Michigan’s largest debt declines

One of Michigan’s important sources of public debt has taken a turn for the better. The state’s shortfall in funding for public school employee pension debt is down by roughly $5.2 billion, according to the latest assessment. But that progress is threatened by a new proposal from the Whitmer administration.

Lawmakers promised pension benefits to workers in a state-mandated system for many years, but they did not set aside enough money to pay for what was promised. State pension funds are not like Social Security, where the federal government sets contribution rates and payout policies, then hopes the numbers match up. (They don’t.)

Instead, pension fund managers have flexibility in making contributions to the system. If they make the right estimates, the costs for pensions are as employees are working, as mandated by the state constitution. This ensures that the costs for today’s employment don’t fall on tomorrow’s taxpayers.

State law requires that all public school employees, including community college workers, participate in a state-managed pension system. There are 396,000 people covered by the school system, including 152,000 current employees and 244,000 people collecting pensions. In other words, the population of people covered by the pension system is about as large as that of Washtenaw County, the sixth-largest county in Michigan.

Lawmakers put less than they needed to into this large pension system. They’ve saved $65.9 billion to pay for $95.8 billion worth of pensions, leaving $29.9 billion in debt.

This gap didn’t appear overnight. The pension system has had enough money to pay for pensions in just one of the past 50 years.

The debt is down $5.2 billion from last year’s $35.1 billion. The biggest portion of this drop was due to the state’s experience being more favorable than assumptions, which accounted for $3.5 billion of the decline.

That $29.9 billion is still the state’s largest debt. The state’s bondholders have only lent the state $26.2 billion, in comparison. One irony of pension underfunding is that it has turned public school employees into the state’s largest creditors.

Pension debts are expensive. The state pays for pensions by levying assessments on school districts based on their payroll. The state requires districts to pay the pension system up to 48 cents for every dollar they pay teachers at present.

This is a much larger expense than retirement costs in the rest of the state. Contribution rates for major Michigan private sector employers tend to cost 5%-7% of payroll.

The bulk of the costs are made not to prefund the benefits earned by employees, but to catch up on liabilities. Roughly two-thirds of the 48% contribution rates go to pay down pension debts.

Lawmakers have made progress in preventing themselves from deferring pension costs to future taxpayers. New employees receive 401(k)-style benefits or can opt for a conventional pension where they bear half the risks of underfunding.

Lawmakers also have opted to keep contribution rates up until debts are paid. While improvements like the $5.2 billion decline in pension debts result in lower contribution rates, state law keeps pension contributions up until savings catch up with liabilities.

Gov. Gretchen Whitmer wants this to change. Her executive budget asks lawmakers to reduce pension fund contributions by $670 million in order to spend the money elsewhere. Deferring debt payments would cost taxpayers $1.4 billion in extra interest costs over the expected life of the pension debt, according to the Reason Foundation.

State Sen. Thomas Albert, R-Lowell, opposes the governor’s proposal. “The governor’s plan to raid the MPSERS fund is reckless, and in my opinion, illegal,” he said. “We still have massive debt in the system and aren’t anywhere close to that. Raiding the fund now and reversing the progress we have made could put retirees’ benefits at risk and raise the cost for taxpayers in the long run.”

Whitmer’s proposal should require changes to state law. Legislators have yet to take up bills to put less into the pension system.

The governor’s office did not respond to a request for comment.