Study: 'Barriers' To Public Employee Pension Reform Unfounded

Unfunded liabilities tied to public employee pension plans are bankrupting communities and school districts and are doing so without much attention from state officials, says Michael J. Hicks, director of the Bureau of Business Research at Ball State University, and an adjunct scholar with the Mackinac Center for Public Policy.

Politicians don’t address the issue because the effects of the promises they or their predecessors made come long after they leave office. But it is urgent that the unfunded liabilities of state pension funds be addressed immediately, Hicks said at a March 7 speech in Lansing sponsored by the Mackinac Center.

His concerns are echoed by the Mackinac Center’s Assistant Fiscal Policy Analyst James M. Hohman, who said in a study released Monday that there are numerous ways to address the barriers to pension reform.

In particular, the notion that it would cost too much to transition from defined benefit pension plans to defined contribution plans that exist in the private sector, is untrue, Hohman said. One need only look at the unfunded liabilities of state pension plans to see the urgent need. 

Consider that the pension plan in the Michigan Public School Employees’ Retirement System has unfunded liabilities of $17.6 billion (the state has set aside $43.3 billion aside to pay for $60.9 billion worth of pensions).

State officials claim the “transition costs” associated with closing such pension plans and starting 401 (k)-style individual retirement savings account or other measures are prohibitive, but Hohman disagrees. “These ‘transition costs’ are little more than accounting gimmicks that the state can ignore at its own discretion,” Hohman said.

Even so, Hohman shows that any transition costs can be mitigated a number of ways.

For example, generous retirement health insurance benefits for public school employees could be reduced, he said. The state also could pay upfront transitional costs, which would accelerate the payment of unfunded liabilities.

Hohman says the state must re-examine ways in which to mitigate the transition costs and be open to new options. His study is available at www.mackinac.org/16589.