ESCANABA, Mich. (WJMN) — Representatives for one of the largest pension fund managers in Michigan stood before the Escanaba City Council Thursday night to plead their case, trying to salvage their relationship after years of what city leaders say were disappointing returns and a lack of transparency.

City Manager James McNeil said the complaint is simple. “We’re just tired of the funding position it is in. It has not improved in a very long time… and for a closed plan—it should.” McNeil says at its current funding level, Escanaba faces high contribution costs to get the municipal pension fund up to 100%, regardless of who manages it. The decision to self-manage the fund is an effort to wrest control and stop the perceived bleeding.

MERS is a private, not-for-profit company with an elected governing board. The city of Escanaba was a founding member in 1946. At that time the company managed only about 20 funds across the state. 

Since then it has exploded in popularity to now manage over 80% of Michigan’s pension funds. That’s money from over 1,000 municipalities, and adds up to over $15 billion. MERS manages money in some capacity for cities from the largest (Grand Rapids, Detroit, and Lansing), to communities like Watersmeet Township in the Upper peninsula holding just over 1,000 residents.

At the end of September McNeil filed a request to terminate the city’s Municipal Employees’ Retirement System (MERS) Defined Benefit Pension Plan. MERS amended its termination policy in 2018. Steps for a municipality to exit include:

  • notifying MERS of its intention at least one month prior to the first meeting
  • making the topic an agenda item at two consecutive meetings
  • passing a vote on the issue with at least a two-thirds majority

MERS reps make their case to the City Council

That one-month notice for MERS is to allow them time to address any complaints. Marne Daggett, a regional manager for MERS began the defense of their work. Daggett said benefits of MERS expand beyond its billions of dollars in shared assets and call center for policyholders.

“[The city doesn’t] have to pay for fees for participants, or ongoing costs, or plan setup, or legal fees, things like investment advisors, and consultants, and record keeping, and banking fees… think about from your retiree’s and your active’s perspective; when someone adds a beneficiary, gets married, gets divorced, has done all of those things. We process all of that so it doesn’t put additional work on your staff,” Daggett said. “usually when I talk to groups about this, they they were unaware of a lot of the things that go into that.”

McNeil says under a city-run fund, participants could take care of that business at City Hall.

Another factor Escanaba city leaders took issue with was an apparent lack of transparency by MERS. “We sent an inquiry into MERS for a detailed accounting of the investments. They provided an answer, but not the level of detail we were looking for.” McNeil said that information included private investments and their valuation models.

Daggett paused for questions. The first from the council was, “does the city or employees have a say in investment opportunities?”

Daggett said that kind of control is limited to a supplemental retirement fund program offered by MERS.

Councilmember DuBord asked, “do we get to know what you invest in?”

“Absolutely,” responded Daggett.

“So if we look at private investments, that 20%, do we get a look at what those private investments are?”

“We have a lot of white papers on our website, there is a lot of information out there.”

“So they do get to see exactly what those investments are.”

Daggett then turned to a colleague, who said “some things like that, we don’t disclose deal-by-deal.”

DuBord asked if it was correct that participants can see the global equity, global fixed income, but not the private investments. Daggett’s colleague said that was correct.

City manager claims they can do better

The criticism transparency also stands in the shadow of Escanaba’s separate pension plan, which the city says is performing well. For at least the past few decades the city has managed its own money. “We’ve self-managed the Public Safety Pension Plan for a long time and have done a better job,” McNeil said. 

After the 2008 financial crisis both funds suffered, and at a glance, their recovery looked similar. The MERS fund was 67% funded in 2008, dropping before its recovery to sit at 69% in 2022.

  • Escanaba city manager's presentation on terminating fund with MERS.

The city’s Public Safety pension fund was 89% funded in 2008 and now sits at about 91%. The difference is a $2,500,000 cash infusion from Escanaba to the MERS fund, paid on top of the required contribution. 

Another difference between recoveries was the decision by managers of the MERS fund to execute a 10-year smoothing plan. “It’s saying ‘we’ve lost so much money, rather than raise your contribution today, we’ll phase it in over 10 years.” McNeil says a 3-5 year smoothing period is more common.

Then there is the operating fee paid to MERS. Daggett said in the last 10 years, MERS’s costs have gone down 43%. That’s the benefit of being part of a $15 billion fund pool, according to the company. Still, McNeil and the rest of the city leaders don’t seem convinced. “We found with the public safety plan that we can perform better… And our cost to leave MERS—it will be about the same cost.” 

As to whether other cities should follow suit, McNeil says it all depends on their resources and how they plan to invest the money next. “If it’s something you’re not familiar with, you definitely want to bring in help to navigate the process, but for Escanaba, it has worked… It’s worth an evaluation,” said McNeil.

The second hearing to address the city’s effort to take over control of its MERS pension fund is at City Hall on October 19th at 7 p.m.