Post date: Jun 27, 2011 6:18:26 PM

Where does the Employees’ Retirement System leave the City of Ann Arbor? Clearly Public employee retirement systems create a series of complicated issues. However, with hard economic times and a push in the private sector of more affordable retirement systems, these issues have been brought to the fore. Unfortunately, more and more, the typical public sector defined benefit retirement systems have proven to be unsustainable.  Because of this realization, it is necessary to explore the issues that states and their municipalities face across the country, as well as discuss possible alternatives that could alleviate and even solve growing budget problems. The City of Ann Arbor is a fine place to begin.

Based on the 64th Annual Actuarial Valuation, projections have been made regarding the necessary contribution rates as well as future funding ratios of Ann Arbor’s employee retirement system.[1] What will be discussed here is the projection for higher levels of city contribution rates alongside the projections for ever decreasing projections of the funded ratio. Why is this occurring, and what exactly does it mean for the city, its employees and its taxpayers?

Before discussing the situation in Ann Arbor, it is necessary to discuss the system itself. Retirement systems pose complicated terminology that is often difficult to understand. Generally speaking, retirement systems are split into two categories, those being defined benefit and defined contribution plans. Defined benefit plans, as indicated by their title, promise a particular benefit to employees after retirement based on a simple formula. This formula indicates that employees will receive retirement pension benefits based on a percentage known as the accrual rate (typically between 1.5%-2.5%) of their final average compensation, multiplied by the number of years that they have served their employer.[2] Visually, this formula reads as ((Accrual Rate)X(Final Average Compensation)X(Years of Service)). This benefit is payable for the remainder of the employee’s life after retirement, with the greater part of the burden placed on the employer. On the other side, defined contribution plans place the funding burden, as well as the investment risk, on the employee.[3] Interestingly 84% of state and local government employees are members of defined benefit systems while only 22% of the private sector are members of these systems.[4] The private sector, then, has largely transitioned to defined contribution retirement systems, while the public sector generally upholds defined benefit systems. Ann Arbor, like many municipalities, continues to retain a defined benefit retirement system.

In the Ann Arbor Employees’ Retirement System, an employees’ retirement pension is determined based on the defined benefit formula discussed above. That is, employees are vested 2.5% of their average final compensation times their years of service as general city employees. That rate is increased to 2.75% of average final compensation times years of service for city police and fire employees.[5] An analysis of the growing unsustainability of this Ann Arbor retirement system is provided below. The data used to prepare the analysis was provided by the City of Ann Arbor Employees’ Retirement System Actuarial Valuation Report As of June 30, 2010.

• Increase in retirement benefits paid- In the year 2000, the average allowance of retiree benefits paid for every retiree was $19,310. By 2010, that number had increased to $30,915, a 60% increase. During that same time period, the number of retirees receiving benefits from the city increased from 603 to 879. This increase in both the number of retirees receiving benefits as well as the increase in the average amount of benefits paid is displayed by the drastic increase from $11,643,664 paid by the city in 2000, to $27,174,651 paid in 2010 for retiree benefits (233% of the benefits paid 10 years previously).

• Active employee per retiree rates- In 1985, the number of active employees per retiree receiving benefits from the City of Ann Arbor was 2.7. With 2.7 employees for every retiree, the system appears to be sustainable, at least on the surface. However, by 2010, the number of employees per retiree had dropped to .8. This number has consistently dropped since 1985 and appears as though it will continue to decline. This is not sustainable. The city cannot continue to let people retire early. With longer lifespans as well as earlier retirement, the pool of retirees will continue to grow in comparison to the number of people who are actually employed by the city. 

• $10 million a year in retirement benefits for people under age 60-$10,327,609 worth of retirement annual allowances were paid to City of Ann Arbor retirants and beneficiaries under the age of 60 for 2010. Using the average wage of $66,880 for that same year, 154 additional employees could have been employed by the city, providing services and protection, just by eliminating retirement benefits for those under the age of 60.

• Average pay increase between 2000-2010- In 2000, the average Ann Arbor city employee made $45,130 annually. In 2010, the average employee’s salary jumped to $66,880. This 48% hike in salaries averaged over the 10 years shows that salaries have been increasing at 4.8% annually for the City of Ann Arbor.

• City employees do not continue to work after accepted retirement age (60 for general, 55 for police and fire)- of the 516 general city employees, only 22 are 60 or older. Of the 124 police employees, none are over the age of 60, only 3 are 55 or older, and only 11 total employees are 50 or older. For fire, only 4 of the 88 employees are 55 or older. With defined retirement benefits vested after age 60 for general employees and after 55 for police and fire employees, there is no reason for these employees to continue working. Instead, they retire as early as possible, straining the retirement system with growing numbers of retirees.

• Increase in required employer contribution- In 2000, the City of Ann Arbor was required to contribute $1,327,426 in order to sustain the City’s retirement system. In 2010, the city was required to contribute $12,538,412 in order to sustain the system. It is expected, as calculated by actuaries, that the city will be required to contribute $16,770,000 in order to sustain the system in 2020. Therefore, while in 2010, the city was expected to contribute 18.1% of total payroll to the retirement system, in 2020, it will be expected to contribute 24.81% of total payroll.

• Decreasing funded ratio alongside increasing required employer contributions- Even with the increasing required employer contribution, the funded ratio for the retirement system is decreasing and is expected to continue decreasing. In 2000 the system was 157% funded, meaning that it had more funds than it needed in order to sustain the system. By 2010, that percent funded had dropped to 90.3%. Already, the system is underfunded with still growing numbers of retirees and higher average benefit promises. By 2020, the Ann Arbor Employees’ Retirement System is expected to have a funded ratio of only 76.4%.

 Further commentary on the City of Ann Arbor Employees' Retirement System can be found below:

“R e t i r e d”  A n n   A r b o r   C i t y   E m p l o y e e s   E a r n i n g  $ 1 0 0 K +   W h i l e   C o l l e c t i n g   T a x p a y e r   F u n d e d   H e a l t h c a r e / P e n s i o n   B e n e f i t s 

[1] Gabriel Roeder Smith and Company, Consultants and Actuaries. City of Ann Arbor Employees’ Retirement System: Actuarial Valuation Report as of June 30, 2010.

[2] Michigan State and Local Government Retirement Systems, Citizens Research Council of Michigan, July 2009, Report 356, i

[3] Ibid, i.

[4] Ibid, i.

[5] City of Ann Arbor Employees’ Retirement System: Actuarial Valuation Report As of June 30, 2010. D-1.

Note: In order to view the Gabriel Roeder Smith and Company City of Ann Arbor Employees' Retirement System Actuarial Valuation Report as of June 30, 2010, visit the City of Ann Arbor Website