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. 

Both the Pontiac School District and the city of Pontiac are operating with deficits, but the city is climbing out of the hole while the school district suffers.

Why? Because the schools are operating with the same officials at the helm trying to implement a deficit elimination plan while the city recovers thanks to a strong emergency manager.

In spite of its own plan to get out of the red, the Pontiac School District faces a $24.5 million deficit. That's 32.4 percent of its annual revenue. Of the 48 Michigan public school districts with deficits, only two of comparable size are deeper in the red in terms of percentage of annual revenues. Those two are Muskegon Heights, which is now being run by an emergency manager, and Benton Harbor. Neither of those districts approach the revenue level of $75.5 million that the Pontiac district has at its disposal.

By contrast, the city of Pontiac finished the 2011-2012 fiscal year, which ended June 30, with its deficit reduced to $8.4 million. The original deficit projected last year was $12.5 million.  What's more, Lou Schimmel, Pontiac's emergency manager (who was director of municipal finance at the Mackinac Center from 2006-2009), has proposed a budget for the 2012-13 fiscal year that is estimated to result in a $4.7 million surplus in the city's general fund as of June 30, 2013.

Deputy Oakland County Executive Bob Daddow said that comparing what's happening at the city of Pontiac with the performance of the school district shows the value of an emergency manager.

"Our emergency manager law is about taking action," Daddow said. "Unfortunately, public officials often prefer to delay when it comes to making needed decisions. When it's a situation like the one with Pontiac schools it's the students who suffer the consequences."

How do the two examples differ? A glance at key budget figures shows that the city's emergency manager is making needed adjustments to its drastically shrinking revenue. The Pontiac schools haven't seen a similar level of adjustment.

For the city, total revenue has tumbled from $54.2 million in 2008 to $36.8 million in 2012. Total expenditures in 2008 were $55.1 million. In response to the tumbling revenues, the city adjusted its spending to $37.7 million in 2011. Now it appears on the verge of ending next year with a budget surplus.

The school district, by comparison, saw average teacher salaries increase to $76,449 in 2011 from $60,708 in 2010. In 2004, the average teacher salary in the Pontiac School District was $45,002.

Total general fund spending at the school district for 2011 was $88.1 million, up from $81.8 million the previous year. The average per pupil operating expense was $14,685 in 2011, up from 2010's level of $13,002.

Like the city, the school district is facing falling revenues. However, much of its revenues have literally walked out the door. School districts receive government dollars for each student in the districts. They lose funding when students transfer to other schools.

In 2005, Pontiac schools had 10,507 students. By 2008, the number had fallen to 8,149. In 2010 the number of students slid to 6,023 and in 2011 it was just 5,785.

"Why should the students stick around in a failing system?" Daddow asked. "It's the same as what has happened in Detroit. In 2000, the Detroit school system had 175,000 students; now it's down to around 60,000."

Pontiac public schools' current interim Superintendent Walter Burt has not responded to requests for comment.

The school district's previous interim superintendent, Jonathon Brown, thought he had to tackle a $12 million deficit, but not long after taking the job last July, he discovered the deficit was closer to $25 million.

Brown has said that when he reported financial misconduct to the state, the Pontiac School Board fired him, according to news reports. Brown eventually filed a whistleblower lawsuit against the district.

In response to Brown's lawsuit, the school board said Brown wasn't fired but that he resigned after board members expressed concerns about him taking actions without first consulting them.

While all this was playing out within the school district, Schimmel used the state's emergency manager law provision to get an Intergovernmental Agreement for fire protection and medical response services with Waterford Township.

He also made arrangements for Oakland County to provide law enforcement, emergency dispatch, assessing, animal control, vital records and federal grant administration at a reduced cost without compromising service levels.

The changes Schimmel made were impossible previously. City officials struggled to cut expenses and had their hands tied by union contracts that had built in pay increases in to them regardless of financial realities.

The cost of public safety in Pontiac, for example, was $28.6 million in 2008. It's now down to $17.1. Taxpayers were saddled with general government costs of $5.5 million in 2008. Those costs were $4.9 million in 2012 and projected to be $4.5 million in 2013.

"EMs have been able to use the powers of the Act [P.A. 4 of 2011] to leverage employees, retirees and labor organizations to do the right thing to reduce the cost of government," said  John Naglick, finance director for the city of Pontiac. "I realize that the repeal and modification of state taxes and regulations reduce the amount of funds that the state can give to local units of government. But I can tell you from experience that the cost of local government can be reduced by the techniques that were employed here."

To help further, Schimmel has announced plans to sell the Pontiac Municipal Golf Course for $1.3 million. He's also in the process of selling the Strand Theatre.

But some decisions have been tougher than others.

For a second straight year, Pontiac has missed its payment to the police and fire Voluntary Employees' Beneficiary Association. Missing these payments has led to litigation.

Other problems involving legacy costs remain. Proposals to meet retiree health care obligations include a request to transfer funds from the city’s General Employee Retirement System pension plan to retiree insurance costs. There is also the possibility that the city will ask voters for a millage to help address the retiree issue.

But the city also is now investigating new ways to generate revenue. A deal that would allow surrounding municipalities to pay for hooking up to the city's waste water treatment system has been reached, which would give the city a one-time $46 million boost in 2013. It's expected that most of that single-year windfall will be used for legacy costs, while yearly budgets continue to reflect economic realities.