Holland City Council discusses issuance of $22 million in bonds

The city of Holland, Mich., may have a plan to pay down its unfunded pensions.

Tim Vagle, city finance director, presented a comprehensive financial plan to council on Wednesday, Oct. 25, which includes the issuance of $22 million in pension obligation bonds.

The issue of pensions for municipal employees has become a messy situation for the state of Michigan in general. Municipalities are one of the few sectors of employment in Michigan that still has a traditional, defined pension plan as opposed to a 401k plan or the hybrid pension/401k plan many of Michigan's teachers have.

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According to information from the governor's office, more than 800 of Michigan's roughly 2,000 local governments offer defined pensions or health care benefits or both.

The city of Holland has closed pension plans to new hires and has moved to a 401a program, the municipal equivalent of a 401k. However, the city still has 330 retirees who currently receive benefits and 183 active employees who will have a pension upon retirement.

Municipal workers who participate in the Michigan Municipal Employees Retirement System are given a check upon retirement with the amount based on a specific criteria, usually how many years they worked and how much money they made. MERS then invests that money and uses it to pay pensions.

The problem, Vagle explained to council back in April, is that MERS investments didn't earn as much money as anticipated, and costs of healthcare benefits rose more than anticipated. If MERS can't pay pensions, municipalities have to step up and foot the bill.

Holland has to pay MERS $1.7 million in fiscal year 2018 to fund pensions, $360,000 more than the current fiscal year. Across Michigan, local governments are having to shoulder $10 billion in healthcare liabilities and $4 billion in unfunded pensions, according to the governor's office.

The plan Vagle presented will fund those pension obligations by issuing $22 million in bonds. These bonds will allow the city to funnel revenues gained from taxes paid by residents into the debt service fund. In the proposed 2018 fiscal year budget, 34 percent of the 13.077 mills levied from residents will go to pay for debt service.

"The plan explains the legacy costs for retirees the city is obligated to pay and it attempts to show the pension liabilities the city has as well as other post-employment liabilities," Vagle said. "This plan outlines the costs the city has promised to pay for its retirees and it helps to address a solution to pay for the those costs."

The city approved a similar plan in 2015, which issued $25 million in bonds to pay a portion of unfunded accrued liability — expenses not yet paid — relating to pension obligations for non-union employees of the city as well as members of the Holland Board of Public Works union.

Vagle said his office will ask council to approve the plan as a whole as well as the issuance of bonds up to $22 million at council's Wednesday, Nov. 1, meeting. If approved, the next step will be getting the plan approved by the Michigan Department of Treasury, then the city would be allowed to start issuing the bonds.

It is not yet clear how the state as a whole will deal with unfunded pension liabilities. A taskforce created by Gov. Rick Snyder to address the issue released its recommendations in July, which urged the state to require municipalities to prefund new hires' retiree medical costs and help local governments facing substantial underfunding.

In December, legislation was introduced that would end post-retirement health care for new local government workers and generally force existing workers and retirees to pay 20 percent of their post-retirement health care costs, but it was quickly shelved due to furious backlash from police and firefighters.

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