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Michigan Funding Its Pensions, Using More Realistic Numbers

Hat trick: Legislature also contained school pension liabilities by closing system to new hires

The level of underfunding in Michigan’s public school pension system increased again last year, but this time it wasn’t because officials failed to deposit the right amount into the system.

Unfunded liabilities in the Michigan Public School Employees Retirement System increased from $29.1 billion to $29.4 billion in 2017, according to the annual report released by the state. The increase was due to using a more conservative estimate of future investment returns.

The estimate is used when determining how much needs to be contributed to the fund now to make future pension payouts, so a more conservative one leads to more realistic contribution levels.

“The assumed rate of return on the pension plan was lowered from 7.50 percent to 7.05 percent, which is a smart fiscal decision that reduces risk to the system,” said Kurt Weiss, spokesman for the Michigan Department of Technology, Management and Budget, in an email. “Reducing the assumed rate of return caused the slight increase in unfunded liabilities because the state is now taking the more conservative and responsible approach of assuming less investment income in the future. Had the assumed rate of return NOT been reduced, the unfunded liability would have gone down from $29.1 billion in 2016 to $27.9 billion in 2017. The state continues to pay down the liabilities each year, now with a more conservative assumed rate of return, and Michigan remains on target to have these liabilities paid off by the year 2038.”

Michigan has a long history of not contributing enough to the school pension fund to cover the pension promises made to employees. For 20 of the past 30 years, the state shorted what its actuaries stated was needed to cover the annual cost of funding those promises.

In 2017, the state contributed $2.4 billion to the school retirement system. That was $64.7 million more than the amount — called the annual required contribution — recommended by accounting standards.

In 2017, legislators closed the defined benefit school pension to new employees. Those employees now have a choice of getting employer contributions worth up to 7 percent of their salary to a 401(k), or enrolling in a defined benefit system in which they themselves are partially liable for any future underfunding. A self-funded annuity will also be offered but is not available yet.