Thanks to House Republicans, a major school pension reform passed by the state Senate last week could be undone. As reported by CapCon, Senators defied government employee unions by voting to close the chronically underfunded “defined benefit” school pension system to new employees, starting in 2013.

If the House follows through, this would be arguably the most transformational state budget reform since Gov. John Engler signed a similar measure for state workers back in 1996. That measure has helped taxpayers avoid some $4.3 billion in unfunded liability since then.

If the House fails, every new school employee hired going forward represents a new taxpayer liability that won't be extinguished during the lifetime of most who read this. The history of this and and other government pension systems suggests that much of this liability won't be properly pre-funded, with the cost falling on our children and grandchildren. 

And yet House Republicans led by Appropriations Committee Chairman Chuck Moss, R-Birmingham, appear willing to give the state's largest government employee union a victory by deep-sixing this reform.

If that holds this would be the second time the school unions have won on this issue: Gov. Engler’s original 1996 pension reform proposal included school employees, but the Michigan Education Association melted the phone lines into lawmakers' Capitol officies and got this removed. A similar spectacle appears to be unfolding now.

Taxpayers today are paying a steep price today for that 1996 GOP surrender: Persistent underfunding of school pension contributions has created almost $18 billion in unfunded liabilities, or some $4,600 per household, which under the Michigan constitution must be paid eventually. Given the system’s history and political incentives (lawmakers love to promise benefits that future taxpayers will have to pay for), failing to close the system for new employees now will almost certainly increase that bill.

One excuse for the current surrender is “transition costs,” which means accounting rules that appear to require more upfront cash to pay-down existing unfunded liabilities when a pension system is closed. A recent study reveals this argument to be dubious: The rules require reporting of how much accelerated “catch up” payments would cost, but do not require the state to actually change its current (and reasonable) plan for gradually getting caught up. (Even if the rules did require this, paying more now would also means paying less later.)

A related excuse is that “the bond market” would look askance at any failure to slavishly match the reporting requirement with actual policy. However, bond buyers (and potential employers looking to locate here) aren’t stupid, and can easily distinguish between a major transformational reform and comparatively minor technical tinkering. The positive effect of closing the system to new employees would have a far more positive impact on the state’s credit rating than replacing the current and perfectly adequate “pay back” plan with a slightly faster one.

The Michigan Legislature is on the threshold of a major reform that will pay dividends for many decades to come — but only if only Republicans don’t blow it (again).