A news service for the people of Michigan from the Mackinac Center for Public Policy

How Michigan Can Fix Its Pension Problems

Event featuring former Utah State Senator Dan Liljenquist

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Dan Liljenquist

LANSING — There are an estimated $730 billion to $4 trillion in unfunded pension liabilities across the states. These costs are crowding out services, harming communities, and causing public employees to worry that governments cannot keep their promises.

It’s time to do something about that before it gets too late, said former Utah State Sen. Dan Liljenquist at an event on Wednesday.

Liljenquist helped usher through reforms in Utah that shifted public employees to a 401(k)-type plan and was named public official of the year in 2011 by Governing Magazine. He spoke at an Issues & Ideas forum hosted by the Mackinac Center for Public Policy titled, “How States Are Fixing Pension Problems – And Michigan Can Too.”

Michigan is almost unique around the country because the state began shifting new employees off of a pension plan in 1997 under former Gov. John Engler, Liljenquist said. This has saved up to $4 billion and is something he said Michigan “has not gotten enough credit for.”

But there are pension systems for teachers and many local municipal workers. The teacher system has an unfunded liability of $24.3 billion while some municipal and counties are worse than the City of Detroit. Liljenquist said the state should move toward generous 401(k), defined contribution plans in order to provide “true retirement security.”

He pointed to Utah as a lesson.

“For 50 years, Utah made every payment, did everything right — we were 100 percent funded going into the economic downturn,” Liljenquist said. “But in 2008, one year of market losses blew a 30 percent hole in our pension fund.”

That would have required 10 percent of the state budget for 20 years to pay off those losses. Instead, Utah moved to a defined contribution-style system to prevent the loss of future services and, potentially, dollars going to retirees.

Shifting employees capped the liabilities and allowed Utah to move forward.

“If you have an oil spill, what do you do?” Liljenquist asked. “First, you cap the spill. Then, you clean up the mess.”

Utah called its bill the “Wage Liberation Act” because freeing up money from the pension system allowed for salary increases and investments into important government services. Pension funding is crowding those things out in many places.

Like in Michigan, where money to retirement systems has squeezed taxpayers and public entities.

“There is an argument that Gov. Snyder has not spent more on education; he absolutely has,” Liljenquist said. “But a lot of that money has gone to the pension system — if that is not an argument for reform, I don’t know what is.”

He added that the governor and Legislature have done “fantastic work” the past few years by tackling liabilities and capping Other Post-Employment Benefits (OPEB). But the state should close the teacher pension system and work to help locals do the same.

Liljenquist said moving employees to a 401(k)-style system is the most sustainable reform because it helps prevent future elected officials from backtracking. In Michigan, over the past decade, the state rarely met its minimum pension payments. And under a deal struck by former Gov. Jennifer Granholm, the state raided the pension funds to bail out a failed movie studio, among other deals.

Getting retirement funds out of the hands of politicians is the best way to protect workers and taxpayers, Liljenquist said. He also believes people should direct criticisms toward elected officials — not government employees.

“If someone offered me a good deal, I would take it,” Liljenquist said. “Sometimes we vilify people for taking a good deal the legislature offered. If you can’t meet that commitment, don’t offer it!”

Politicians underfunding the system to pay for projects now at the expense of future retirees is the real problem.

“Our goal as legislators should be to think 30 years out,” he said. “Not just the next election.”

Liljenquist said states like Kansas, Kentucky, Oklahoma and Rhode Island are all making major changes or have done so in recent years. At the other side of the spectrum is Illinois, which has seen its estimated unfunded liability skyrocket to $200 billion.

Fixing these plans will require hard, mostly unappreciated work – but it is worth it, he said.

“The states that refuse to make the move to defined-contribution plans will languish behind those that do,” Liljenquist said. “Reality is not negotiable.”

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See a video replay of the event here:

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See also:

Pension Costs Mean Tighter Budgets For Classrooms, Taxpayers

Commentary: Shifting School Employees To a 401(k) Is the Most Important Thing

Teacher Pension System Hole Getting Deeper