News Story

Michigan County Pension Systems Owe $2.5 billion

Taxpayers dished out $390 million last year for public employee retirement

In a private retirement system, such as a 401(k) or defined contribution plan, retirees only collect money they and their employers paid into the fund and the investment gains on it. Public pensions are different in one crucial aspect: Retirees can collect money that they did not pay into the fund.

If governments promise benefits they have not reserved enough money to pay for, then the government has an unfunded liability. This is happening all across Michigan, and is leaving taxpayers and retirees responsible to pay for the local government’s mess.

Michigan Capitol Confidential reviewed all of the county pensions in Michigan and found some counties acting wisely, while others continue to build debt.

Overall, Michigan’s 83 counties owe $2.55 billion more to retirees than they have saved to pay in benefits. Combined, these counties are 76 percent funded.

Ten counties have stopped enrollment in defined benefit plans and now offer defined contribution plans to new employees In these closed plans, they have set aside 94 percent of the money required to pay retirees

Two counties in Michigan are funded over 100 percent: Bay and Kalamazoo. Both of these counties have defined benefit pension plans.

In 2015, county records showed  $390 million given to county pensions across the state.

Taxpayers in Wayne, the largest county in Michigan, paid the most: $89 million toward its county’s $842 million unfunded liability. The county has 2,321 active employees enrolled in its pension plan. So, taxpayers contributed more than $38,000 for each employee.

This money, however, is not paying for the pensions being earned by current employees. This is because most of the money is going to pay down the system’s unfunded liabilities.

Pension Funding in Michigan Counties

Despite contributing more money than any other county, Wayne’s pension is 49 percent funded, which is the lowest percentage in Michigan.

The next two largest counties, Oakland and Macomb, look much better. Both of these counties have closed their defined benefit plan and now enroll new employees in a defined contribution plan, which does not have the risk of underfunding.

Oakland has an unfunded liability of $13 million and is funded at 98 percent. Macomb’s unfunded liability is $38 million, and the county has a funded percentage of 96 percent.

Genesee, the fifth largest county, plans to close its defined benefit plan to new hires on Nov. 20, 2017. Genesee has only 69 percent of the money it needs to pay retirees. The county comes up $109 million short of its obligations.

Robert Daddow, Oakland’s deputy county executive, talked about the county’s success and the choice to close its defined benefit plan to new hires in 1994.

“We realized that long-term defined benefit plans were going to be a problem. At that time and until the market declined in 2008, we were in good shape,” Daddow said. “But then we took a hit. We thought long-term defined benefit wasn’t where we wanted to be.”

Oakland’s civil service pension was 160 percent funded in 1994, but Daddow said the county wanted to act proactively by closing it.

Daddow laid out what it takes to have a fully funded pension system.

“To avoid an unfunded liability, the only things you can do are either fund the dollar amount that the actuary recommends, or alternatively you can cut benefits,” Daddow said.

Due to the Michigan Constitution, cutting pension benefits is nearly impossible. So the only option is to pay the required amount.

Daddow said closing defined benefit plans and enrolling new hires in a defined contribution plan will cut down on the required payments long-term, while still providing solid benefits to retirees.

Oakland County has saved $115 million since 1994 by using a 401(k) instead of its defined-benefit pension plan.

Michigan’s counties have promised to provide retirement for over 63,000 employees but right now not enough money is being saved for them. Local governments need to stop offering new pension benefits but still fulfill the promises made to those already in the system.

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.