30-Yr MPSERS Bond Costs Taxpayers $13B Less Than Status Quo
August 13, 2019
The bonding-against-teacher-pensions plan floated as a way to free up road funding would cost taxpayers $13 billion less than the current debt repayment plan, as well as $26 billion less than extending the repayment schedule without bonding, according to the West Michigan Policy Forum (WMPF).
The WMPF study of restructuring the unfunded liability tied to the Michigan Public School Employees Retirement System (MPSERS) has been tied to a possible avenue to free up money to pay for legislative Republicans’ road funding plan.
That’s provided the Legislature opts to use the short-term cash freed up by the MPSERS bond to backfill a hole that would be created by eliminating the sales tax collected on gas and replacing it with a penny-for-penny increase in the gas tax which is what House Speaker Lee Chatfield (R-Levering) has pushed for as part of the plan.
But Jase Bolger, the former House Speaker and now a policy advisor for the WMPF, said finding more road funding revenue wasn’t the motivation behind studying the MPSERS restructuring. But he did note tying the freed-up revenue from the proposed MPSERS bond to roads “could be an acceptable use,” but said it’s ultimately up to the Legislature to decide.
WMPF looked at a concept involving the state issuing a 30-year, $10 billion bond at 4% interest as a way to pre-fund the teachers’ retirement fund and then pay back those bonds on a set schedule, in part, by investing the large influx of cash it would receive. Such a plan would lessen the state’s annual commitment to MPSERS by as much as $900 million a year, Bolger said.
Meanwhile, the hole created by taking the sales tax off gasoline sales has been estimated at $800 million, with the School Aid Fund (SAF) and local governments facing a potential impact if such a fund shift occurred.
Bolger said the 30-year, $10 billion bond plan would ultimately cost taxpayers $70 billion, which compared to the status quo — the 19-year plan to pay off MPSERS in 2038 — would leave taxpayers on the hook for $83 billion. And if a 30-year amortization were implemented but without the bond, that’d cost taxpayers $96 billion.
With those figures at hand — which assume a “conservative” 6% investment return, Bolger said — the 30-year plan with bonding would meet all three goals the WMPF set for this exercise: Locking in a MPSERS repayment schedule, ensuring the system is fully funded and comparing how much taxpayers would have to ultimately pay to shore up those debts.
Since June, it’s been reported legislative Republicans are considering such a scheme as a road-funding alternative to present to Gov. Gretchen Whitmer’s gas tax increase plan. Both Chatfield and Senate Majority Leader Mike Shirkey (R-Clarklake) have been briefed on this.
Whitmer voiced opposition to the bonding idea when she was asked about it. But she has provided public openness to extending the timeline to pay off the MPSERS to free up money in the short-term toward roads.
But school groups have come out firmly against altering MPSERS in any way to pay for roads. The Michigan Education Association (MEA), the Michigan Association of School Boards (MASB) and the Michigan Association of Superintendents & Administrators (MASA) have all spoken up on the issue recently.
In a joint MASB-MASA op-ed released Wednesday, the groups contend the idea of either securitizing the state’s pension funds or delaying repayment of debt aren’t “a real solution” that “would not only push back the date of full debt repayment for the state, but it would also add billions of dollars to our state’s debt, all on the backs of Michigan educators and public servants.”
When asked about the 30-year bonding plan saving taxpayers money on MPSERS over time, MASA’s Peter Spadafore wasn’t buying it.
“That doesn’t make sense because you’re paying interest on all that stuff,” Spadafore said, who is the associate executive director for advocacy and communications for MASA. He said amortization is something to consider when the state is in an economic downturn because “we need to be able to have options on the table to be able to preserve school funding.”
Spadafore also said there’s always a risk that the rate of return falls below assumptions to make those payments, which would ultimately mean “schools will suffer.”
Bolger contended the 30-year bonding plan would increase more funding in MPSERS than the status quo does in the short term, and he argued not adopting the 30-year bonding plan would result in less K-12 funding in the next five years because “effectively all School Aid Fund growth for the next 5 years must go to MPSERS funding in the 2038 plan.”
Any decision to bond against MPSERS, or to extend the current debt repayment schedule, would require enabling legislation. That’s because Treasury believes, at this point, the department doesn’t have the authority to carry out such proposals.
“Treasury doesn’t believe it has the authority to issue such bonds and thinks legislation would be required,” Treasury spokesperson Ron Leix said.
And asked if Treasury thinks it has the authority to refinance MPSERS – or another state retirement system – or extend the debt payment timelines, Treasury spokesperson Danelle Gittus said, “We believe this would also require legislation.”
MPSERS’ estimated pension liability is at $32.7 billion, with the State Employees Retirement System, or SERS, carrying a $6.5 billion pension liability, according to figures provided by the Office of Retirement Services (ORS) Wednesday.
Bolger, however, said WMPF used a 6% investment return for projections, putting their MPSERS pension-only unfunded liability estimate at around $40 billion.
Bolger said WMPF told lawmakers a similar scheme could be considered for SERS but the group didn’t ultimately run the numbers for SERS.