Commentary: House GOP Not Passing Senate Bill Continues Lansing Tradition Of Underfunding Pension System

Last week, Michigan taxpayers were informed that the state fell $290 million short of making the “annual required contribution” that pension officials estimate is needed to catch up on unfunded school employee pension promises.

The news came in the official Michigan Public School Employees' Retirement System’s 2012 financial statements.

This comes just six months after House Republicans failed to enact a Senate-passed bill that would have closed this system to new employees. That transformational reform would have contained the underfunding problem and eventually eliminated politicians' abilities to create new unfunded liabilities.

This underfunding has practically become an annual Lansing tradition: This will be the eighth year out of the past 10 that the state has put in less than the actuarially-recommended amount.

Every year state officials and actuaries estimate how much money needs to be set aside to cover another year's worth of pension promises made to current employees in MPSERS, which is by far the state's largest government-employee retirement system. In addition, these officials must also figure out how much needs to be set aside each year to pay down unfunded liabilities generated by past underfunding, currently standing at $22.4 billion.

The estimate they made to pay for earned benefits and catching up on unfunded liabilities in 2012 was $1.74 billion, yet only $1.45 billion was actually invested — a $290 million shortfall.

Even if the full amount had been set aside, taxpayers (and school districts) would mostly likely still find themselves further underwater given the politically-determined, "rosy scenario" investment return assumptions used in these estimates and projections. Under laws enacted by past politicians, virtually all of the state's investments are assumed to grow at 8 percent annually.

Despite a good year in the market — pension investments gained 13.5 percent in fiscal 2012 — the average annual return since 1997 has been 6 percent.

Another unrealistic assumption involves expected growth in total school employee wages. Overestimating future payroll growth means not enough is deposited today to keep the system fully funded. Total wages of employees in the MPSERS have yet to get back to their 2004 peak of $10.4 billion, let alone grow at 3.5 percent per year.

(Average compensation has grown rapidly since 2004, but total compensation has not.)

Last year, the House and Senate enacted some useful pension reforms, but these are unlikely to fix the underfunding problem. In part this is due to the unrealistic assumptions that led to the current crisis.

Experience has shown that defined benefit government pension systems don’t get funded — they get underfunded.

There’s just one way to assure an eventual end to such underfunding announcements: Close the defined-benefit pension system to new employees, which is the very opportunity House Republicans let slip through their fingers last year. Had they embraced that opportunity, new school employees would still be granted a generous defined-contribution system, which these days is standard practice everywhere except government.