Done: With School Pension Reform, State's Big Pension Liabilities Contained

LANSING – The Michigan Legislature took a major step toward ensuring the state’s fiscal sustainability last week, passing legislation that creates a new public school employee pension system with safeguards against adding to the $29.1 billion in unfunded liabilities accumulated by the old system.

Anthony Randazzo, of the Pension Integrity Project at the Reason Foundation, called the legislation one of the most innovative pension reforms in the country. The Mackinac Center for Public Policy, which publishes Michigan Capitol Confidential, was also heavily engaged and has been pressing for reform for more than a decade.

In addition to working with Michigan legislators on public employee pension reform, the Pension Integrity Project at Reason has been involved in pension reform in states throughout the country, such as Arizona.

Randazzo believes the legislation is innovative because unlike other pension-reform concepts, the new law will automatically close the system to new employees if it falls behind in pre-funding promised benefits. The old system fell behind though this is prohibited by the Michigan Constitution.

If the assets in the new system’s pension fund fall below 85 percent of the amount actuaries determine it should have for two years in a row, the system will be closed to new employees. This virtually guarantees that managers of new system won't repeat errors that allowed the old system to fall $29.1 billion behind the amount it should hold.

Under the new system, school employees hired after Feb. 1, 2018, can choose to receive employer contributions to an employee-owned, tax-deferred 401(k) account. Everyone will get an amount equal to 4 percent of salary, and the state will also match up to 3 percent of employee contributions.

Alternatively, new employees can enroll for lifetime pension benefits but with substantial cost-sharing requirements. Moreover, if state pension managers fail to fully fund the new system, employees in the plan would be responsible for paying for half the shortfall.

Current school employees remain in the old pension system and are unaffected by these changes.

Gov. Rick Snyder is expected to sign the legislation into law, making Michigan one of a few states that have acted to contain the growth of long-term retirement system debt. Michigan got a head start in 1996 when it closed the defined benefit pension system for state employees. Since 1997, all new employees of the state have received defined contribution 401(k) account benefits instead of pensions.

According to Randazzo, virtually every state in the country needs substantive pension reform. And Michigan isn’t the only state making progress, with Arizona, Kentucky, Florida, Pennsylvania, and South Carolina also passing reform measures within the past year.

Opposing the reform were Democrats and government employee unions including the Michigan Education Association and the American Federation of State, County, and Municipal Employees. Opponents said that the legislation does nothing to pay down the state’s $29.1 billion pension debt.

“We’re going to be taking more money out of schools, we haven’t solved the long-term problem for the teacher pension program and unfortunately it doesn’t solve the problem,” said House Minority Leader Sam Singh D-East Lansing. “[Democrats] wanted to make sure that money was coming in from the state to these communities and in the end what we’re doing is we’re robbing from today’s children to pay for this.”

Christine Lucas and Sue Charron, two teachers from Fowlerville who were in Lansing to lobby against pension reform, expressed their concern that the legislation was introduced and pushed through committee before its positive and negative aspects could fully be discussed.

“We want the outcome to be good for education in the future, both for teachers and students,” Lucas said.

Charles Owens is the director of Michigan’s branch of the National Federation of Independent Business, and he praised the bill.

“We commend the Legislature and the governor for standing up to the teachers’ unions and those who continue to stick their head in the sand when it comes to addressing the unfunded liabilities of the teachers’ pension fund,” Owens said.

Richard C. Dreyfuss, an actuary and adjunct scholar with the Mackinac Center for Public Policy, called the pension reform fantastic and believes it will ensure pension debts aren’t transferred to the next generation.

“I think it's a very good and timely set of changes that are being considered,” he said.

Rep. Thomas Albert, R-Lowell, who was the main sponsor of the House bill, said that pension reform is the responsible choice moving forward.

“Government must not write checks and expect the next generation to pick up the tab,” Albert said. “This alone will not deal with our pension issues, but it’s a start.”

With the new system’s safeguards against underfunding and the 1996 reform that contained liabilities in the system for state employees, the largest state pension plans are on a path toward zero taxpayer liabilities in the very long term. (The system for State Police is still open but it is a fraction of the size of either the state or school employee system.) The one remaining large and unresolved government legacy cost issue in Michigan is the scores of municipal pension systems, but there too some progress has been made.