The $39 Billion Bill for 'One of the Best Public Pensions Around'

The first sentence of the official handbook produced by the state of Michigan for teachers and other public school employees says the following about their pension plan: “As a member of Michigan’s Public School Employees Retirement System, you are eligible for one of the best public pensions around.”

The handbook speaks an undeniable truth, supported by the evidence. As a recent analysis of MPSERS produced by the Mackinac Center for Public Policy makes clear, Michigan’s public school employees receive several costly pension perks that are rare in the private sector and some that are even unheard of for employees hired to work for state government. The net result is to expose Michigan taxpayers to an unfunded liability which — by one estimate — may exceed $39 billion. (For comparison: Excluding federal funding, all of Michigan government now spends roughly $26 billion per year.)

The retirement benefit provided by MPSERS is a conventional defined-benefit pension, as opposed to the modern 401(k)-style defined contribution personal retirement plans offered by most employers that provide retirement plans. For Michigan taxpayers, the difference between the two is critical.

Conventional pensions promise public employees constitutionally protected retirement payments in the future and rely upon politicians and government financial planners to make the payments and invest the money wisely enough to meet that future promise. If the politicians, the bureaucrats or the financial markets don’t behave, it is the taxpayers who are on the hook to make up the difference.

As one example of potential future problems with this, consider that MPSERS currently operates on the assumption that its investments will return 8 percent per year — a highly dubious assumption given the volatile U.S. stock market over the previous decade. Reducing that assumption by even two percentage points can add billions to the bill being tallied up for tomorrow’s taxpayers.

The Mackinac Center report states that future Michigan taxpayers already face an estimated outstanding unfunded liability of nearly $12 billion for MPSERS.

By contrast, most American employers have found 401(k) retirement plans to be both more predictable and more affordable. The 401(k) contributions are made to employee accounts as they are earned, leaving the employee to select the investments and bear the responsibility for the results. Unlike a conventional pension, it places no future obligations on the employer: Control of the money and the investment decision is immediately placed in the hands of the worker.

The conventional pension plan for most of Michigan’s state government employees was ended by the state Legislature and then-Gov. John Engler in late 1996, and most state employees hired in the 14 years since were placed in a new 401(k) system. Intense and ultimately successful lobbying from the public school employee unions blocked an attempt by lawmakers to make a similar reform for MPSERS.

Unlike the $12 billion MPSERS liability for a plan that continues to add new members every day, the pension plan still serving state employees hired before 1997 is mostly closed and for the most part not adding future liabilities on the taxpayers. It currently has a much smaller unfunded liability of just over $3 billion.

The Mackinac Center report refers to Engler and Michigan lawmakers as "visionary" for their decision to close the state employee pension plan and convert it to a 401(k) plan. And while it was unique for a state government to take such a bold step at that time, the report points out that it was not so bold in comparison to what is reported for private-sector trends: “Also of note, between 1985 and 2010, the percentage of Fortune 100 companies that offered traditional defined benefit pension plans to new hires fell from 89 percent to 17 percent.”

But the unique nature of the MPSERS plan doesn’t stop with retirement payments. And neither does the peril for future taxpayers. There are other perks, most notably a retirement health care benefit that is funded on a pay-as-you-go basis. The Mackinac report estimates that unless the statute authorising these benefits is amended, future taxpayers will be on the hook for between $16.8 and $27.6 billion — even greater than the actual retirement benefit itself.

Unlike the retirement pension payments, which are guaranteed by the state constitution once an employee is allowed to enter the system, Michigan courts have ruled that the MPSERS retiree health care benefit can be modified by lawmakers if they are willing to require higher co-pay costs from retirees, later vesting periods or other cost-saving options.

Because of its cost, offering a health care benefit to a retiree that has left the workforce is an exceedingly rare employment perk, particularly considering that the federal Medicare plan is already in place to provide this to Americans who reach retirement age. Looking at large companies that provide health care to current workers, the Kaiser Family Foundation reports that just 28 percent of them also offered health care to retirees in 2010; this was down from 66 percent in 1988. For businesses of less than 200 employees, just 3 percent offer such a benefit.

Yet for government workers, Kaiser reports that the number is still 87 percent.

In addition to having “one of the best public pensions around,” Michigan’s school teachers have regularly been amongst some of the nation’s highest paid.

In terms of GDP per capita, Michigan has recently become one of America’s 10 poorest states.