News Story

Rigged Pension Study Produces Expected Conclusions

Legislators should close underfunded defined-benefit system

In June, House Republicans called for a rigged study that would examine transitioning the state’s school employee pension system to a defined-contribution retirement system. Unfortunately, the study’s conclusions were rigged and the study’s release shows problematic conclusions.

When reading the report, a person would suspect that the state’s pension system is perfectly fine. The report shows that the state is offering benefits that aren’t overly generous compared to peers, that it is about as well-funded as its peers, and that the state has adopted typical investment risks.

If all things went according to plan, however, the state would not even consider pension reform; pension costs would be the relatively low and no one would complain. The state repeatedly considers pension reform, however, because things have not gone according to the plan and the pension system is severely underfunded — the state has only 65 cents saved for every dollar earned by pension fund members, a $22.4 billion gap.

The system is not underfunded simply by a streak of bad luck, but due to optimistic assumptions used by state politicians and a series of laws made by state politicians that have mandated smaller payments be put into the system. In addition to assuming a return that the state has not been able to achieve in the past decade, the state also extended its debt repayment and marked its assets to market, all of which have led to long-term problems.

Nor has this been a small and temporary phenomenon. Since 1990, the school employee pension system has been fully funded in just one year — and even then it was because of a gimmick that the state enacted. It’s been closer to full funding in some years, but underfunding has been a consistent problem. The cost to catch up on unfunded liabilities now represents the majority of pension contributions (See image nearby).

Michigan’s Constitution wanted the state to be more honest about properly funding state-run pension systems. Drafters wanted to ensure that politicians paid their pension promises when they made them. Yet the problem remains.

But this study, unfortunately, does not cover the question of whether politicians will underfund the system. The one passing mention it receives is a brief statement about “contribution volatility risk,” but without explaining the extent of the risk or the state’s experience with it. It also adds that “employers may be better able to accept this risk than employees.” While this is true, its inclusion shows that the study is more an example of theoretical differences in retirement benefits than a statement about the problems Michigan school districts, taxpayers, and politicians face on the school pension system.

In a pleasant omission, on the other hand, the analysis does not state that closing the pension fund will require the state to catch up on pension underfunding in a more expedited manner, as some in the state have wrongfully asserted.

But as expected, the study makes a mistake when comparing the “normal costs” of the pension system — the amount that politicians believe is necessary to prefund the benefits earned in a year — to the contribution rates in a defined-contribution system. Because they compare the artificially-low cost benefits of the pension system to the artificially-high cost benefits of the defined-contribution system (the study’s authors were told to use the more-expensive state defined-contribution system as a basis of comparison), the analysis shows a financial gap between costs. But because the pension system costs more than the “normal costs,” this analysis compares apples to lemons.

Likewise, the analysis on the adequacy of benefits is misguided. As a theoretical matter, there is no magical number about how much a person needs in retirement. A person can declare bankruptcy at any income level, as spats of celebrity bankruptcies show. Whether a person lives comfortably in retirement depends on much more than the type and generosity of an employer’s retirement system.

Still, the report’s analysis of this issue is problematic. The pension system can only give out what it receives in contributions plus investment gains. A person’s defined-contribution retirement system is the same. If investment returns are the same, then the system can only pay out what’s been contributed to it. The results from their adequacy plan simply show that the pension plan provisions have little to do with the contributions.

For instance, a person working for a school district for less than the vesting requirement would receive no benefits under a pension plan, even though he or she may have contributed and his or her employer may have contributed to cover the benefit. They would receive something in a defined-contribution system, however.

The adequacy of benefits is irrelevant to whether Michigan should transition to a defined-contribution system, though it may want to influence how large of a system is offered. Legislators should transition because a defined-contribution system eventually fixes the major problem of the pension system. By transitioning, the state will contain its ability to underfund the system. But a valid plan to fix the problems of the pension system was not included in the state’s rigged study.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

News Story

Extra Early Voting Opportunity in Heavily Democratic Area Raises Eyebrows

'One clerk decided the voters of one city would get a voting opportunity those in the rest of the state didn't get'

Some voters in Lansing got an early opportunity to vote that others in the state didn't have, and some Republicans say that bonus day for absentee voting looked suspiciously like a maneuver to boost turnout for Democrats.

The early absentee voting on Sunday, Oct. 28, took place at the South Washington Office Complex, a site located in a Democrat-heavy portion of Lansing. The timing, noon to 4 p.m., coincided with people getting out of church.

Official notice of the Sunday voting opportunity was posted on the city's website. Registered voters in Michigan can get an absentee ballot if they meet one of six requirements. Many local communities across the state, including Lansing, allowed absentee voting on Nov. 3.

But it is believed none set up an earlier day and promoted the opportunity for residents to vote by absentee ballot.

Trevor Pittsley, a Republican poll watcher, said he found out the about extra chance for absentee voting on Facebook. He showed up at the voting site and witnessed what was going on.

"I didn't see any buses, but it sure looked like some people carpooled to get there,” Pittsley said. “There were signs all around town saying 'Vote Today.' There was a pro-Proposal 2 tent (a union-backed ballot initiative) right there, near the gate. A lady with a UAW emblem on her shirt was directing traffic. The whole thing generally seemed to be a unionized process.

"Inside the room, I heard comments such as — 'Why didn't we try this last year?' I also heard people offer to help voters who weren't clear on the proposals. It looked to me like they were very organized."

Pittsley said he did not intervene because he was not acting as a poll watcher that day.

"This was absentee ballot voting on a Sunday," Pittsley said. "I didn't poll watch, because you're not really allowed to poll watch in that situation. I taped what was going on with my iPod."

The photos in this article were taken by Pittsley.

In an interview about the bonus voting day, Lansing City Clerk Chris Swope defended the city's action. 

CapCon: Was this an effort to increase voter turnout for Democrats?

Swope: It was an opportunity to get out more voters in Lansing.

CC: But, because Lansing is more of a Democrat-leaning city, isn't it likely most of those voters were Democrats?

Swope: That's true.

CC: Couldn't this lead to a situation where both political parties start adding voting hours in places where more of their base voters are likely to turnout?

Swope: I suppose that's true, but different townships and different municipalities have different hours. I'm not responsible for those. My focus is just on the city of Lansing.

CC: Regarding the hours the polls were open, from noon to 4 p.m., were those chosen to accommodate people who were getting out of church?

Swope: It was to make it convenient for folks. Yeah, that was part of the reason for choosing the time.

CC: Do you see any constitutional problems with doing this regarding equal protection? If you live in most other places in Michigan, you didn't have that opportunity.

Swope: I don't foresee that. Again, different places have different times that people can vote.

CC: Were those on the Democratic side given advanced information about what was happening that the Republicans didn’t receive?

Swope: Nope. I think some nonpartisan organizations were told ahead of time that this was something we might do. I had also talked with one of my council members about it. I guess it really wasn't something no one had heard about, but, as far as the notice was concerned, both parties were informed of it at the same time.

Only a couple of hundred voters voted that day.

Republican political strategist Greg McNeilly, said the decision to allow the Sunday voting wasn't nonpartisan.

"It's essentially a situation of injustice," McNeilly said. "One clerk decided the voters of one city would get a voting opportunity those in the rest of the state didn't get. And it was done in a way that was very advantageous for one voting group."

Michigan Secretary of State Spokesman Fred Woodhams said he wasn't aware of anything that would prohibit clerks from offering people the opportunity to cast an in-person absentee ballot ahead of the election as long as the voter had a qualified reason to get an absentee ballot.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.