Pension Officials Mislead Lawmakers

Michigan’s Office of Retirement Services did a disservice to state lawmakers and the public in a Senate appropriations committee meeting on Nov. 30. Testifying on Senate Bill 102, which would close the state’s massively unfunded school pension system to new enrollees, ORS repeatedly told lawmakers that the proposed bills would generate hundreds of millions of dollars in new costs to the state. The bills would do no such thing, however, meaning that ORS experts either did not read the bills before testifying or just don’t understand them and shouldn’t have weighed in.

A couple of years ago, when a similar bill was being debated in Lansing, ORS testified that closing the pension system would require huge, upfront “transition costs.” The bill the Legislature took up this year would close the current pension system to new enrollees and explicitly require the state to avoid paying these optional costs. Yet, ORS officials recommended following so-called best practices of pension financing that are entirely irrelevant to these bills, because those practices would be against state statutes if the legislation were implemented. ORS maintained, however, that the state still should incur these phantom costs if the law were approved.

In addition, ORS cited in its testimony extra projected costs of this reform that would not be triggered by the legislation. These costs may occur if the administrators of the retirement system would like to trigger them, but that would be an administrative decision that would happen outside the scope of the legislation.

Because ORS insisted on the importance of following best practices in funding and managing a retirement service, lawmakers ought to note a number of activities — clearly not best practices — that ORS has itself engaged in or otherwise completely ignored. Here is an incomplete list:

• Carried unfunded liabilities in the pension system for 33 of the past 34 years. This requires extra payments that have inflated the cost of the system;
• Racked up $26.7 billion in unfunded liabilities over the past 20 years;
• Continued to assume that payroll will grow 3.5 percent annually when it has steadily decreased; from 2008 to 2014, school payroll fell 15 percent, though ORS assumed it would increase by 23 percent over this period and has not changed this assumption moving forward;
• Pledged retirement assets to guarantee the bonds on a speculative movie studio;
• Maintained a policy to not pay the required amount of annual interest due on the system’s unfunded liabilities;
• Failed to pay the annual required contributions of the pension system 14 out of last 20 years;
• Rejected state auditor's recommendation to lower payroll growth assumptions and ignored warnings about optimistic investment return assumptions;
• Marked assets to market during good times to shortchange annual costs of the system. The last time the system had enough assets to pay for liabilities was due to this change in 1997. And lawmakers did so again in 2006 to artificially lower annual required costs.

Based on its testimony, it seems like ORS is more interested in protecting the status quo — the $26.7 billion underfunded, defined benefit school pension system that is ruining school district budgets and promising pensions that the state cannot afford — than it is in providing lawmakers and the public with an accurate and thorough analysis of proposed legislation. Legislators should be skeptical of ORS’s sudden interest in ensuring pension-funding “best practices” and pension system solvency.