Courtesy of MIRS News
Senate Majority Leader Arlan MEEKHOF (R-West Olive) is planning to meet with staff and confer with his caucus next week about renewing a conversation about the now $29.1 billion and growing debt in the teachers’ retirement program known as the Michigan Public School Employees Retirement System or MPSERS.
With Senate appropriations subcommittees having carved $277.1 million from Gov. Rick SNYDER‘s proposed Fiscal Year (FY) 2018 budget, Meekhof is looking into whether now may be the time to address the subject again, confirmed Meekhof Press Secretary Amber McCANN.
Nothing is nailed down. But this could include more discussions on whether to end the state’s hybrid retirement benefit option to new teachers as a way to curb future costs, she said.
McCann emphasized that the discussion would be around offering new hires defined contribution plans, like 401(k)s, and would not include touching the pension benefits of current employees or retirees, which are constitutionally protected.
Earlier this week, speaking during a panel discussion at the Business Leaders for Michigan (BLM) conference, Meekhof disclosed that his top budget funding priority is paying down debt.
Asked Thursday by MIRS what, in particular, concerned him about the state’s long-term debt, Meekhof answered with one word, “MPSERS.”
“If we continue to accumulate debt, we will be unable to use our discretionary funds in other ways down the road,” McCann said. “It’s in everyone’s best interest that we address the debt load and the accumulation of debt.
“The Senate Majority Leader would argue that the state is not great at being in the pension business. It’s not something we do well.”
Meekhof and the Senate brought up this issue in lame duck, but wasn’t able to get the 20 votes in his caucus to pass anything.
Various state-by-state rankings of Michigan’s debt load shows that when the unfunded liabilities connected to MPSERS and other post-retiree benefits are added to the definition, Michigan looks worse when compared with its counterparts.
The Mercatus Center at George Mason University ranked Michigan 35th among the states on its fiscal health, not because of its $7.21 billion debt load, but because of its unfunded pension liabilities of $123.31 billion — this includes all government employees — and $20.60 billion in retiree health care liabilities.
When the Tax Foundation ran the numbers with just Michigan’s (at the time) $7.7 billion state and local debt from roads, infrastructure, buildings and other related capital expenses, it ranked 23rd in terms of lowest debt.
Snyder had put an emphasis on MPSERS upon taking office, going as far as breaking off MPSERS payments in the budget process to make sure schools were making their payments. Budget spokesperson Kurt WEISS said the state is paying down its debt in the budget and that if the state stays the course Snyder has set, the state’s unfunded liability will be paid off by 2038.
“The state retirement liabilities have been reduced by more than $20 billion with the reforms passed in 2011 and 2012 and now have the hybrid plan within MPSERS that is 100 percent funded,” Weiss said.
The problem, pointed out Mackinac Center’s James HOHMAN, is MPSERS’ unfunded liability is growing, not shrinking.
A report submitted three weeks ago to the MPSERS board concludes the fund’s unfunded liability number grew in 2015 from $26.7 billion to $29.1 billion and is only 60.1 percent funded down from the year prior. In 2011, the debt was $22.4 billion. In 2007, it was $5.8 billion.
The unfunded liability is increasing because its investments are not performing as well as needed. Some of the increase is due to the state’s chosen contribution rates.
Part of the recent increase is because the Snyder administration is lowering its assumptions on how much money it believes it can make from 8 to 7.5 percent, but Hohman, said even 7.5 percent is generous.
“They have no clue what unfunded liabilities are going to be in 2036,” Hohman said. “It’s going to take a lot of money to pay down liabilities, and there could be six different governors by then that have different ideas about the importance of paying off debt.”
In the past, legislators let the Governor take the lead on the pension reform, since he took the first steps in addressing the issue upon taking office in 2011. In recent months, however, the Senate, Mackinac Center and the libertarian-minded Reason Foundation have lad the discussion on further reform.
When asked where MPSERS ranked among the state’s most pressing fiscal issues, Hohman responded, “It’s clearly No. 1. This is the reason schools cost so much.”
But the concerns expressed by these think tanks have been pushed aside by school groups and other lawmakers as theoretical talking points.
However, the call for additional reform received some heft this week when the Business Leaders of Michigan (BLM), a fairly middle-of-the-road industry group as business groups go, put out the call that all new public employees be put on 401(k)s.
Meekhof could begin to tackle MSPERS, said Mitch BEAN of Great Lakes Economic Consulting, but closing a system or otherwise ending the flow of new-hire contribution to the pension system, will cost the state somewhere in the neighborhood of a $1 billion, at least. It’s a lot more than the $277 million the Senate was able to scrounge up in FY 2018 budget cuts.
He also noted that ending a pension system doesn’t save money until many years down the line. In the meantime, the state has to be put in a position to add money to a system that is not getting contributions from new hires.
“MPSERS is a big deal,” Bean said. “To do what it sounds like they’re looking at doing is going to cost money and it’s going to be hard to do without hurting the budget too much.”
The House is angling toward a tax cut. Lowering the income tax rate from 4.25 to 4.15 percent for a year would be in the $260 million range, he said.
So, what are the practical prospects of both an income tax cut and a MPSERS reform?
Said the former House Fiscal Agency Director, “It can’t be done.”