Oakland – the County That Could (Reform Its Pensions)
The path to sustainable retirement plans
Oakland County offers Michiganders more than excellent shopping, dining and events. It demonstrates exemplary retirement planning.
In contrast to the majority of Michigan counties that promise employees more retirement benefits than their revenues can cover, Oakland County is nearly 100 percent funded according to its Comprehensive Annual Financial Report (CAFR).
Deputy County Executive Robert Daddow credited these savings to the county’s forethought in adopting a defined contribution, 401k-type plan in 1994.
“We switched proactively rather than retroactively.” Daddow said. “We saw the liabilities from retiree benefits and switched. At that point, federal law had changed to allow the plan. We were, and always are, trying to be at the forefront of change.”
The change paid off. Three years after switching to defined contribution plans, the county was fully funded. Laurie Van Pelt, a member of the pension board, noted that first year savings alone topped $3 million adding up to a present day savings of $107 million in total.
The county also benefited from risk sharing with employees.
“[The] defined-benefit [system] is a promised benefit.” Daddow said. “When investments decrease, the local unit is hammered because it still has to pay promised benefits with decreased funds. With a defined contribution, all costs are budgeted. So when investments increase, everyone benefits. When investments decrease, employees share the decrease. For instance, the 2008-2010 depression resulted in decreased investment which delayed retirement for some employees with defined contribution plans. But now they are starting to retire again.”
Even with risk sharing, employees still opted for the benefits of Oakland’s defined-contribution plan. Most employees, including Daddow and Van Pelt, converted to defined-contribution retirement plans due to their portability, decreased vestment time, shared risk, no max out date, and the opportunity to leave funds with beneficiaries rather than the county should an employee pass away.
Oakland businesses have also benefited from the county’s cut in unfunded liabilities.
“The savings have helped retain the county’s AAA investment rating, which allows the county to manage resources more efficiently and helps keep taxes down," Daddow said. "Oakland has seen an increase in business which boosts economic productivity and attracts investment.”
Most counties are in much worse shape. The average funded ratio for Michigan counties is approximately 74 percent, according to an analysis of the county CAFRS. This means that the average Michigan county has unfunded liabilities equal to a quarter of its promised benefits. The average local municipality is in even worse shape.
In response, many counties are making the switch to defined contribution plans, but it isn’t easy.
“Change depends on the municipality.” Daddow said. “The number one question is: do you close the defined-benefit plan to new hires? If you are expanding, you should close to new hires, or else you will increase unsustainable liabilities. The number two question is: do you close the defined-benefit plan to current employees? You have to transfer everything. You have to cash out. And you face the risks of the market.”
He recommended that counties simply close their defined benefit plan to new employees. That way, the county can transition away from its pension system while avoiding the hassle and cost of switching employee plans and crashing into an unpredictable market.
But before counties can even begin to address those questions they must first overcome the opposition of political leadership and public-sector unions.
There are two pieces of legislation that can help with that. One is currently in place and the other has been proposed.
House Bill 4804 is sitting in committee right now. The proposal gives local voters the power to prohibit unions from re-opening a defined-benefit plan during collective bargaining once it has been closed.
Public Act 54 of 2011 also helps put municipalities on the same playing field as unions. The law prohibits automatic wage hikes after a contract has expired. Both Daddow and Van Pelt expressed their thankfulness for PA 54.
“Snyder’s initiative [PA 54 of 2011] has really helped. Before this initiative, unions could drag out negotiations and demand retroactive pay increases for the time spent negotiating, which often resulted in huge checks to union workers after the fact,” Daddow said. “Now there is no incentive for unions to drag out negotiations because there are no retroactive pay increases, which makes it much easier for the county to budget expenses, and benefits.”
Despite PA 54 of 2011’s success, Daddow and Van Pelt fear that its benefits could be short lived.
“There is a movement to make this law non-applicable to law enforcement — that would be horrible for the county.” Van Pelt explained. “That would undo all the good the law did.”
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.