“The overriding influence on the pension plan over the past five years was the recession and the stock market crash,” says city administrator Steve Powers.

Nancy Walker, executive director of the city’s retirement system, says that influence was all bad. At the end of fiscal 2007, the investment fund supporting city’s pension plan was valued at $452 million. “At the end of [fiscal year] 2006, $405 million was the plan’s value. … At end of 2009, the fund was at $322 million.”

The fund still hasn’t recovered. “Right now it’s at $450 million, so basically back up to where it was 2007,” Walker says. And at the same time that the recession was taking a bite out of the plan’s value, more people began drawing pensions. “There were a lot of cutbacks in personnel, and that increased the number of people in retirement substantially,” Walker says. “So we’ve had to pay out more.”

Powers explains that while “benefits vary between general service employees and police or fire employees, there is one pension plan, and there’s always been one pension plan. The most significant difference is between general services and police and fire because police and fire employees have shorter careers and more physically demanding jobs.”

The same one-two punch–investment losses combined with rising payouts–has hurt Washtenaw County’s pension plan so badly that leaders are talking about raising taxes to cover more than $200 million in unfunded liabilities (“What Price Pensions?,” November 2013). This year, the county started putting all new employees into a “defined contribution” plan, which promises to put only a certain amount into the plan. But the city is sticking with a traditional “defined benefit” plan, which guarantees retirees a fixed level of benefits.

“There’s a popular misconception that a defined benefits plan is expensive and a defined contribution plan is cheap, but the true difference is who gets the risk,” Walker explains. “In a defined benefits plan, the risk is centralized with the plan. In the defined contribution plan, the individual assumes the risk.”

In addition to a pension fund, the city also has a Voluntary Employees’ Beneficiary Association (VEBA), “a trust fund to fund post-employment health benefits,” Powers explains.

“Our VEBA is low [at 38 percent funded], but it’s better than most cities’,” says Walker. “We still have assets set aside.” That’s because “the city always made contributions,” Powers says. “Some cities didn’t always make contributions during the recession.”

At the turn of the century, the pension plan was so well funded the city didn’t have to contribute new money from its general fund. But then the city slashed its staff, and the recession took a big bite out of plan’s value; in the upcoming fiscal year, the city general fund will pay more than $12 million into the fund.

How’s the plan doing now? “It’s very good compared with five years ago,” Powers replies. “The gold standard is 100 percent funded, and pre-recession the city’s was 100 percent. The recession dropped it, and now it’s at 80 percent. Our advisor gave us a B+.”

“It’s a hard B+, because the city follows all prudent policies,” says Larry Langer, the city’s Chicago-based pension fund consultant. “One, they get an analysis done every year. Two, they get our recommendations, do their due diligence, and then invest. Three, they do [long-term] reviews every five years. On those basic elements, I’d give them an A. There are other plans that are funded better in the state, but not by much better, and Ann Arbor’s assumptions are more conservative.”

“Our plan assumes a 7 percent market return,” says Powers. “That’s on the low side for the state,” adds Walker, “and we’ve been doing better than that lately. When the last fiscal year ended in June of 2013, return was 11 percent net of fees. Through November of 2013, however, we were 7.9 for pensions and 7.8 for VEBA.”

“A typical assumption nationally is about 8 percent,” says Langer. “If we moved the city’s [assumed rate of return] to 7.5, I could see the funding status increase to 88, 90 percent.”

Powers says that the city will eventually catch up–he predicts that “we’ll reach 100 percent funded by about 2035.” Why so long? “It does seem like a long time, but it’s not really that long,” says Langer. “In the public sector, when you have unfunded liabilities, they’re similar to other obligations, and they get amortized over a number of years and paid off like a mortgage.

“The standard is thirty years. Here we’ll be there in twenty-three, twenty-four, twenty-five years. It’s good. The longer the amortization, the less the [the general fund] contribution and the less [market] volatility.”