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Commentary: House GOP Still Flailing Around on Pension Reform

Michigan House Republicans have so far failed to say "yes" to a Senate-passed bill that would close the school pension system to new employees and instead offer them a generous 401(k) plan.

The failure is based on a concern promoted by teachers unions and state pension bureaucrats that if the system is closed, then accounting rules require allocating hundreds of millions of dollars over several years to "front load" the amortization of unfunded pension liabilities.

Ironically, these new converts to the "holy writ" of accounting rules were all but silent during 10 years of serial pension-rule violations by this state in the form of persistent annual underfunding of the school retirement system. All that contribution low-balling is a major reason taxpayers here now carry a burden of $22 billion in unfunded pension liabilities, or some $6,000 per Michigan family (pension fund investment returns not meeting expectations is the largest reason). In only two of the past 10 years has the state met or exceeded a "required annual contribution" to the pension system. In most years the shortfall was 10 to 28 percent.

Given the incentives inherent in all government pension systems, it would be foolish to expect unfunded liabilities not to grow even more in the future. This is why closing the system to new employees is the single most important reform Michigan could make right now.

Nevertheless, rather than leaping to say "yes" to the Senate-passed bill doing just that, some in the House Republican caucus have bought into the union and the "pension industrial complex" claims that doing so requires coming up with hundreds of millions of dollars almost immediately to "catch up" more quickly on all that past underfunding.

It doesn't, and in any event the House has already found a better answer to a genuine concern those false claims exploit: The money to "catch up" on unfunded pension liabilities has to come from somewhere. The House proposes doing this with a simple change in the formula for allocating those "catch-up" costs to future school district budgets.

There is zero chance that Michigan won't meet its obligation to future retirees, and everyone knows it. The bad faith arguments being made by a special interest with zero credibility on the issue aren't about accounting rules, but  instead are part of a campaign to halt a transformational reform: Making Michigan just the second state in the nation to place itself on a glide path to eventual elimination of government employee legacy costs.*

House Republicans should say "yes" to the Senate and stop listening to people who have good reasons to mislead them.

* A State Police pension system would remain open, but this is tiny compared to the system for school employees and the one for state employees (which was closed to new hires in 1997). Separate municipal pension systems would also remain open. But the magnitude of these bits of uncompleted business pales in comparison to the acheivement that having closed both the state and school employee pension systems to new members would represent.


See also:

Teacher Pension Underfunding Hits $22B

Taxpayers Agree: 401(k)s for New Hires

House GOP on Verge of Surrendering to MEA

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.