Michigan’s Credit Rating Upgraded, Agency Cites School Pension Reform

The state of Michigan’s credit rating was upgraded last week thanks in part to pension reform, a move that could save taxpayers millions because of lower interest rates. The credit upgrade also contradicts the message of special interest groups that opposed changes to the state’s public school employee pension system, who said the reforms would be fiscally irresponsible and hurt taxpayers.

Standard & Poor’s increased Michigan’s credit rating from AA- to AA and said the state’s economy and finances have a “stable outlook,” according to the Michigan Treasury Department.

“S&P’s AA credit rating enables the state to borrow money at a lower interest rate — saving taxpayers millions of dollars — and reflects improvements in the state’s economic and financial condition since the recession,” a department press release said. “This is also S&P’s first state-level credit rating upgrade since the states of Hawaii and Tennessee in 2016. To date, two states have been downgraded this year.”

The report noted that the “adopted various pension payment methodology, assumption changes, and other reforms” will “address its substantial liabilities” in the upcoming years.

“The upgrade reflects Michigan’s demonstrated resilience following the Great Recession and improved credit fundamentals that we believe will persist through economic cycles,” the report said. “In our view, diversification of the state’s economy, revitalization of distressed communities, structural budget alignment, stronger reserves, and reforms to address its sizable pension and other postemployment benefit (OPEB) liabilities will better position it for the next downturn.”

Gov. Rick Snyder in July 2017 signed into law comprehensive pension reforms which overhauled the Michigan Public School Employees Retirement System, commonly known as MPSERS. The reforms replaced the old retirement system with a new system that gives new employees a defined contribution 401(k) account with substantial employer contributions, or a defined benefit plan in which enrollees would themselves be responsible for making up any future underfunding. (State officials are also working to create a third option, an employee-owned annuity.) The changes will limit the $29.1 billion debt accumulated by the previous system and will gradually reduce it.

The improved credit rating stands in stark contrast to the claims issued by public sector unions, interest groups, and Democratic lawmakers in the months before the state enacted the measure in 2017. The Michigan Education Association, the Michigan Association of School Administrators, the Coalition for Secure Retirement, and the American Federation of Teachers-Michigan were among the groups opposed to the reforms.

MEA Director of Public Affairs Doug Pratt said in Nov. 2016 that the reforms proposed were irresponsible and cited experts who said there would be “negative financial consequences.”

“Dismantling the school employee retirement system would cost taxpayers billions of dollars and would hurt kids and local schools in the process,” he said. “Ramming through this legislation in the final days of the legislature is utterly irresponsible, especially when so many fiscal experts are warning lawmakers about the negative financial consequences of this reckless proposal. We need to have a transparent, public debate about this issue, and lame duck is not the time for such a debate, especially when independent fiscal experts are sounding the alarm bells about the staggering price tag for taxpayers.”

In June 2017, after the Legislature passed the pension reform bill package, MEA President Steve Cook said the legislation would be detrimental to “the fiscal health of the state.”

“The rushed passage of this legislation today — over the objections of educators from across the state who came to Lansing at the beginning of their summer break — is a travesty that will not bode well for future school employees, the students they serve or the fiscal health of the state,” he said.

The legislation “is a direct attack on public school teachers and public education here in Michigan,” Sen. Curtis Hertel, D-Meridian Township, said at the time, according to the Detroit News. “For everything our teachers do for our state, they deserve at least a secure retirement. This legislation steals that from them.”

Richard C. Dreyfuss, an actuary and scholar with the Mackinac Center for Public Policy, called the new credit rating an “upgrade that is well deserved.”

“It’s a good plan design and they also included some responsible funding reforms,” he said. “By that, I mean they are trying to actually pay down the deficit, otherwise known as the unfunded liability, so I think it is an upgrade that is well deserved.”

A commentary published Tuesday by the Reason Foundation’s Pension Integrity Project detailed how Michigan’s reforms have “driven such a successful collective outcome,” citing S&P’s improved credit rating.