Politicians May Prop Up – But Not Reform – ‘One of the Best Public Pensions Around’

By Tom Gantert | May 20, 2011

James Hohman says if state legislators are not careful, they could be wasting $160 million of the unexpected state government surplus for the benefit of the Michigan Education Association and other school unions. The fiscal analyst for the Mackinac Center for Public Policy is referring to the $160 million that Gov. Rick Snyder announced would be used to help school districts pay for retirement costs of employees.

Details haven’t been released yet in the state budget deal that was approved late Thursday afternoon. But Hohman said it’s important to watch how the state uses that $160 million with the troubled Michigan Public School Employees’ Retirement System (MPSERS). Not only does the school employees’ pension have an unfunded liability of nearly $12 billion, but districts’ contributions will rise from 20.66 percent of total district payroll this year – and to 24 percent next year – just to cover the cost of the retirement plan and its extraordinary (by private-sector standards) health care benefit for retirees.

The contribution rate is paid by the district on top of employee salaries.

If state legislators use the $160 million to help school districts cover their increased payments to MPSERS, that would just free up more money for schools to pay for raises and cover more of the employee’s health care costs, Hohman said.

The average Michigan employer that provides a health care plan requires that employees kick in at least 21 percent of the premium cost, according to the Kaiser Family Foundation. Yet more than half of Michigan’s 549 school districts do not require teachers to pay a percentage of the premium. And many that do require a percentage contribution require well under 10 percent.

”These things increase costs for education at a time when schools need to fix the problems that continually require more cash,” Hohman said.

Hohman says the school employees’ pension plan has to be changed from a defined benefit, which pays out an annual pension in retirement, to a defined-contribution 401(k)-type plan.

State officials have said that a switch would mean the state would have to come up with about $200 million due to changing accounting practices. They would prefer to defer paying that cost until the future. Hohman said he’d like to see the $160 million used to pay the transition to a 401(k) plan. Hohman said that those payments ought to be made sooner rather than later and that there will be substantial savings from a defined-contribution plan over time.

Defined-contribution 401(k)-type plans are easier to budget, Hohman said. For example, in 1997, the state switched most state employees in the Michigan State Employees Retirement System (MSERS) from a defined-benefit pension to a defined-contribution 401(k)-style plan. Hohman said in those 14 years, the state has not adjusted its contribution rates.

At least one politician agrees that a change needs to be made.

“I don’t think there is any doubt that this is the way it should be,” said State Rep. David Agema, R-Grandville. “The defined-benefit pension is just eating us alive, and it is something we can no longer afford.”

In a conventional defined-benefit pension plan, schools put money aside each year to finance a projected annual retirement income. The problem is that with MPSERS, not enough money has been put aside to meet projected future payouts. The unfunded liability for pensions is $11.98 billion. The unfunded liability for public school retiree health care and other benefits ranges from $17 billion to $28 billion, according to state actuary reports.

Retiree health care is a different benefit than the health care plan offered to current employees who still provide services to the district.

While they are standard operating procedure for Michigan’s public school employees, conventional pensions and health care policies for retirees who no longer provide services are rare fringe benefits for the majority of the American workforce. The state’s handbook for MPSERS refers to it as “one of the best public pensions around.”

For large American firms that have a health care insurance plan, just 28 percent behave like MPSERS and also provide health care to retirees, according to the Kaiser Family Foundation. This number has plummeted from a high of 66 percent in 1988. For smaller firms – defined as those with fewer than 200 workers – retiree health care has almost vanished: Just 3 percent offer it.

Likewise, a recent Mackinac Center for Public Policy analysis of MPSERS notes that conventional pensions are also vanishing from the private sector: "[B]etween 1985 and 2010, the percentage of Fortune 100 companies that offered traditional defined-benefit pension plans to new hires fell from 89 percent to 17 percent.”

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Politicians May Prop Up – But Not Reform – ‘One of the Best Public Pensions Around’

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