News Story

Good News/Bad News On Michigan Teacher Pensions

Unfunded liabilities are up, but for a good reason: More realistic projections about investment growth

There’s good news and bad news about unfunded taxpayer liabilities in Michigan’s school pension system.

The bad news is that the shortfall — the amount needed to meet the system’s pension promises — rose to $30.7 billion in 2018, up $4.2 billion.

The good news is that $6.6 billion of the deficit is due to officials using more realistic estimates of how much the investments in the pension fund will grow in future years.

In the past, officials had masked the true size of the system’s unfunded liabilities by using optimistic assumptions about investment returns, as well as future payroll growth. This allowed the state to contribute less than it should have each year, using unrealistic future expectations to make up for current contribution deficits.

More good news: For the second consecutive year, the state of Michigan contributed as much as it should have to the system. The proper contribution amount is an estimate based on many assumptions about the future, including how quickly pension fund investments will grow.

The state contributed $2.8 billion to the system in 2018, which was $317 million above an amount called the annual required contribution, or what actuarial accountants project is needed to catch up on years of past underfunding. In 2017, the state contributed $2.4 billion, which was $64.7 million more than what was required that year.

The information is contained in the latest comprehensive annual financial report for the state-run system, called the Michigan Public School Employees Retirement System. The report was assembled by the state Office of Retirement Services, which manages the system.

According to James Hohman, a fiscal policy analyst at the Mackinac Center for Public Policy, the system’s unfunded liabilities actually declined by $100 million in 2017. “This is because the state outperformed its assumptions, but also because the state changed its assumptions,” he wrote in a blog post.

The need to catch up on years of pension underfunding has placed and continues to place a tremendous strain on school district budgets. For example, in 2018, Walled Lake Consolidated Schools had to pay $26.8 million into the pension system. In 2009, the district paid only $9.8 million.

In 2017, the Legislature overhauled the school pension system, containing its capacity to generate additional unfunded liabilities by making a 401(k) the default for all school employees hired after January 2018. New hires can still choose a traditional defined benefit pension rather than the new defined contribution plan, but they will be on the hook for any future underfunding.

A second reform adopted in 2018 instituted a more rigorous formula for paying down, or amortizing, the debt accumulated by past pension underfunding.

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.