Commentary: Shifting School Employees to a 401(k) Is the Most Important Thing

The Michigan state Senate has been a frequent target of these pages for being insufficiently frugal with taxpayer money, but Republican Senators surprised CapCon and many others last month by passing a transformational reform: Closing the “defined benefit” school pension system to new hires, and instead providing generous taxpayer contributions to their employee 401(k) accounts.

In other words, transitioning to the type of retirement benefit that’s the norm in the private-sector, and is the benefit provided to state employees hired since 1997. 

But another surprise soon followed: The Michigan House, which has generally pressed harder for reform than the Senate since a GOP majority gained control after the 2010 election, stripped out this provision and passed a much weaker bill. House Republicans pushing the watered-down bill were led by Rep. Chuck Moss, R-Birmingham, and Rep. Rick Olson, R-Saline.

Specifically, their version would continue to generate more taxpayer liabilities for every new school employee hired, but at a slightly reduced level than currently through a system misleadingly labeled a “hybrid” pension. The House also voted to “prefund” health insurance currently provided to school retirees (many of whom stop working and begin collecting in their 50s), even though this benefit is completely optional and could be trimmed or eliminated at any time.

In several articles Mackinac Center policy analysts James Hohman and Jack McHugh have debunked claims promoted by unions and pension bureaucrats that the Senate-passed reform would require the state to incur massive “transition costs,” challenged the plan’s fake “savings” and exposed a rigged study the House ordered up. They have taken some claims head-on and pointed out past pension-rule violations.

Accountants or others interested in the nitty-gritty bookkeeping details can review the articles linked above. But citizens concerned that Michigan may eventually follow Greece, California and Illinois down the road to fiscal perdition should remain focused on the thing that really matters in this dispute: To stop digging a deeper liability hole by no longer enrolling new school employees in the "defined benefit" pension system.

The House Republicans leading their colleagues on this issue have cranked-out articles, videos and letters to the editor emphasizing how "complicated" this issue is, and there are indeed some thorny issues. But the value of capping the state's pension liabilities is not in dispute. Examples from around the country underline just how critical this is.

Exhibit No. 1 (there's a growing stream of them) is Stockton, Calif., which just became one of the largest municipal bankruptcies in history. Citizens in two other California cities, San Diego and San Jose, both voted by 2-to-1 margins to avoid this fate by giving heavy benefit "haircuts" to city employees. In all three cases, the crisis broke after laying off a large part of the cities' workforces.

In Illinois, school employee pension problems are so bad that even former Obama administration official and Chicago Mayor Rahm Emanuel says businesses are starting to avoid the state because they can see massive tax hikes coming down the pike. Actually, they’re already here: Last year, the Land of Lincoln passed a 67-percent income tax increase and a massive business hike, accelerating a job-provider exodus.

These and many more fiscal basket cases were primarily caused by defined benefit pension systems like the one the Michigan Senate voted to close. The Great Lake State's dysfunctions haven't reached the levels of those poster-child examples, but unfunded liabilities have been rising and pension fund investment return predictions have been way off. Because of the political incentives to keep serving powerful government unions' interests ahead of citizens, Michigan taxpayers remain at deep risk.

The House has tied itself in knots dealing with arguments primarily intended to muddy the water. The question remains: Why do these Republicans believe that school employees should get retirement benefits so far out of line with what almost all their private sector neighbors receive, and even with those of most Michigan state workers?

The Mackinac Center is hardly the only voice making this case. The Wall Street Journal, The Detroit News, the American Enterprise Institute, the Arnold Foundation, David Littmann and many others agree. (Littmann is the former senior vice president for Comerica Bank and one of the most respected economists in the state; he is also senior economist with the Mackinac Center).

Supposed conservative Republicans in the House, most of whom show up at tea party rallies preaching fiscal responsibility, are trying to make the case to their constituents that unionized public school teachers should play by different rules than everyone else. They should not.