State Retirement Managers Develop Convenient, Hypocritical Excuse

Tantamount to only brushing your teeth when you go to the dentist

Michigan lawmakers might offer new school employees defined-contribution, 401(k)-style retirement benefits instead of defined-benefit pensions. The state-run pension system’s managers in the Office of Retirement Services contend that this will generate large and unavoidable “transition costs.” But their reasoning for defending the status quo suggests that they are more interested in pressuring lawmakers away from reform than in maintaining a well-funded pension system.

ORS argues that moving to a 401(k)-style plan would force them to change the way they pay off the $29.1 billion in unfunded liabilities in the system. Right now, they have chosen to pay this off over the next 21 years by increasing the payments by 3.5 percent per year, the rate at which they assume schools’ payroll will grow annually.

If the system goes to a defined-contribution retirement plan, they argue, “best practices” recommend they stop assuming that payroll will grow. Thus, they would need to put more cash into the system in the near term, since they would no longer be able to backload payments. This is what they mean by transition costs.

One problem with invoking so-called best practices, however, is that ORS has a history of ignoring them when it’s convenient. And while it’s true that best practices do call for not assuming payroll growth when a pension plan gets closed, this is something the state should have been doing all along.

ORS has assumed that payroll would grow 3.5 percent per year, which equates to 60 percent growth over the past 15 years. But payroll hasn’t grown at all over this period — in fact, it has steadily declined. Keeping this in mind, what ORS calls “transition costs” might be better called “the cost of doing what you should have done all along.” Basically, ORS is saying that you don’t need to brush your teeth until you go to the dentist.

ORS officials say they will still pay off the unfunded liabilities over time, pointing out that they make extra payments if their assumptions are faulty and they fail to put enough money into the system. But it’s important to remember these payments are made entirely at their own discretion, and they can simply cancel the process, as they did from 2012 to 2015.

Using this artificial price tag, ORS has succeeded at scaring a lot of lawmakers away from voting in favor of fiscal prudence and closing, once and for all, the school pension system. But the reality is that there is no mandate to pay the so-called transition costs, and keeping the state’s plan to pay down unfunded liabilities would be just as prudent with a closed system as it would be with an open one.

If state lawmakers can find money in the budget to pay ORS’s transition costs, great; they would be paying down the state’s largest debt at a faster pace. That would also be prudent, saving interest expenses over the long term. But there is no mandate that lawmakers do so, and ORS managers are hypocritical for even raising this as a reason to oppose switching to a defined-contribution retirement 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.