," October 10, 2011. accessed October 23, 2013
  34. The Courant "Promising Too Much On Public Pensions," August 10, 2012. accessed October 23, 2013
  35. Business Wire "NCPERS 2013 Survey: Public Pension Plans Report Increasing Confidence, Lower Costs, Growing Returns," October 22, 2013. accessed October 25, 2013
  36. National Association of State Retirement Administrators "Issue Brief: Public Pension Plan Investment Return Assumptions," October 2013. accessed October 23, 2013
  37. State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  38. 38.0 38.1 38.2 38.3 Moody's Investor Service, "Adjusted Pension Liability Medians for US States," June 27, 2013
  39. Cite error: Invalid <ref> tag; no text was provided for refs named report
  40. MLive.com, "Gov. Snyder signs teacher pension law, will appeal court ruling on previous, mandated 3 percent contributions," September 4, 2012
  41. 41.0 41.1 Detroit Free Press, "Michigan Supreme Court won't step into dispute between Snyder, teachers' union," November 9, 2012
  42. Office of Retirement Systems, "Summary of Public Act 300 of 2012 and Public Act 359 of 2012, Michigan Public School Employees Retirement System Reform," accessed November 14, 2013
  43. Michigan Legislative Website, "Senate Bill 1040 (2012)," accessed November 14, 2013
  44. Michigan Education Association, "MEA retirement lawsuits still pending in court system," April 12, 2013
  45. Reporters Committee for Freedom of the Press, "Pension payouts are public records," December 22, 2005
  46. State Integrity Investigation, "Michigan report," accessed November 14, 2013
  47. Executive Organization Act of 1965, "Section 91," accessed November 14, 2013