Legislation does not cap potential taxpayer contributions
Some Michigan legislators appear to not understand the effect of Detroit pension legislation passed by the House last week as a condition of giving the city $194.8 million in state dollars — and as a result are misrepresenting what the bill does.
For example, on Facebook House Speaker Jase Bolger, R-Marshall, stated: "We did not mandate that they go to a DC (Defined Contribution retirement system); we said, however, that the employer (taxpayer) cannot contribute more than 7 percent."
However, the legislation the House passed gives the city two options, neither of which caps employer contributions at 7 percent. The first option is continuing a "hybrid" plan that is part of a proposed Detroit bankruptcy settlement. Nothing in that plan limits potential taxpayer contributions to 7 percent, and it would leave intact the city's ability to generate new unfunded liabilities (although the risks may be mitigated by funding assumptions more conservative than in the current system).
Alternatively, Detroit could adopt a pension system in which the city "does not contribute more than 7 percent of the employee's base pay to an appropriate retirement account." Once again, however, this would not prohibit the city from generating new unfunded liabilities, and any future underfunding catch up cost payments would not be limited to 7 percent. In fact they would be unrestricted because these payments would go into the retirement system as a whole rather than to "an appropriate retirement account."
Defenders of the House package argue that it imposes supervision by a state oversight panel, and one of the conditions for ending this is the city adopting those 7 percent "caps." Yet this provision just reiterates the language that does not actually cap payments at 7 percent.
While it is in place, state oversight may help the city avoid generating unfunded liabilities, and other provisions in the bills limiting "benefit spiking" schemes and the notorious "13th check" can also help.
However, the essential cause of unfunded liabilities in the Detroit pension system is not addressed by the legislation — promising benefits and not paying for them. The state oversight commission is given little control over this.
Initially, some House Republicans spoke about trying to fix this essential problem. The original House pension bill would have guaranteed that underfunding eventually would be eliminated. The reforms the House passed do not.
If the Legislature wants to accomplish what Speaker Bolger says this legislation does, there is still an opportunity to do so as it advances through the process.