Faulty assumptions led to $2.3 billion catch-up on Michigan school pensions

The 2022-2023 state budget passed in the state Legislature in June includes $2.3 billion for extra debt payments to the Michigan Public School Employees Retirement System. That is a helpful step toward dealing with a fiscal crisis that arose in part from the state's history of underfunding public employee pensions.

Generous retirement promises, in practical terms, made school employees the state’s largest creditors, according to James Hohman, fiscal policy director at Mackinac Center for Public Policy. Pension liabilities are non-dischargeable, meaning Michigan taxpayers are on the hook for them no matter what happens to the state's finances. 

The situation was made worse by the state's failure to fund the pension plan fully. Most of the underfunding was accidental, but not all of it.

On one occasion the state even used the pension system to bail out a bad deal it made with a movie company. Gov. Jennifer Granholm in 2010 formed an agreement with Michigan Motion Pictures for an $18 million bond for the studio that produced “Oz: The Great And Powerful.” The studio defaulted on the bond and the state took 80% of the $18 million from MPSERS to pay off the debt. The Michigan Public School Employees Retirement System was $17.6 billion in debt in 2010.

More than a decade later, the underfunded retirement system debt had nearly doubled, to $34.4 billion in 2021. Hohman says the most recent increase in the pension debt is the result of better assumptions about the cost of pensions.

“They used bad assumptions to calculate the value of what people earn in pensions,” Hohman said.  

Lawmakers realized the issue with poor assumptions and that the problems were larger than previously assumed. More accurate assumptions make it possible to fix the problem. Ensuring the system is funded will also save money on interest.

Gov. Gretchen Whitmer has not yet signed the budget. It is unclear if she plans any line-item vetoes.