SAGINAW, MI — Since 1965, Saginaw has managed the pension system for its police officers and firefighters internally, through a five-member board.
But that is about to change, at least for the city’s current and retired police pensioners.
Saginaw City Council took the first steps Monday, May 11, to move about $72 million invested for police pensions from the city-run system to an outside pension system through the Municipal Employees’ Retirement System (MERS) of Michigan.
It’s a transition that has been in the works for quite some time, featured as a major topic of discussion at City Council’s January 2013 strategic planning session.
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Human Resources Director Dennis Jordan explained that the move is expected to result in lower annual costs to the city budget and in higher returns for the fund.
“They have demonstrated a better return on investments and lower management fees,” Jordan said. “In addition to that, the administrative costs that we are doing in-house, we’d be outsourcing that. So there would be an internal saving with that.”
The end result, Jordan said, would be a reduction to the drain police pension contributions have on the city budget.
“With all those types of savings, what it does is it reduces or lowers our annual required contribution that we have to make into those types of plans every year,” he said.
A $250,000 savings
City Manager Tim Morales said the move is expected to save the city about $250,000 in the 2015-16 budget year alone, which begins on July 1.
Morales said the shift is management of the plan only and will not impact the benefits it distributes to current or future retirees. He said it will mean pensions will be distributed in once-a-month paychecks to retirees instead of the twice-monthly distribution under the current system.
The city manager said he would recommend shifting the funds to MERS regardless of the level of savings.
“Even if it were savings-neutral, I think it’s a good move,” he said. “Just because of the fact that it takes that burden off the city administration and that board.”
Saginaw Police Officer Doug Wortley, president of the police officers union, said his members got on board with the plan because it could ultimately help the department and the city government as a whole.
“We knew the city wanted it and we weren’t opposed to it,” Wortley said. “The view we had going into the negotiations was it could help the city out and in the future it could help us out, by keeping our staffing levels the same or hopefully someday getting more officers.”
He said moving to a third-party system ensures the pension funds are protected and gives the city more options to realize savings and flatten out annual costs, hopefully help the city stay solvent.
“That’s in our best interest,” Wortley said.
The Police and Fire Pension Fund Board of Trustees established by Chapter XVI of the City Charter in 1965 and is comprised of five voting members: a police representative, a fire representative, a citizen representative, the mayor and the city manager.
$40 million advantage
Morales and Jordan explained that MERS investments in past years have performed significantly better than the city-run pension fund.
“That’ s what they do every day,” Jordan said. “They have all the resources.”
A 10-year analysis of the difference between MERS fund performance and the city police and fire pension fund’s found the city would have earned $40 million more had the funds been managed by MERS.
While investment performance is difficult to predict, Morales said MERS is simply better poised to realize better returns because of their expertise and the size of investments they manage for municipal retirement accounts across the state.
“The MERS program manages funds for hundreds of municipalities in the state of Michigan,” he said. “You’re getting administration that is much more experienced than a board can be.”
Councilman Floyd Kloc pointed out that all other city pensions are already managed by MERS.
“We’re actually sort of catching up with the other unions,” Kloc said.
Morales said that the police and fire pension fund in total had about $125 million the last time he received a report on the investments.
Of that total, the value of police pension funds amount to nearly 58 percent, or about $72 million.
Jordan said the police and fire pension fund is a little more than 60 percent funded, with an unfunded liability of about $71.5 million.
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The city also has an unfunded liability of about $76 million tied to pensions for non-public safety personnel, in a retirement system already managed by MERS, and another $220 million associated with retiree healthcare costs.
Steps toward transition
City Council on Monday took three steps toward making the transition, leaving one final step for its next meeting.
The Council voted in favor of introducing city ordinance amendments that will allow MERS to replace the city pension board in management of police and fire pension funds. The changes will come back to City Council at its Monday, May 18, meeting for final adoption.
The Council approved the MERS adoption agreements and administrative agreements to facilitate the transition.
After discussing the issue in closed session, the Council approved changes to the command officer contract that, among other things, will allow for the transfer of pension funds to MERS. The new patrol officers contract allowing the transition was approved by Council at a November 2014 meeting and later ratified by the union.
Assuming the new ordinance language is approved for adoption on May 18, Jordan said the plan is to move all police pension funds to MERS on June 1.
The transition will leave about $52.6 million in the fund, the portion of the fund set aside for city firefighter pensions. That money will remain there for now.
Jordan said the ultimate goal is to negotiate a similar transition with the firefighters union and transition their fund to MERS, closing out the old city-run police and fire pension system.
“We have been in dialog with the fire union,” he said. “I’m optimistic that sometime in the near future we can come up with some type of agreement with that group.”
Mark Tower covers local government for MLive/The Saginaw News. Contact him at 989-284-4807, by email at firstname.lastname@example.org or follow him on Twitter, Facebook or Google+.