Alleged ‘Transition Costs’ Avoidable In Detroit

Shouldn't be used as a roadblock to pension reform

By James M. Hohman | May 13, 2014

State legislators are discussing which strings to attach to a $194 million partial Detroit bailout.

One of those strings — a requirement that the city close its pension systems to new members — is being met with opposition over alleged "transition costs" from the move. But these costs are completely optional and easily avoidable, as other governments that have reformed their pension systems show.

Transition costs allegedly are mandatory increased up-front cash requirements to catch up on underfunded pensions. Detroit does not have enough money saved in its pension system to pay for the benefits that members have earned. According to an esoteric rule by the Governmental Accounting Standards Board, governments should switch from a back loaded payment policy to a more front loaded policy, requiring more short-term cash but saving money over the long-term. "Thus, the claim goes," as Andrew Biggs of the American Enterprise Institute remarked, "[I]f you stop digging, the hole actually gets deeper."

However, GASB has clearly stated that it does not dictate funding policy, just accounting treatment. If officials believe that their payment policies are prudent, they can keep that policy.

Moreover, other governments have made pension reforms without making this accounting switch.

A 2012 paper from Robert Costrell of the University of Arkansas looked at how state governments avoided even changing their accounting policies. Utah's pension reform avoided this switch by giving employees the option of a defined contribution plan or a pension plan that shifts underfunding risk onto employees. They did shift their accounting treatment of existing unfunded liabilities. Alaska gave new employees of one of its retirement plans a defined contribution plan but still kept its back loaded payment accounting after making a one-year switch.

In both cases, these governments limited their ability to rack up unfunded liabilities while avoiding transition costs.

The important issue regarding pension funding is not how to catch up on the problems, but how to prevent them. By closing the pension system, Detroit will stop its policy of promising to provide a benefit and paying for it later.

If the city had set adequate money aside to pay for pensions, it would not be in bankruptcy asking retirees to make concessions.

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.

MEA Economist Ignores Billions In Education Spending

'The Truth About Funding' video repeats union's inaccurate claims

By Tom Gantert | May 13, 2014

A Michigan Education Association video that says schools are getting less money under Gov. Rick Snyder does not tell the whole truth about education funding.

In the video, "The Truth About Funding," MEA labor economist Ruth Beier repeats the union's inaccurate claim that school funding is lower today than before Gov. Snyder took office. Never mind that the non-partisan Senate Fiscal Agency reports that the state has increased state funding for K-12 schools.

In the video, Beier cites a reduction in per-pupil revenue and says: "Let me give you the facts …" But she proceeds to cite only money from the per-pupil foundation allowance, which is only a portion of the funding a school district receives from the state. In some cases, the foundation allowance is only about half of the total revenue schools receive.

Beier used the Lansing School District as an example to try to make her case.

The Lansing School District received about $63.3 million from the state foundation allowance in 2013-14. Beier ignores about another $19 million the state give the Lansing School District in 2013-14 for expenses such as special education, adult education and payments for the district's employee retirement costs. The state made a $5 million payment this school year to Lansing for the Michigan Public School Employees Retirement System.

Beier did not respond to a request for comment asking why she only included the lower per-pupil foundation allowance in her presentation. But it is a common tactic used by many of Gov. Snyder's critics.

"The math is simple," Beier says in the video.

Actually, experts have said repeatedly it's not simple. That's because school funding is based on more than just the per-pupil foundation allowance that Beier cites.

For example, the Lansing School District received $8,929 per pupil in 2013-14 if all the state funding is factored in. The district received $8,742 per student overall in 2010-11, which was the final budget of Gov. Jennifer Granholm. Meanwhile, the district has lost about 1,375 students in those three years.

"The MEA is well known for only telling part of the story because it's easier to mislead people that way," said Ari Adler, communications director for Michigan House Speaker Jase Bolger, R-Marshall. "The reality is that state funding for K-12 has been increasing during the past few years, even while pupil counts were decreasing. …Basing numbers on only a single part of the funding available is fuzzy math and something I hope isn't being taught to kids in Michigan’s schools."

Adler said that according to the non-partisan House Fiscal Agency, the proposed School Aid Fund budget that funds K-12 education was $10.675 billion in 2010-11 and has increased every year under Gov. Snyder to the proposed $11.973 billion in the 2014-15 budget.

"Besides, as has been shown time and again, per-pupil funding is a poor measure of success for kids in Michigan," Adler said. "The now defunct Highland Park school district was receiving more than $14,000 per pupil in total state and federal funding and yet it was a dismal failure when it came to educating the students in that city."

Beier also serves as a councilmember for the city of East Lansing.