News Story

Top Legislative Leaders Make School Pension Reform Their Top Budget Issue

‘Underfunding has made benefits expensive, costing 37 percent of each school district’s payroll’

New bills to close the state-run public school pension system to employees hired after Sept. 30 of this year may get a boost, according to a weekend report from the Gongwer news service.

Under legislation introduced last week, new employees would get defined contribution retirement benefits instead of traditional pensions. Gongwer reports that the Republican Speaker of the Michigan House and the Republican Senate majority leader have made pension reform the top issue for next year’s state budget, which they hope to pass in June.

If adopted, the reforms would not affect current employees, but going forward would contain the growth of a $29.1 billion unfunded liability the school pension system has accumulated. The pension fund only holds about 60 percent of the amount it needs to honor benefit promises made to employees, according to a report released by the House Fiscal Agency on Wednesday.

Both the House and Senate legislation requires the unfunded liability be paid off by 2038.

A so-called hybrid pension system that provides slightly less generous benefits along with employer 401(k) contributions was created in 2010 for employees hired since then. While fully funded, the system has also has not accumulated a large surplus, despite strong investment market returns that have prevailed since it was created.

“The system continues to take on massive amounts of debt, and just in the last year alone we’ve accumulated $2 billion worth of additional debt that has pushed to nearly $30 billion unfunded liabilities, and it’s growing,” said Sen. Phil Pavlov, R-St. Clair, who is sponsoring the Senate version of the bill. “So in order to protect the pensioners and the taxpayers, we need to close the system, and put new hires in a defined contribution system.”

In addition to the 2010 changes, lawmakers also engaged the issue in 2012, when a law was passed that ended post-retirement health insurance benefits for new school employees and made other changes. During the 2015-16 session, Pavlov sponsored a bill similar to what he introduced last week.

Interest groups in Lansing are taking similar positions as the last time the issue was engaged. The Michigan Chamber of Commerce favors the reforms.

“We believe that this is a taxpayer issue at its core, and Michigan needs to get in control of its expenses and its unfunded liability,” said Wendy Block, the chamber’s senior director of health policy and business advocacy.

The state’s largest teachers union, the Michigan Education Association, opposes the proposal, citing an Anderson Economic Group memo commissioned by the Michigan Association of School Administrators. The MEA says the memo indicates that ending the defined benefit system would impose more than $20 billion in “transition costs” over 30 years.

In a press release issued last week, MEA President Steve Cook called the legislation an “attack [on] the livelihood and retirement security of school employees.”

Senate Minority Leader Jim Ananich, D-Flint, called the proposed reforms haphazard and said they will jeopardize current employees’ retirement.

“If we are going to say that Michigan’s young people deserve a world-class education, we need to be willing to support the people who are going to make that happen,” he said in a press release.

Responding to the MEA’s claims in a May 23 press release, Pavlov said the current system’s unfunded liabilities are a threat to pensioners and reforms will help keep them from growing larger

“Today their pension is only worth 60 cents per dollar, and if the current trend continues it will only be 50 cents per dollar,” Pavlov said.

James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, believes future public school employees will do better with the proposed defined contribution retirement funds, either employee-owned annuities or 401(k) accounts.

“The current plan isn’t especially generous,” Hohman said. “Roughly half of teachers are not working long enough to earn a pension. But the underfunding has made benefits expensive, costing 37 percent of each school district’s payroll. This makes it bad for teachers and taxpayers alike.”

Hohman added that having to pay down the current system’s unfunded liabilities means that schools now have about $1,600 per pupil less to spend each year. Also, he said, the transition costs supposedly associated with closing the defined benefit system — essentially paying off its debt at a faster rate — are not automatic. A Senate Fiscal Agency summary projects that paying them would add about $410 million to statewide school spending in the first year of implementation.

“The system owes $29 billion more than lawmakers have saved, so the state needs to put more money into it,” Hohman said. “But putting new employees into a 401(k)-style plan doesn’t require lawmakers to put more money into the system. The costs raised by state officials are optional.”

Pavlov echoed Hohman: “I think [the House Fiscal Agency is] making an assumption and they’re considering best practices that aren’t a part of this bill.”

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.