Teacher Pension System Hole Getting Deeper

For the eighth time in the past 10 years, the state of Michigan has failed to meet the "annual required contribution" level estimated to catch up on unfunded school employee pension promises.

Due to years of failing to fully pay this contribution, the Michigan Public School Employees' Retirement System (MPSERS) now is underfunded by $22.4 billion. The contribution for 2012 should have been $1.74 billion. However, the state invested $1.45 billion, resulting in a $290 million shortfall.

Last year, the Legislature and Gov. Rick Snyder had an opportunity to switch new education employees over to a defined contribution, 401(k)-style system. This is the type of system used virtually everywhere outside of government as well as for all other state employees in Michigan.

Sen. Mark Jansen, R-Grand Rapids and Sen. Phil Pavlov, R-St Clair, led the charge to make the change. They were successful in the Senate, but the Snyder administration and some key members in the House argued that the change couldn't be made, largely because of transition costs.

Analysts at the Mackinac Center for Public Policy have maintained that the so-called transition costs are primarily illusionary.

After being debated throughout the summer of 2012, reforms to MPSERS were passed that did not include the defined contribution switch over.

The Snyder administration said in time, the shortfalls should not occur.

"Act 300 of 2012 significantly reduced the employer cost of the plan, and therefore future contributions. Pension liability was reduced by approximately $1.6 billion, and health care liability was reduced by approximately $14 billion," said Kurt Weiss, a spokesman for the governor. "These savings, combined with an employer rate cap on the unfunded liability portion of the contribution rate, will reduce volatility and help ensure that the retirement system will receive its required contributions. As the overall school payroll stabilizes or increases, the contributions received by the retirement system will more closely match the expected required contributions.

"Act 464 of 2012 also ensures that retirement payments will be made on behalf of retirees returning to work," Weiss added. "These two pieces of legislation will have the effect of stabilizing the employer contribution rate."

Weiss also said that Michigan's improving economy would help the retirement system recover its funding deficits through investment returns.

"In fiscal year 2012, the retirement system achieved a double-digit return on investments," Weiss said. "This helps counteract the severe investment losses of 2008 and 2009, which were the two worst investment years in plan history."

Sen. Pavlov, however, said he has his doubts about long-term prospects for the system.

"The intent of the legislation was to provide protection for the retirees as well as the taxpayers of the state, but I have concerns regarding the overly optimistic assumptions on payroll growth and market returns," Sen. Pavlov said. "The massive unfunded liability will continue to accumulate in the system if we fail to meet those expectations."

Weiss said state employees can switch to defined contribution plan, but added that a study done in November recommended that the current system be retained.

The Segal Co. study has been criticized by some for assuming that the state would continue fully funding the defined benefit plan — something it has repeatedly not done.

Sen. Pavlov said he doesn't think defined benefit systems are viable.

"Reforming a retirement system with hundreds of thousands of members and billions of dollars in debt has proven to be a difficult assignment," Sen. Pavlov said. "My concern has always been centered on protecting the benefit that members have worked a lifetime to earn. The reality we all must recognize is that defined benefit retirement systems are no longer viable in the public sector but the political will to make that change is hard to come by."

Former House Appropriations Committee Chair Chuck Moss, who helped lead the charge to avoid changing to a defined contribution plan, couldn't be reached for comment.

Rep. Jeff Farrington, R-Utica, was a member of the work group that examined the MPSERS issue last year. He supported the position that a switch over to a defined contribution system shouldn't be made immediately.

"I'm concerned about the (Segal) report and will be seeking input from the administration to find out what's actually happening and how we can address it," Rep. Farrington said, upon being informed about the $290 million shortfall in the 2012 contribution.