Commentary

Other Michigan Cities in Pension Debt

Not just a Detroit problem

Detroit's pension woes are in the news, but municipal employees around Michigan should not presume that their pension systems are secure.

Indeed, in most Michigan cities the underfunding problems are worse than those in Detroit.

On paper, the unfunded liabilities for Detroit's police and fire system are $147 million, and its general employee pension system underfunding comes to $838 million. That translates into 96 percent and 77 percent funded, respectively. That is, for every dollar in pension benefits earned by an employee, the city has an average of 87 cents saved.

That's not good, but the 2012 financial statements of Michigan's 35 largest cities found that 90 percent of municipal pension plans were underfunded, with total underfunding stated at $2.1 billion.

It may be even worse. Pension funding policies can mask the magnitude of underfunding.

For example, to prevent a single very good or very bad year in the stock market from skewing the value of their investments, pension systems typically use a "smoothing" method to average the values over a period of several years.

Detroit uses an eight year smoothing window. This lengthy period means that its pension fund valuations do not yet fully incorporate the effects of the great recession. At current market prices, the system's assets are $1.35 billion below their "smoothed" values.

Moreover, Michigan's cities also tend to offer retiree health care benefits to employees, even though few private sector employers provide such coverage. Unlike pensions, these benefits are not protected by the state constitution. They amount to gratuities that can be revoked at any time. Importantly, these "other post-employment benefits" are rarely prefunded.

With prefunding, employees know there's some money set aside to pay for what they were promised. Just as important, the cost of each year's service is largely paid for during the same year. When benefits go without prefunding, the certainty that benefits will be provided as advertised is diminished. This is especially the case in the Michigan cities that have lost residents and jobs. Without prefunding, the costs of long-gone government employees' service must be paid by a shrinking tax base.

Underfunding is not the only reason Detroit is seeking to trim the pensions of retirees. The city also is insolvent. That is, it lacks the cash to pay its bills when they come due — including constitutionally mandated pension prefunding contributions. Insolvency coupled with underfunding risks pensions, and the increasing costs of catching up on unfunded liabilities can drive some governments to insolvency.

It wasn't supposed to be like this.

Delegates to Michigan's 1962 constitutional convention wanted cities to pay for pensions as they are earned, and not defer the costs of current employees to future taxpayers. The provision they wrote into our current state constitution amounts to an instruction to city managers to make good, reasonable assumptions about the future value of investments made today, and deposit enough each year to cover the future costs of another year's worth of benefits earned.

The reality of underfunding shows that they have not made good assumptions, and are still assuming excessively rosy scenarios. As a first step, this should change.

Beyond that, the only sure way to avoid digging even deeper holes in the future is to follow the lead of a handful of municipalities that have closed their conventional defined benefit pension systems to new members and offer defined contribution retirement plans instead.

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

Michigan Third-Grade Reading Levels Down Significantly

Overall MEAP scores up slightly

While the Michigan Department of Education lauded improved fourth-grade reading scores on the MEAP last week, the Great Lakes Education Project says the test scores from younger readers were shockingly bad.

The 2013 Michigan Educational Assessment Program (MEAP) reading results for third-graders showed that 61.3 percent of them are reading at grade level, down from 66.5 percent in 2012. Fourth-grade scores improved from 68.1 percent in 2012 to 70 percent in 2013. The MEAP is given in the fall and is supposed to be reflective of what students learned the previous year.

Gary Naeyaert, executive director of GLEP, said that for years, readership was gauged by the fourth-grade results, but the alarming drop at the third-grade level shows there is a need for the state to take legislative action to improve reading at the earlier stages. GLEP is a bipartisan, non-profit organization that promotes school choice.

"We wouldn't be throwing a parade for a minor uptick in fourth-grade scores when the number is still abysmally low and when third grade proficiency is actually going down," Naeyaert said. "We need to pass the early literacy bills."

School districts are promoting a number of students who cannot read. Legislation has been introduced that would attempt to correct the problem.

House Bills 5111 and 5144 were introduced last year and drew a lot of attention. HB 5111 calls for some students to be retained at third grade if they aren't reading proficiently at grade level, and HB 5114 offered ways to improve reading proficiency. The two bills are still on the floor of the House.

Naeyaert said HB 5111 would allow students multiple years of "organized education" including screening and school-based and home-based interventions. It also allows for exemptions, alternative tests and proficiency shown through a portfolio of work if the student has a disability or if the student hasn't been exposed to English.

Retention would be the last resort, he said.

"It's an important last resort," Naeyaert said. "But it's not the goal."

State Rep. Amanda Price, R-Park Township, introduced House Bill 5111 and said she was "dismayed and frustrated" with the third-grade MEAP reading results.

"We clearly have more work to do in our schools and at home to increase reading proficiency in all grades," Rep. Price said. "It is my determined hope that House Bills 5111 and 5144 would more clearly focus our attention on the importance of reading for our children."

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.