County seems to have pension obligations under control

April 1, 2011
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While pension costs have crippled the budgets of some private firms and public entities the past few years, that apparently hasn’t been the case for Kent County. From 2005 to 2009, the annual average cost to the county for operating its pension plan has been 38 basis points, or 0.38 percent.

“From my experience, that’s pretty low. At 38 basis points, we’ve done pretty well” said County Human Resources Director Don Clack. “It’s 100 percent funded right now.”

County Pension Plan Administrator Michelle Balcom said that 0.38 percent translated into $1.8 million last year, which is roughly the same amount the county spent to subsidize the Lodging Excise Tax fund last year.

The county’s cost to operate its defined benefit plan includes paying for a consultant, an investment manager, an actuarial, legal and custodial fees and two full-time employees, along with a few other items. Clack said those expenses are paid from the plan’s assets, meaning the plan supports itself and doesn’t need financial support from the county’s general operating budget.

The county’s plan had a market return of 17 percent in 2009 and 12 percent last year. Because the 2009 earnings turned out to be so good, the county’s contribution rate to the pension fell from a projected 13 percent of payroll for this year to 9.29 percent.

“In 2009, we had higher than expected returns that put our contribution rate at 9.29 percent,” said Balcom. “In 2010, we had higher than expected returns.”

Over the past 15 years, from 1995 to 2009, Clack said the average annual county contribution rate has been 5.89 percent. As for employees, their contribution rate is 6.5 percent of their pay this year. But their cap will rise to 7.5 percent next year, at least for most of the bargaining units. Two of the unions — corrections officers and road patrol personnel — haven’t agreed to the new cap on the variable employee contribution rate.

For the last several years, some county commissioners have suggested moving the retirement plan from a defined benefit program to a defined contribution plan — something like the standard 401(k) plan prevalent in the private sector. But going to a defined contribution plan wouldn’t change the status for county retirees and putting one in place for current employees would have to be negotiated. So if the county created a defined contribution plan, it would only be for new employees, and Kent currently has a hiring freeze in most departments.

“We can’t eliminate pensions, and the commitments made to pensioners have to be honored. A DC plan could be negotiated for current employees, but that would be a significant undertaking,” said County Administrator and Controller Daryl Delabbio.

Clack said the county would need approval from the Michigan Attorney General’s office and the Internal Revenue Service to offer a defined contribution plan.

Still, Clack gave members of the county’s Finance Committee the pros and cons of both plans for the county and its workers.

Advantages of a defined benefit plan:

  • For the county: A DB plan is less expensive to fund the retirement benefit on a per-dollar basis over the long term; spreads the retirement investment and payment risk over a larger participant population; lowers investment costs by maximizing asset pooling; ensures a consistent security benefit for workers; and reduces employee turnover.

  • For the employee: A DB plan provides the security of a guaranteed retirement income for life; has a known formula for income replacement at retirement; establishes a retirement investment-and-income strategy; spreads risk over a large participant population; and has lower investment fees from pooling.

Disadvantages of a defined benefit plan:

  • For the county: A DB plan has fluctuating funding costs each year; there is pressure to reduce funding positions, like legacy costs; employees often don’t understand or appreciate its value; more complicated to administer; and higher direct costs are possible.

  • For the employee: A DB plan is less portable than a DC plan; no access to contributions during an emergency; limited distribution options at retirement; county contribution rate can be more difficult to understand; and contributions fluctuate, depending on the contribution structure.

Advantages of a defined contribution plan:

  • For the county: A DC plan has predictable annual contributions; doesn’t assume the investment performance risk; lower fiduciary risk to administer; costs are annually funded without legacy costs; and administrative costs drop as the total investment balance increases.

  • For the employee: A DC plan lets a worker “see” its value immediately; portable and transferable; offers higher disposable income for non-career types; can access funds in an emergency; and has many options to access funds in retirement.

Disadvantages of a defined contribution plan:

  • For the county: A DC plan doesn’t encourage employees to stay; can’t take advantage of a strong investment performance; mandates investment-and-retirement planning education; increases investment-education requirements; and employees that don’t participate are upset when they reach retirement age.

  • For the employee: A DC plan reduces retirement savings due to lack of participation early in career; accounts are often too conservatively invested; responsible for retirement-income planning; assumes risk for unsatisfactory investment performance; and assumes risk of outliving available assets.

“If the county offers a defined contribution plan, it has to be for new employees and it must be bargained,” said Delabbio. “I believe there still are a lot of questions that need to be answered for the public about the long-term cost for a defined contribution plan,” said Commissioner Harold Voorhees, who chairs the Finance Committee and serves on the county’s Pension Subcommittee.

Clack pointed out that moving to a defined contribution plan will raise the administrative cost until the asset base is established. He also said other public-sector costs for a DC plan have ranged from 6 percent to 10 percent annually.

Kent has lowest retiree costs of biggest counties

Although Kent County’s $2.8 million annual expenditure is nothing to sneeze at, it is the lowest yearly expense for Other Post Employee Benefits among the state’s six largest counties by far. For example, Wayne County’s $57.8 million expenditure is 21 times that of Kent’s, while its annual budget is only seven times that of Kent County.

According to County Administrator and Controller Daryl Delabbio, the major reason for the county’s lower annual contribution to OPEB costs is Kent offers its retirees a monthly stipend that most use to help pay for health-insurance premiums, while the other counties pick up the tab for that cost. The stipend ranges from $300 to $350 a month, depending on a retiree’s length of service, and it doesn’t rise like the cost for health insurance has over the past few decades.


County
Kent
Genesee
Washtenaw
Macomb
Oakland
Wayne

 

OPEB
Liability

$40 million
$192 million
$195 million
$595 million
$819 million
$838 million

 

Annual
Contribution
$2.8 million
$192 million
$10.8 million
$49.5 million
$47.5 million
$57.8 million

 

Annual
Budget*

$307 million
$180 million
$214 million
$469 million
$819 million
$2.1 billion

*Indicates all funds, not just general operating budgets.

Source: Kent County, March 2011

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