In 1996, Gov. John Engler made a bold move. In a lame duck session, he tried to close all the state government’s defined-benefit pension systems.
While he was not able to get all that he wanted, Michigan became the first state government to close some of its pension systems and instead offer new employees a defined-contribution retirement system. While this was an achievement in the ‘90s, one of Michigan’s largest financial drains continues to be the largest system that remained open: the Michigan Public School Employees’ Retirement System.
Since that legislative discussion and implementation in 1996 and 1997, this retirement system has incurred a $22.4 billion unfunded liability for the state. The costs to catch up on this underfunding weigh constantly on struggling legislators, who try to find ways to lower the pension system’s price tag without crossing collective bargaining demands.
We showed in a 2010 study that these benefits were financially exhausting, but also that they were profoundly unique when compared to other Michigan residents. We benchmarked to 24 major Michigan private-sector employers and found that few offered benefits as generous as what was available to school employees.
These studies went largely unanswered, until a new governor and Michigan legislature were curious about closing the pension system. We answered with a study showing that the Engler reforms had saved the state from racking up $2.3 billion to $4.3 billion in unfunded liabilities.
The 2012 budget included a call for a workgroup to study reforming the pension system and members’ concerns that converting to a defined-contribution retirement system would result in large “transition costs.” The Mackinac Center published a study in 2012 showing what these “transition costs” really meant, and also offering five ways to address them.
The Michigan Senate voted to close the defined-benefit pension system in May, but the house rejected that change in June.
As the debate went on, Michigan Capitol Confidential rebutted the objections made by pension system defenders. Unfortunately, the Senate caved in August. Now, the debate once more returns to an unwelcome reality: Michigan’s public school employees enjoy unprecedented state-wide benefits, and the state lacks any means to continue supporting this system, to the detriment of these employees and all taxpayers.
Timeline of the pension reform movement
Gov. Engler closes state employee retirement system to new members, the first transition to a defined-contribution system in the country.
Michigan policymakers opportunistacally increase the reported actuarial value of the state’s pension assets, allowing them to contribute less money to the pension plan in the following year.
The national recession begins, substantially decreasing the market value of the state’s assets and causing even larger gaps between pension assets and liabilities.
The Michigan Legislature lowers retiree health and pension benefits and requires greater employee contributions, but also provides an early retirement incentive that increases the system’s unfunded liabilities.
The Mackinac Center releases a study, titled “Michigan’s Public-Employee Retirement Benefits: Benchmarking and Managing Benefits and Costs,” that shows Michigan’s pension systems are far more generous in their benefits than what exists in the private sector.
Michigan passes a budget including a call for a study on how to spend $133 million reforming the Michigan Public School Employees’ Retirement System.
The Mackinac Center shows how the state can address the alleged “transition costs” of converting to a defined-contribution system in a study, titled “Five Options for Addressing ‘Transition Costs’ When Closing the MPSERS Pension Plan.”
Michigan Senate votes to close the pension system, among other reforms.
Michigan House votes to keep the pension system open, among other reforms.
Michigan Senate concurs with house; commissions a study to compare defined-benefit and defined-contribution systems that will be completed in November.