AS OF DECEMBER 1, 2012, Ann Arbor city engineer Homayoon Pirooz “retired” with a pension funded by the taxpayers of Ann Arbor. However, in a scenario that has become common, Mr. Pirooz did not retire. He took a new job—a full-time position which pays well over $100,000 per year. His salary in Ann Arbor prior to his departure was $110,000 per year. He was one of the city’s 25 highest paid staffers.

In November 2012 Evanston, Illinois City Council members approved a resolution to allow their city manager to “sign a lease for the one bedroom apartment on the second floor of the Service Center, 2020 Asbury Avenue, with Mr. Homayoon Pirooz from November 26, 2012 through November 26, 2013.”

Pirooz’s “retirement” from the City of Ann Arbor went through on December 1, 2012 and on December 4, 2012 Evanston officials announced his appointment. The announcement reads:

“…Mr. Pirooz comes to the City of Evanston from the City of Ann Arbor, Michigan, where he served as Project Management Services Unit Manager since 2000 and Street Administrator since 2005.”

Pirooz worked for Ann Arbor from 1982 until 2012.

Over the past 36 months, several of the city’s highest paid staffers “retired” into jobs that paid six-figure salaries, and while they collected paychecks, they also collected pensions and health care benefits funded by Ann Arbor taxpayers. This list includes:

• Roger Fraser, former City Administrator.
• Sue McCormick, former Public Services Area Administrator
• Barnett Jones, former Police Chief
• Dan Rainey, former Information Technology Director

In just the past 36 months one-quarter of the city’s highest paid administrators have “retired” with city-funded pensions and health care benefits into high paying jobs.

Ward 2 Council member Sally Petersen, when asked to respond to the news that one-quarter of the city’s highest paid administrators had “retired” into jobs that pay six-figures, wrote in an email: “I think the intent of the original legislation was to allow for a generous retirement. If these retirees then decide to work instead of actually retiring, then the original intent failed. What ‘retirees’ do in their retirement is their personal choice. I am not sure why this wasn’t anticipated.”

The “generous retirements” were not only anticipated, the city’s pension ordinance was changed under former City Administrator Neil Berlin. Berlin, served as administrator from 1995 to 2001. The Berlin-era changes allowed city employees to collect pensions after just five years of city employment.

Prior to Berlin’s tenure, the city’s pension ordinance required employees to work for 10 years before vesting. The Berlin change remained unaltered until 2011, after the April “retirement” of former City Administrator Roger Fraser into a job with the State of Michigan and a six-figure paycheck.

Fraser left his job as Deputy State Treasurer for Local Government Services at State of Michigan in May 2013. That same month, Fraser applied for the City Administrator’s job in Kalamazoo, but officials there were reportedly “underwhelmed” and Fraser launched a consulting business in June 2013.

After Fraser retired, Council members voted to again require employees to work 10 years before becoming eligible for taxpayer funded retirement benefits. However, three months earlier, at Fraser’s urging, on January 3, 2011, Council voted to change the language of the pension ordinance so that cost of living (COLA) increases to city pensions became mandatory. Prior to January 3, 2011 cost of living increases were discretionary.

Ward 1 Council member Kailasapathy, a CPA, would like to see pension reform in the list of Council’s top priorities in 2014.

“Our pension problem is a mess,” said Kailasapathy. “Obviously people need to retire, but we must to close these loopholes. We need to put in millions of dollars to plug the funding gap, but that’s not enough either. We need to really rethink all of the upcoming capital expenditures.”

Putting the brakes on capital expenditures—in essence severely curtailing spending—is not what others on Council or city staff want to hear.

Council member Kailasapathy goes on to explain: “Right now, we’re facing a quarter of a billion dollar pension fund and health care funding gap that is growing. We can’t keep spending and spending. For instance, we can’t afford to build a $40 million dollar train station.”

Ward 2 Council member Sally Petersen, who earned her MBA at Harvard, wants to make sure Council members understand how the pension system works.

She said that “during the December 9th retreat, Council will have the ability to choose its budget priorities. If we zero in on pension reform, then I suggest that we start with a deep dive into training on the mechanics of our pension system. I don’t think most Council Members understand its details.”

Ward 3 Council member Stephen Kunselman agrees. He said, “I’m always open to learning more. I’m certainly no pension expert.”

Ann Arbor State Representative Jeff Irwin, a Democrat, weighed in on the subject of public employees collecting multiple pensions:

Organizations like the city or the school district should be empowered to make these decisions in concert with their employees and prospective employees.  Obviously, I’d like my local units of government to make wise hiring decisions, deploying the best service for the lowest cost.

How to get there, in each specific instance, doesn’t lend itself to a blanket policy. Also, even if we did enact such a policy, former employees would just as easily be able to work for a former employer as a contractor, potentially costing the public far more. So, the devil is in the details and a statewide policy couldn’t effectively deal with all the complexities of hiring decisions for schools and municipalities.

I would also add that most of the new employees at the state and local government level are in 401K style programs (except police and fire). In time, the concern raised when a public employee works for a second pension will evaporate. Also, I suggest that the high-profile instances center around employees at the top of the organizational chart. I think the problem is more with how we compensate director-level staff than pension policy per se. We need flatter, fairer organizational structures in government.

As of June 2012, there were 650 employees paying into a pension system which paid out $31.5 million dollars in benefits to 837 retirees and 134 beneficiaries (971 individuals).

