Engler-Era Pension Reforms Saved Billions; Teacher Pensions Not Part of Deal

When former Gov. John Engler and Michigan lawmakers switched new state employees from a defined-benefit to a defined-contribution, 401(k)-type retirement plan in 1997, it saved taxpayers billions in additional unfunded liabilities and another $167 million in other costs, according to a new policy brief released by the Mackinac Center for Public Policy.

The change to the Michigan State Employees’ Retirement System saved the state an estimated $2.3 billion to $4.3 billion in unfunded state employee pension liability from 1997 to 2010, according to the report, authored by public pension expert Rick Dreyfuss. Even with these savings, the MSERS unfunded liability for employees hired prior to the reform date increased to $4 billion in 2010, according to a recent actuarial report.

The state employee defined-contribution 401(k) plan provides a 4- percent of salary automatic contribution with an additional 3 percent match on employee contributions, meaning the state will kick in up to 7 percent of state employee salaries.

James Hohman, assistant director of fiscal policy at the Mackinac Center, said the study was more evidence that the state needs to go a similar route with its public school employees’ pension plan — the Michigan Public School Employees’ Retirement System (MPSERS).

Most public school employees are enrolled in a defined-benefit plan that pays out an annual pension in retirement. The MPSERS pension system has a $11.98 billion unfunded liability.

“Something has to be done about that,” Hohman said of the growing MPSERS unfunded liability. “This is the way to get out of it.”