Pension board steps closer to possible legal action

By: April Lehmbeck | Advertiser Times | Published February 15, 2015

HARPER WOODS — The city is working to try to fix its pension fund contribution shortfall, but it might not be fast enough to avoid legal action for the second time.

The Pension Board positioned itself for that possibility by passing a resolution concerning its next step during a meeting Jan. 26.

“We directed the attorney to take whatever measures he deemed appropriate,” Pension Board Chair and Harper Wood Public Safety Director James Burke said. 

By press time, no legal action had been initiated.

However, it doesn’t appear that the city is going to be able to move fast enough to clean up years of failure to properly fund the pension system to avoid some type of action. 

The city was sued by its own pension system a few years ago. At that time, the legal outcome forced the city to levy mills against the taxpayers to pay for contributions.

The Pension Board voted in December to have its attorney send a demand letter to the city. The city’s answer to that letter was that it is planning to make contributions to the fund and it has been working on longer-term steps to fix the shortfall.

That response led the Pension Board to direct the attorney to take steps needed to deal with the matter. The board can be held liable for not acting in the best interest of the fund, and the city is required to make the appropriate contributions each year.

The city is planning to make at least $1.7 million in contributions for 2015, but the city’s required contribution for this year is actually more than $2 million. The city is also behind on payments from a couple of recent years. It did make a sizeable contribution in 2014 — more than it had initially budgeted when the city had a surplus at the end of the year, according to city officials.

City officials have said that the city doesn’t have the ability to pay all of the required contributions this year to catch up on both this year’s and past years’ shortfalls. 

While Burke knows that the Pension Board and its attorney must look out for the best interest of the fund, he also understands that the city is in a tough spot. If the city were to try to fund the required contributions, departments like the public safety department would be slashed, and it has already cut staff over the years.

“My first concern is keeping operations going here,” he said. “We have to have … personnel to provide services to our residents.

“The No. 1 responsibility we have here is providing for the safety of the residents,” he said. “We are doing that right now.”

Yet, the board also has a legal obligation to ensure the viability of the pension fund now and into the future, Burke explained.

“It’s a giant balancing act,” he said.

He said he also understands that the current administration and council have worked to make contributions to the fund, but there were more than 25 years prior to the current administration that they didn’t make all of the needed contributions, especially when times were better.

“The contributions should have been paid,” Burke said. “That would have minimized the impact of what we’re facing now.”

Then the recession hit, and the city saw a huge drop in property values, which caused a financial struggle.

“We were the third hardest-hit city in the state of Michigan in the percentage lost in property values,” Burke said.

Besides being sued by its own Pension Board, the city also could face a possible financial review by the state. One of the triggers for an emergency manager is a pension fund being underfunded.

Burke said, however, that Skotarczyk is in regular communication with the state Treasurer’s Department, so they know the city’s financial situation.

“They’re keenly aware of the stress that we’re under,” he said.

If they were to come in and do a financial review, they might see the city’s plan to chip away at the problem with projections to catch up down the road and allow them to keep working on it.

Burke also praised the mayor, council and city manager for their work to make contributions and look for long-term solutions. He said the city is tackling other issues, as well, like retiree health care costs and other legacy costs.

“The council and the city manager have done a great job at reducing (costs) as far as we can go,” he said.

“The city has done just about everything it can do,” Burke said.

The city has contributed more in the last couple of years than it had in the last 10, according to city officials.

“We have every intention of complying with the contributions,” Skotarczyk said.

Besides making cuts to the city’s staff and operations in recent years to keep the budget in line and allow the city to make contributions to the fund, the city is working on important steps to help the city’s pension fund issues. For instance, it has negotiated changes with unions concerning pension costs.

Another big change is in the works, as well.

“We had been working on a plan to make major renovations to the pension system,” Skotarczyk said.

That big overhaul will take the city from a self-administered pension system to a large pension fund group.

“A lawsuit at this time is unfortunate, because we’ve made a lot of positive strides,” Skotarczyk said.

If they go to court, they would be able to argue all of the steps they have taken.

It’s not just the administration and council working toward fixing the problem, but also the employee groups. They have been agreeing to changes that will help the city.

“The employees are working with us on it,” Skotarczyk said, adding that they’ve handled contract negotiations in a positive manner. “Our residents should be very proud of their employees.”

If the city makes the transition to a group pension system, something they’ve been working on for more than a year, it will help in several ways.

The city is looking to join the Municipal Employees’ Retirement System group.

“We’re gaining a ton of experience in managing the fund and (a) reduction in costs,” he said of the change.

They are working on what the annual required contributions would be.

“We are targeting a July date right now,” he said of making the switch.

“It puts our money into a much larger funding group,” he said, adding that it also lessens the city’s workload.

It would also mean a different board of trustees handling the pension system, which could impact any legal action that may be filed by the city’s current board.

Skotarczyk said the Municipal Employees’ Retirement System offers different services, which he thinks would be a plus for the city’s retirees.

“I think it will be a positive thing for the employees — a positive thing for the city,” he said.

Burke said no one wants to sue the city. He said the board’s attorney is “a local guy here, so he’s very aware of the situation we have here.”

“We’re hoping for the best,” Burke said. “We’re all working together as a team. We’re all trying to figure this out together.”

“We don’t know what’s going to happen,” he added.