Shelby outlines plan to pay off pension debt by year’s end
June 9, 2014
SHELBY TOWNSHIP — At its June 3 meeting, the Shelby Township Board of Trustees unanimously approved the first step of a pension debt relief plan — the intent to issue bonds — and revealed how it resolved to pay off the township’s $24.3 million accrued unfunded liabilities by the end of the calendar year.
The plan includes borrowing $13 million from the Department of Public Works’ $27 million fund, issuing bonds in the amount of $9.5 million and taking the remaining $1.8 million from the police and fire funds.
The plan denotes that the township has up to 25 years to pay back the DPW loan at an interest rate of 1 percent, and up to 20 years for the bonds at a rate of 4.5 percent, said township assessor John Kaczor.
In its contract negotiations with the police patrolmen’s and fire unions, the township promised to pay off the pension debt by the end of the year in return for the switch of all new hires to a 401(k)-type retirement plan instead of a pension.
Kaczor said closing the pension system and using funds from within the township and bonds saves the township the 7 percent yearly interest it would otherwise have to pay on the accrued unfunded liability.
Kaczor said the township established the pension system in 1967, which was not fully funded beginning in its first year. He said the underfunding also resulted from a loss of market value and understated actuarial estimates.
With the defined contribution plan, employees contribute 5 percent of their salaries and get a vested 10 percent from the employer after five years of full-time employment with the township, which Kaczor said reduces township risk compared to the guaranteed 16 percent township contribution on the defined benefit — or pension — plan.
“The township will be saving 20 million in the next 14 years by funding (the pension debt) through this approach and also get a fixed annual payment instead of an annual reassessment fee based on an actuarial study, so it will stabilize funds significantly,” Kaczor said.
Treasurer Michael Flynn said he expects the township to be able to pay off early the loans through the DPW and bonds because he believed market values and the tax base would increase over the next three to five years.
“What I can tell you is there are no guarantees, but we are doing the best with the numbers that we have in front of us,” Flynn said. “The majority of the board is very conservative. We asked for the most conservative numbers, and it still looks like we can do it.”
He added that he would update the board and public about the township’s progress in paying off the accrued unfunded pension liabilities as the process unfolds.
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