City spent less than expected, audits say

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January 14, 2013

City spent less than expected, audits say

BY BRIAN McGILLIVARY bmcgillivary@record-eagle.com The Record Eagle Mon Jan 14, 2013, 07:14 AM EST

TRAVERSE CITY — Recent audits show Traverse City outperformed its budget projection by $500,000 in the last fiscal year, but still owns a $27.8 million unfunded liability in its pension plans.

The city commission will review the audit for its 2011-2012 fiscal year and actuarial reports for its two pension funds when it meets today at 7 p.m. for a study session at the Governmental Center.

Both reports likely will play an important role for commissioners as they begin budget discussions in February.

The audit bolsters Commissioner Jim Carruthers' position that the city budgets too conservatively and shouldn't cut services, he believes. The city expected to spend almost $500,000 of its budget surplus last year, but instead increased it by $42,000.

"Things are better off than the ... sky is falling," Carruthers said. "That $500,000 is what we've been arguing about. We are not a broke town, so why do we have to cut everywhere."

On the other end of the spectrum sits fellow Commissioner Mike Gillman, who calls the budget numbers "miniscule" compared to the pension liability.

"I'm happy we spent less that we anticipated last year. I'm happy the fund balance went slightly up instead of down, but I'm concerned about the long haul ... when those unfunded liabilities come home to roost," Gillman said. "I see the potential to eventually erode our ability to provide services in the future."

Gillman said the unfunded liability is closer to $37 million. He calls the pension funds' anticipated earnings on investments, 7.5 percent to 8 percent, "unrealistic."

If the pension funds don't meet earning projections, the cost to the city budget to make up the shortfalls will steeply rise and cut into the city's ability to provide services, Gillman said. He wants to put extra money toward reducing the liability now, but doesn't believe he will get commission support.

The city will pay about $960,000 to cover its current year pension costs, plus an additional $1.6 million to reduce the unfunded liability over the next 20 or 27 years. Police and fire department employees belong to a locally managed pension fund with a 20-year payback, while the rest of the city's workforce is part of a the Municipal Employee Retirement System, a state organization with a 27-year payback.

City Manager Ben Bifoss attributes the large unfunded liabilities mainly to the stock market collapse of 2008. The pension funds' investments had losses similar to what individual retirement accounts endured, and it will take time to recover, he said.

Bifoss said the municipal employee pension fund historically has hit its 8 percent earning assumption, but the locally managed police and fire fund has not made 7.5 percent.

The city has worked to change pension formulas so employees earn smaller pensions going forward, Bifoss said. But that doesn't impact the unfunded liability, which is based on the amount of money the city needs to pay for pensions already earned.

"The most significant thing you can do address pension costs is to change the (formulas), but it doesn't impact your unfunded liability," Bifoss said. "Either the market will come back or it won't."