The State Is Already Addressing 'Transition Costs' in School Pension Fund

Michigan House members are worried about large and substantial "transition costs" when closing the pension fund and offering new members a defined-contribution retirement plan.

They should know better than to be waylaid by these "transition costs." The state is already adept at avoiding them. Indeed, it’s implementing this evasion in the very same fund that they’re working on reforming, the Michigan Public School Employees Retirement System.

There are seven state universities that participate in this system. In 1995, the legislature closed them out. All of the university’s current employees would continue on in the pension system, but the university would be free to offer whatever retirement benefit it wanted to new employees.

Unfortunately, the system was only 74.6 percent funded at the time. Legislators felt that these universities had not paid their full share of the benefits earned by their members and retirees, and wanted the universities to contribute for as long as their members were a part of the system. So they applied the costs to catch up on underfunding to the payroll of all employees.

A report from the House Fiscal Agency explains what happened:

Spreading the costs of paying off the UAAL [unfunded accrued actuarial liability] across all university employee payroll, rather than just MPSERS payroll, addresses the inevitable decline that has taken place in MPSERS payroll as new employees enter university-run retirement systems. The costs were applied on a percentage-of-payroll basis, rather than a fixed-dollar basis, to avoid larger dollar contributions in the years immediately following the legislative change that removed new employees from MPSERS.

The universities would stop paying these amortization expenses on all payroll in 2036, according to the HFA report.

In other words, legislators avoided "transition costs" by applying amortization payments to all employees. Legislators can do the exact same thing for the rest of the system, closing out the system while paying off the unfunded liabilities without "transition costs."

Legislators who use these transition costs as an excuse to avoid defined-contribution reforms should know better.

They’re stumbling on a barrier that they are already avoiding.