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Articles from the AFT Michigan Forum

Volume 65 No. 4, Winter 2006

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Pension Fund Report

Each year the Michigan Bureau of Investments provides a financial report on all of the State of Michigan Retirement Systems Pension Funds (SMRS). A summary of that report was recently presented at the annual Retirement Coordinating Council Workshop. The Bureau currently administers over $50B of public employee retirement funds including those of the Michigan Public School Employees Retirement System (MPSERS). Michigan has the 13th largest public pension fund in the country.

The goals of the Bureau's investment are to provide each pension fund with enough liquidity to pay current benefits, create ample diversification to protect investments and to provide optimal return on the money. The stated financial goal of the Bureau is to achieve a return of at least 8 percent.

The MPSERS fund, which is the single largest segment in the system, is currently valued at $39 billion. The fund currently provides annual pensions to 146,000 retirees and survivors. It has a liability for an additional 117,000 school employees who are currently vested in the program. They have a potential liability for another 203,000 school personnel who are in the system but not vested and 14,000 who are entitled to benefits but are not currently working the public school system. Added together, the MPSERS fund is responsible for 480,000 public school employees.

To support this pension system most school employees contribute 4 percent of their pay to MPSERS. A small group is enrolled in the "basic" plan and makes no contributions. At the same time the local school districts, or LEAs, contributed 14.8 percent of the pay for each employee during the 2004-05 school year. This year the contribution has increased to over 16 percent.

In 2000, 2.48 employees contributed to the system for each retiree. By 2004 the ratio had declined to 2.21 to 1. This loss was due to the downsizing in many districts and the increase in charter school employees who are not part of the system.

The size of the MPSERS Fund has increased dramatically over the years. In 1980 the fund was valued at only $4B and had an accrued liability of $8B (50.1%). By 2000 the fund was worth $37B and had a liability of only$37.1B (99.3%) The difference in value and funding levels was due to the increases in employee salaries during this period and the relatively low pensions provided to earlier retirees and the increasing investment profits.

The fund value dropped to $31B in 2002 as a result of 9/11 and the ensuing recession but recovered to its 2004 value of $39 billion. By 2004 the liability had also increased to $46 billion (83.7%).

In terms of investment profile the SMRS report offered some insight into the utilization of our pension money. The top three investment categories were Stocks (48 %), bonds (17%), and Private Equity Holdings (11.7%). Only about 4 percent of the pension funds are kept as cash reserves.

The top five stock investments were Citigroup, Exxon Mobil, General Electric, Pfizer and Microsoft. Although we might be critical of banking charges, drug costs and the price of gasoline, these companies and others provided the pension fund with ever increasing value. In terms of real estate investments, the SMRS has put about 32 percent of their property portfolio into apartments. Office buildings take up another 23 percent with retail property at 13.3 percent. A recent investment in the Marriott chain brought the hotel investment level to 10.6 percent. Interestingly enough the investment in senior living properties was only 3.1 percent.

The overall return on the MPSERS Pension Fund has met the Bureau's expectations. Over the past year the fund has averaged 8.3 percent. Over the past 3 years the increased value has averaged 8.4 percent. The 5-year average unfortunately fell to 2.3 percent. The 10-year average has been 9.0 percent.

Even though our pension fund has met or exceeded financial expectations, the growing liability continues to outpace revenues. This has forced school boards to pay a larger and larger percentage to maintain the current funding level. This has resulted in charges that the pension system is taking funds away from student services and programs. This in turn has created calls from superintendents and school boards for some type of relief. The public employee response to this is the recent K-16 petition drive to have the state pick up any additional costs over the current pension contribution levels.

The revenue shortfall has already resulted in increased costs to retirees for health and drug coverage. It has also prompted the legislature to undertake steps to modify or eliminate the "Cadillac" pensions of public school employees and to stem the increasing costs of medical coverage. Their proposals to establish a "Defined Contribution" pension system, and a "Graded Scale" Premium Insurance Co-Pay plan, solves the pension problem by virtually eliminating the current pension system for all new employees.

Public school employees have a vested interest in their future and their retirement. That interest needs to be protected.