ESCANABA — Like many communities across the state, the city of Escanaba is burdened with payments to the Michigan Municipal Employees’ Retirement System, commonly known as MERS, for unfunded pension liability. Escanaba, however, may soon be faced with an even greater cost after the state determined the city had not contributed enough to pay its obligations to former employees.

“We’re in this situation not because of anything the city has done. The city has followed MERS recommendations forever and ever, and unfortunately they gave the city some bad advice 10 or so years ago, and they at that point recommended the city not make payments for … one or two years, and that put us on this path, unfortunately,” said Mayor Pro Tem Ron Beauchamp, at the council’s regular meeting Thursday.

This year, the city was required to submit a form to the Michigan Department of Treasury containing a two-part test to determine if the city’s liability for defined benefit pensions is considered “underfunded” under Public Act 202 of 2017. For cities, a determination of “underfunded status” is made if the total balance held by MERS for paying for defined benefit pensions is less than 60 percent of those liabilities and the city’s annual contributions to the plan are greater than 10 percent of total fund revenues.

Being only 58 percent funded, Escanaba failed both parts of the test this year, earning underfunded status. However, according to City Controller Melissa Becotte, the city is in much better shape than the form indicates.

A significant portion of the city’s fund revenue comes from enterprise funds, such as water and wastewater, which were not included in the calculation to determine fund revenues. That omission skewed the results, making the annual payments to MERS a much larger portion of the city’s budget than it actually is.

The city initially reached out to the Department of Treasury to argue the calculations did not reflect the city’s actual financial position, but no changes were made to the department’s decision on the matter.

“Unfortunately, Treasury didn’t have a whole lot of interest in complying with our suggestions,” said Becotte.

To avoid filing a corrective action plan with the state, the city then attempted to file a waiver. That waiver was denied.

Now the city is required to create the corrective action plan — which must be approved by the city council — detailing how the city will reach the 60 percent funding goal and how quickly that goal will be reached. The plan itself must be approved by the state and take effect within 180 days of approval.

How the city will reach the funding goal has not been determined, but there are a few options.

The city can opt to continue making payments as it has been and include in the plan when 60 percent funding would be reached based on current information, but doing so could be a gamble. Funds paid into MERS are invested rather than being applied directly to pensions, and market fluctuations can significantly change how high a percentage any contribution will actually yield. Extreme market fluctuations can even reduce existing funding percentages, as happened in 2008, which could raise the amount needed to even maintain the city’s current funding percentage.

If there were no changes in the market the city could reach 60 percent funded in four or five years under this plan.

“The problem is we’re not dong anything new, and if they deny the plan, then they send it back to me, then I have to redo it, come back to (the council) and we have to go through this whole thing again,” said Becotte.

The city could also opt to make a one-time payment to MERS. This would have the added benefit of being a demonstrable effort to reduce the city’s liabilities — something which could have an impact on whether or not the state approves the plan — but it could leave the city faced with inter-fund loans to rebalance the budget.

If the city choses to make a lump sum payment, that payment can be applied one of two ways: it can be applied to the different divisions of the plan that correspond to union groups receiving benefits or it can be applied to what is known as a “surplus division.” If it is applied to a surplus division, the city’s annual payments will not change, but if it is applied to a specific division of the plan the annual payment is reduced. In this fiscal year, the city is anticipating a total payment of around $1.7 million to MERS for its annual contribution.

“I think if we went this way, I would prefer to just do the surplus division and continue to pay our contributions. It’ll pay it down faster,” said Becotte.

How much the lump sum would need to be to get the city off the underfunded list is also a guessing game. Based off the information available Thursday, the city could pay $600,000 and be 60 percent funded, but MERS is currently recalculating its predicted return on investment (ROI). For the past five years, MERS has provided cities with a 7.75 percent ROI, but Becotte predicts that will drop by at least a half a percentage point. If that happens, the city’s contribution would need to jump to $2.5 million, and a lower ROI would mean an even higher payment would be needed.

Still, the city could benefit from investing money in MERS. The city’s bank accounts and other investments are currently yielding around 2 percent interest — significantly lower than any anticipated ROI from MERS.

Regardless of how the city structures the corrective action plan, there is a possibility that the city will be monitored for four to five years by the Municipal Stability Board, a three member panel, which approves or denies the corrective action plans and their oversees compliance.

As only a public hearing was scheduled on the MERS liability Thursday, the council did not make any final decisions on the corrective action plan.

In other business,

– the council approved a budgeted purchase of a used motor grader

– approved an agreement with the Michigan Department of Transportation for maintenance of traffic signals, approved entering into a contract with the Central Upper Peninsula Regional Planning and Development Commission (CUPPAD) for administration of the Escanaba Downtown Facade 2018-2019 project

– approved having the interim city clerk also serve as the interim Freedom of Information Act officer.

– Mayor Marc Tall also issued proclamations for the 2018 Escanaba 9-10 Little League All-Star softball team, Escanaba Major (11-12) Little League All-Star Softball Team, Escanaba Eskymos Varsity Softball Team, and the Escanaba Major (11-12) Boys Little League All-Star Team.