The city provides health care benefits to 958 retirees and surviving spouses. Over 90 percent of retirees elect to take advantage of city-funded health care benefits. It’s a plan that provides full coverage to the retiree, spouse and all dependents as long as the retiree is alive.

As is the problem in Detroit, a larger number of employees is receiving benefits than pay into the system. In large part, this is the result of over a decade of cutting the number of full-time employees, increased outsourcing and heavy reliance on temporary employees who receive no benefits and do not pay in to the retiree benefit system. In 2000, Ann Arbor had over 1,000 city employees and a pension fund that was 126.8 percent funded.

Neil Berlin retired with a $26,000 annual pension, but the changes he spearheaded allowed dozens of city employees to retire with pensions in excess of $70,000 per year. The table, above right, shows the number of retirees and their monthly pension amounts as of June 2012. The large number of retirees collecting monthly pension payments of over $4,200 includes:

Former Fire Chief Thomas Schmid retired in August of 2002 with an annual pension of $126,224. Data supplied by city officials in response to a Freedom of Information Act request estimate that the total pension payout to Schmid from Ann Arbor taxpayers will top $3.9 million dollars.

City engineer William Wheeler retired in May 2010 with a $121,861 annual pension. Wheeler’s total pension payout is expected to top $4.3 million dollars.

Records show that the total taxpayer funded payout for the 50 city retirees collecting the largest annual pensions is expected to top $150 million dollars, or about 60 percent of the current total unfunded pension debt.

Meanwhile, the amount of money in the retired employee pension funds  available to pay for those benefits continues to shrink.

Ann Arbor taxpayers fund current employee benefits through a 2 mill property tax assessment. Retiree pension and health care costs are supposed to be funded through employee contributions, gains in the funds’ investments and, if necessary, supplemented by money from the city’s General Fund. Services funded from the city’s General Fund include police, fire and parks.

Council member Sally Petersen says she was told Council will have to increase payments from the General Fund to the underfunded pension fund. Petersen said, “I was made aware that over the next few years we will have to continue to increase payments to the underfunded pension because of the ‘catch-up’ required after losses due to the 2008-2009 ‘Great Recession.’”

Council member Sumi Kailasapathy points out that the city’s General Fund doesn’t have enough in surplus funds to cover the pension fund losses as well pay for the growing funding gap.

The pension fund has lost $27 million dollars since 2008 and the funding gap grew by $77 million dollars during the same period.

In 2005 the Blue Ribbon Panel pension report about the city’s retiree pension and health funds dropped a bombshell: “While the Committee recognizes that monies have been contributed to initiate the funding of the associated retiree health liabilities, these benefits are currently being covered by a largely pay-as-you go basis and partially out of earnings of the retirement system….”

The 2005 Blue Ribbon Panel also concluded, “The unfunded liability related to the City’s retiree medical benefit commitment is a large, looming problem. The problem is not exclusively related to its size, but is related to the fact that it is hidden and is being deferred out to future years’ taxpayers.”

Retiree health care costs have been funded through the contributions of active city employees, retirees, fund earnings and with money from the pension system. As of June 30, 2012, retiree health care liabilities were only 35.1 percent funded. Thus, that unfunded liability stands at $162.1 million dollars.

Over the past dozen years, the city’s employee pension fund has gone from being 126.8 percent overfunded to being 19.8 percent ($100.2 million) underfunded.

Ann Arbor taxpayers face retiree pension and health care unfunded liabilities that exceed $260 million dollars and a total accrued liability for retiree health care and pension benefits that tops $750 million dollars. If projected 2013 property tax revenue  were increased by tripling property taxes, it would still take 2.5 years to pay off the retiree health and pension systems’ $260 million dollar unfunded liability.

The amount of the funding gap has exploded over the past half a dozen years due, in part, to staffing reductions made by offering early retirements. In addition, Mayor John Hieftje and his allies on City Council to put off important reforms to the city’s pension ordinance recommended by the 2005 Blue Ribbon Pension Committee.

Retiree pension and health care fund audit statements from 2013  suggest Council members who served between 2005-2011 exacerbated the problem by approving employee contracts that included retirement benefits that the city could not afford.

That, coupled with the inaction of those same Council members—even as annual audit statements signalled a  rising tide of unfunded liabilities—created a perfect storm. It’s a storm newly-elected Council members want to see the city weather with as little damage to citizen services as possible.

Council members who served between 2005-2011 and who are still active in local government include:

• Mayor John Hieftje
• Ward 1 Council member Sabra Briere
• former Ward 1 Council member Sandi Smith (DDA Board)
• former Ward 2 Council member Joan Lowenstein (DDA Board)
• former Ward 2 Council member Stephen Rapundalo (LDFA Board)
• Ward 3 Council members Stephen Kunselman and Christopher Taylor
• former Ward 3 Council member Leigh Greden (Ann Arbor Housing Commission)
• former Ward 3 Council member Jean Carlberg (Planning Commission)
• Ward 4 Council member Margie Teall
• Ward 5 Council member Mike Anglin
• former Ward 5 Council member Wendy Woods (Planning Commission)

Several Council members have said privately that the retiree pension and health care obligation is one of the most serious financial problems facing Ann Arbor.

“I don’t know if the public really knows just how serious the problem is,” said one Council member. “I’m not sure they want to know.”