Lower investment returns and bigger lifespans mean that Saginaw County, Mich., faces a pension funding shortfall in the coming years, even after issuing $52 million in pension bonds three years ago. At a February 16 meeting, Saginaw News reports, the county Board of Commissioners discussed the situation with the Municipal Employees’ Retirement System (MERS) of Michigan, manager of the county’s pension fund.
The board learned that it owes more than what MERS had estimated last year for the 2017-2018 fiscal year to continue funding the pensions of Saginaw County’s retirees. The county also faces a deficit in the coming years.
Robert Belleman, Saginaw County’s controller, said that the county is “disappointed” with MERS’ estimates that require the county to step in with another $4.5 million in funding for the 2017-2018 fiscal year, representing a 71% rise over the previous year’s annual required contribution.
This situation comes about as MERS adjusts its required employer contributions every year based on the actual experience of the previous year, going by investment experience and demographic experience, as well as changes in actuarial assumptions on mortality rates and changes in the plan’s benefit provisions. As a result of this exercise, in which MERS cut down its estimate of Saginaw County’s investment returns and hiked up the county’s lifespans, the county’s funded level dropped to 90 percent, from 98 percent at the end of 2014.
According to MERS, it provides customers with six-year projections based on various market volatility scenarios to help them plan for the future.
Jennifer Mausolf, MERS communications director, noted that historically MERS has met an 8% investment assumption over the long term. However, since the financial crisis of 2008, the public plan investment community’s position is that an 8% return assumption may be too high. “We feel it is still too soon to conclude that recent economic conditions have permanently changed future long-term financial markets; however, the MERS Retirement Board determined that it would be prudent to reduce the long-term investment assumption to 7.75 percent per year. This increases the likelihood of meeting or exceeding the assumption,” Mausolf said.
To make up the shortfall, Saginaw County’s Board of Commissioners is contemplating another option that would require it to make an annual contribution of only $2.5 million for the fiscal year and effectively “recalculate our amortization from an average of 4-5 years to 9-10 years.”
The County will also continue to look for ways to enable it to make more than the required contribution to address this shortfall, according to Belleman. And although MERS has reduced its expected rate of return on investments from 8% to 7.75%, Belleman believes this is still on the high side, considering MERS’ average annual return of 6.75 percent over the past 15 to 20 years.
Another factor that could impact investment returns would be the possibility of a recession. According to MERS, “Recessions are a natural part of the business cycle. Prudent institutional investors, like MERS, anticipate market downturns and factor those events into our financial models. Given that we are over eight years into a recovery, it seems likely that some kind of slowdown in growth is likely in the next couple of years.”
By Poonkulali Thangavelu