Pension woes plaguing the city

We are presently facing a problem that has been building for over five decades. The problem is our present legacy unfounded liabilities. As of the last actuarial valuation report dated June 30, 2012 shows the following:

     1. The Unfunded Actuarial  Accrued Liability (UAAL)

         A. Retiree Healthcare     $ 113,165,633  
         B. Pension UAAL             $    66,582,013   

        
         C. Total City UAAL        $ 179,737,646 

For this article I will explore Royal Oak pensions and our pension liabilities. I was prompted, in part, by a statement in Mayor Ellison's State of the City Address. "So ladies and gentleman, I am most proud to stand up here today and proclaim that the state of our city is the strongest it has been in more than five years." I question his frame of reference especially in regard to our pension liabilities. I would point to the following:

     Actuarial          Actuarial           Unfunded  
    Valuation           Value of              AAL                    Funded
       Date                Assets              (UAAL)                  Ratio
  
     6-30-07        $143,619,213      19,162,450              88.2%
     6-30-12          124,013,356      66,582,013              65.1%

5 yr. change   ($19,605,857)   $ 47,419,563        (23.1%)

Sorry but these pension numbers do nothing to show a strong financial city.Thanks to a maze of accounting practices and smoke and mirror investment assumptions, it's not even clear just how big a financial hole we have dug for ourselves. With a new set of government accounting standards we could see a very nasty wake-up call to a city with a kick the can down the road, pay as you go, head in the sand accounting.

Royal Oak's most pressing problem to address: who will pay to clean up this growing financial mess? Will it be our retires, bondholders who we may seek loans from, or local taxpayers who may have to pay more to cover the shortfalls or see recurring cuts in public services.

Many local governments have set aside enough money  to comfortably make good on promised retirement benefits. Cities that have funded more than 80 percent of their projected pension liability, a level that's generally seen as financially sound.  As you can see above, Royal Oak is now at 65.1% having fallen 23.1% in five years.

In my assessment of Royal Oak over 7 years I found that understanding our  financial health very convoluted and confusing due to the fuzzy math used to calculate just how much Royal Oak needs to set aside to meet its pension obligations. Even in the best of times, pension accounting is fertile ground for voodoo economics and political expediency because those projections are based on a series of all but unknowable assumptions. It's hard to predict with precision, for example, just how many years of service a current employee will accumulate or how many checks they'll collect in their lifetime.

Especially cities with underfunded plans have come up with a neat trick to make the problem seem to disappear. By simply assuming a higher investment return in the future, they can low-ball the reported amount needed to meet future payments.Royal Oak in the last actuarial report makes the assumption that our investment rate of return at 7.75%.

In 2011, the latest data available, the 100 largest public pension funds projected an average return of 7.84 percent. But their actual return over the prior 10 years was just 5.6 percent a year, according to a survey by Pensions and Investments, a trade publication.

Future pension cost estimates have been more problematic by a common practice known as "spiking - in which retirement-ready workers rack up hours of overtime and apply unused vacation, sick time, and "air time." Even the boom of the 90's was probably thing that happened because cities ended up with a number of overfunded plans and made promises and spent money based on these overfunded plans.

We are also heavily impacted by "smoothing" which which allows - plan management to book investment gains and losses slowly for as long as 5 years. In good times, the scheme lets city officials ride a bull market years after its over, underfunding pensions to pay other city expenses, cut taxes or increase benefits without paying for the added longer-term cost. 

That's one reason the Government Accounting Standards Board (GASB) which sets the booking rules for pension plan managers, has banned smoothing and requires underfunded plans to put away their rose-colored glasses when estimating future investment returns.

When implemented next year, the new rules will paint a bleaker funding picture, cutting the average funding ratio of assets to liability, which stood at 75 percent in 2011 to 57 percent, according to a study by the Center for Retirement Research.

Now what do we have to do to preserve our City? I have felt like that myopic old white haired guy who talks to empty chairs. Believe me when I say that over the last seven years, in "five minute increments," I do know what it's like to speak to seven empty chairs. This is why I've opted to use this forum as the commission chamber is empty.

We need elected representatives and administrative heads start to address the problems, not the symptoms. We need people who will do their homework and become knowledgeable and ask the questions and start the dialogue in search of solutions. It won't be easy and probably painful. Not only will the next few years impact us, but our future generation.  

I still plan to address this problem further in the Patch. I still, also, plan to have a public forum to discuss our and have an exchange of ideas. Like Mayor Ellison, I will also look forward to the recommendations of the "wellness committee" about recommendations and options for cutting employee healthcare costs. If anybody has any knowledge about this committee : when it meets, meeting location, and public inputs I would appreciate it.

If you have any comments, suggestions, or remarks please give me a call. I have a listed number. My email address is theshaw10@yahoo.com. Please let me know who you are so I can have a dialogue.

Thank you

Bill Shaw