News Story

State Officials' Pension Underfunding Crushing Michigan School Budgets

Officials come up short 7 years in a row, 20 of past 29

In 2000, Michigan’s state-run pension system for public school employees was short $246 million of what it needed to cover future retirees’ benefit checks.

The funding gap exploded more than a hundredfold since then, reaching $26.7 billion in 2016. The burden of catching up on this underfunded obligation is creating an ongoing budget crisis for public school districts across the state.

For example, the Ann Arbor school district was required to contribute $13.4 million to the system in 2007; by 2016 it had to pay $23.5 million, a 75 percent increase in just nine years. Had pension costs stayed at 2007 levels, the district would have had enough money left over to give all 1,180 teachers an $8,475 bonus in 2016.

School districts across the state have experienced increases of comparable magnitudes.

James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, did an analysis of the Michigan Public School Employees Retirement System from 2007 to 2015. The unfunded liability grew from $5.8 billion to $26.7 billion over that time.

Employer contributions to the pension fund get invested in stocks and bonds that are expected to grow enough over the decades to cover future retiree pension checks. Poor market returns over part of the last decade are a major contributor to the problem, accounting for nearly half ($12.7 billion) of the $26.7 billion, according to Hohman's analysis.

For example, the value of the pension fund’s investments declined by 16 percent in 2008 and another 7 percent in 2009.

Another $5.6 billion of the gap is due to state officials persistently failing to deposit the amount their own accountants say is needed each year to amortize, or catch up on, past underfunding within a reasonable number of decades. The state has now failed to meet these “actuarially required contributions” for seven years in a row, and for 20 of the past 29 years. The annually “required” payments, which in most years were not fully made, rose from $572.6 million in 2000 to $2.3 billion in 2016.

Another $3.5 billion of the unfunded liability is due to changes in benefits and actuarial assumptions, such how long retirees will live, estimates of future school payrolls and more.

“The state has made repeated decisions in funding policy and investment assumptions that have made school employees the state’s largest creditors. This is unfair to teachers and taxpayers alike,” Hohman said.

Kurt Weiss, spokesman for the Office of Retirement Services, didn’t return emails seeking comment.

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.