Michigan Funding Its Pensions, Using More Realistic Numbers
Hat trick: Legislature also contained school pension liabilities by closing system to new hires
The level of underfunding in Michigan’s public school pension system increased again last year, but this time it wasn’t because officials failed to deposit the right amount into the system.
Unfunded liabilities in the Michigan Public School Employees Retirement System increased from $29.1 billion to $29.4 billion in 2017, according to the annual report released by the state. The increase was due to using a more conservative estimate of future investment returns.
The estimate is used when determining how much needs to be contributed to the fund now to make future pension payouts, so a more conservative one leads to more realistic contribution levels.
“The assumed rate of return on the pension plan was lowered from 7.50 percent to 7.05 percent, which is a smart fiscal decision that reduces risk to the system,” said Kurt Weiss, spokesman for the Michigan Department of Technology, Management and Budget, in an email. “Reducing the assumed rate of return caused the slight increase in unfunded liabilities because the state is now taking the more conservative and responsible approach of assuming less investment income in the future. Had the assumed rate of return NOT been reduced, the unfunded liability would have gone down from $29.1 billion in 2016 to $27.9 billion in 2017. The state continues to pay down the liabilities each year, now with a more conservative assumed rate of return, and Michigan remains on target to have these liabilities paid off by the year 2038.”
Michigan has a long history of not contributing enough to the school pension fund to cover the pension promises made to employees. For 20 of the past 30 years, the state shorted what its actuaries stated was needed to cover the annual cost of funding those promises.
In 2017, the state contributed $2.4 billion to the school retirement system. That was $64.7 million more than the amount — called the annual required contribution — recommended by accounting standards.
In 2017, legislators closed the defined benefit school pension to new employees. Those employees now have a choice of getting employer contributions worth up to 7 percent of their salary to a 401(k), or enrolling in a defined benefit system in which they themselves are partially liable for any future underfunding. A self-funded annuity will also be offered but is not available yet.
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.
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The Great Lakes Trough Truce
Spending interest groups only ask for more money
The 2018 federal budget includes a block of money that goes to groups that do things in the Great Lakes. The Trump administration wanted to lower that funding. But 185 groups banded together to oppose any spending reductions.
Politicians at all levels face pushback if they attempt to reduce spending. While those 185 groups could secure their funding by pointing politicians to areas where they could save money, they don’t. Government spending interests refuse to criticize other spending interests because doing so might expose them to a similar critique. You can only ask for more, never ask less for anyone else. It’s a rule of the Trough Truce.
The letters the groups signed ask for $300 million for the Great Lakes Restoration Initiative, in addition to other spending they wanted. But, there is no clear plan for where that money should come from. The implication must be that it should come from taxpayers, or taxpayer-financed federal debt, because they point to no other area that is less important than their own interest.
Indeed, when they even acknowledge costs, they only do so in an attempt to write them off, claiming that their preferred spending provides a 2-to-1 return on investment. It is a regular strategy of spending interests. The argument that their spending is a benefit and not a cost allows them to ignore the other places that compete for public dollars.
But government spending is rarely about driving economic impacts alone. Spending is also about goals that ostensibly serve the public good.
Spending interests could make the case that their plans accomplish something beneficial, something actually worth doing. After all, government policymakers have established a number of water quality targets, and the Great Lakes spending letters point out that there is progress being made on those goals. But they stop short of the claim that their program is responsible for the progress, let alone make any serious assertion that the program is able to make progress at cost-effective rates.
Of course, these groups are not the only ones to engage in such a tactic. State universities don’t complain about Medicaid. The prison union doesn’t complain about road funding. Environmental cleanup contractors don’t complain about Pure Michigan advertising. Instead, they are all united in calls for more money.
That’s a missed opportunity. Spending interests should make a habit of arguing, in public, about the effectiveness of other uses of taxpayer money. Voters would be better informed and perhaps people would be more content that their representatives were spending their money wisely. But for that to happen, the trough truce needs to be broken.
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.
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