Should the state lower its debt payments into the school retirement system? Lawmakers are pondering it.

Over the course of several decades, the state accidentally made school employees the state’s largest creditors. They’ve promised $35 billion more in retirement benefits than they’ve set aside. In contrast, the bondholders who willingly lent the state money are only owed $25 billion.

This shouldn’t be. Lawmakers are supposed to prefund the pension benefits that employees earn. The state sets aside money into the pension system to ensure that they can afford the pensions that school workers earn.

But lawmakers and administrators have consistently put in less than what was required. The system has had enough savings to pay for the total value of all pensions earned by employees in just one of the past 49 years.

Legislators have long acknowledged that this was a problem. They switched new school employees to plans that lower the underfunding risk and are using more realistic assumptions about investment returns on retirement funds.

Lawmakers also agreed to increase payments against the pension system’s debt. While good returns in the stock market can reduce the gap between what has been saved and what is owed, the state said it will continue to pay down the debt at the same rate, even as the total debt declines. Debt payments can only go up, not down, until the pension debts are paid.

Gov. Gretchen Whitmer wants to change this and spend debt payments elsewhere.

She notes that the state has fully prefunded the retirement health insurance benefits that members receive. This is a good thing; it ensures that the costs of previous employment don’t burden future taxpayers. But instead of applying the money previously used to pay down retiree health insurance debts to eliminate the pension debt, the governor wants to spend those funds on new programs.

Except that’s not what state funding rules require. Debt payments are supposed to continue at the same rate until all debts are paid. State law makes no distinction between debts owed for retiree health benefits and those for pension payments. If the health insurance portion debt is paid, then the payments used for it should go to pay down the pension debts.

There are benefits for paying down pension debts faster. The plan right now is to pay off pension debts over the next 14 years. Spending the $680 million money elsewhere will cost taxpayers $1.4 billion due to extra interest costs.

Instead, Whitmer’s administrators argue that the requirement to keep pension debts payments up mean that we’d overfund the retiree health insurance portion. But this ignores that the money used to pay down retiree health insurance could be used to pay down pension debts faster. She does acknowledge that she will need to change state rules to get what she wants.

State policymakers fully control the size of the payments they make to pay down pension debt. They’ve already established a rule to keep debt payments up until the debts are paid. The rule will save taxpayers money over the long term while protecting school employees’ pensions.

Whitmer wants to lower pension debt payments and spend that money elsewhere. That includes funding poverty alleviation programs for people who are not in poverty or even close to poverty levels.

It is more prudent to pay off debts.

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