2018 School Pension Underfunding Expense Enough To Fix The Roads

The state of Michigan incurred $2.1 billion in what amounts to extra interest expenses in 2018 due to past underfunding in its (now closed) defined benefit school pension system.

The amount almost equals the sum Gov. Gretchen Whitmer says is needed to fix Michigan’s roads. Whitmer has proposed a gas tax increase of 45 cents per gallon that would provide for road repairs.

The state-run school pension fund is $32.7 billion short of the amount actuaries say it should have available to meet its promised pension payouts to teachers. The state has assumed that over the coming decades, the pension fund will earn annual returns on its investments of either 6% or 7.05%. But to make up for past underfunding, those same rates must be applied to the shortfall each year, and the resulting amount contributed to the pension fund. (The different rates apply to different classes of pension beneficiaries.)

This is the pension underfunding “interest” expense that must be paid each year, and it comes out of revenue collected from Michigan taxpayers.

Lawmakers have made reforms to the Michigan Public School Employees Retirement System several times over the past 10 years, but the pension debt has grown larger.

The governor has recommended a state budget that would allocate an additional $1.9 billion to road repairs, contingent on lawmakers increasing the gas tax, which is expected to raise another $2.5 billion.

The state-run pension system was fully funded in 1997, which means in that year, the state would not have paid what amounts to expensive interest charges on pension underfunding. That was the only year in the past 45 years, the Mackinac Center for Public Policy has found, that the plan was fully funded.

The pension benefits are paid for by contributions from members — school employees — and by the public school system that employs them. Members contributed $393.1 million in 2018. The employer contributions that year were $2.8 billion, and the pension plan paid out nearly $5 billion in retirement benefits.

State taxpayers have paid a total of $19.5 billion to cover pension underfunding “interest” expenses since 2006.