State Employee Public Pension Liability Jumps $900 Million in One Year

In one year, the state of Michigan’s unfunded liability for the state employees’ pension plan increased by $900 million due to the poor performance of investments in 2008. The unfunded liability increased from $3.1 billion in 2009 to $4.0 billion in 2010 for the Michigan State Employees’ Retirement System, according to an actuarial report done by Gabriel Roeder Smith & Company that was released last week.

The 29 percent jump in unfunded liability highlights one of the problems with a defined benefit plan: It can be hard to accurately figure out how much it will cost so many years down the road.

James Hohman, fiscal policy analyst for the Mackinac Center for Public Policy, said the jump in unfunded liability is another reason why a pension plan for public school employees should follow in the path of the state employees’ pension plan. In 1997, lawmakers and then-Gov. Engler switched most of the new employees in the Michigan State Employees Retirement System (MSERS) from a defined benefit pension to a defined contribution 401(k)-style plan.

New employees since then are not eligible for the conventional pension. Had they been, then the $900 million increase in unfunded liabilities would likely have been much worse.

As a result, the state hasn’t needed to adjust its contribution rates since 1997, Hohman said.

In a conventional pension, the taxpayers guarantee a rate of return for the retirement funds of government employees, and the taxpayers — through the government — assume all of the risk for making investment decisions that meet the promise. The modern 401(k) defined contribution plan, very common in the private sector, gives government employees the resources (contributions) and responsibility (risk) for making their own investment decisions. Though still very common for government employees, just 17 percent of Fortune 100 companies still offer conventional defined benefit pensions to new employees.

The state has kept the Michigan Public School Employees’ Retirement System (MPSERS) on a conventional defined benefit pension system. In contrast to the MSERS $4 billion unfunded liability, MPSERS has an $11.98 billion unfunded pension liability.

Additionally, the teacher pension system provides a very rare health care benefit for retirees. The unfunded liability for this is estimated to be at least $16.8 billion, and may be as high as $27.6 billion, making it an even more dangerous debt than the MPSERS retirement pension.

But unlike the pensions, the retirement health care benefit is not a constitutionally guaranteed contract between the taxpayers and the government school employees.

While retiree health care is still found in many government retirement plans, very few private-sector companies give health care to retired employees. According to the Kaiser Family Foundation, only 28 percent of large companies do so. And for companies of 200 or fewer employees, retirement health care is available in just 3 percent of them.

The MPSERS handbook tells teachers that they have “one of the best public pensions around.”

Hohman says that the state is better off meeting its pension liabilities annually when it has a defined cost instead of kicking that obligation down the road where it can grow to be unmanageable.

“Fewer games can be played in a defined contribution system. If you underfund a pension system, employees won’t grumble too much — their benefits are constitutionally protected. It’s just the taxpayers that have to pick up the slack, or the school districts that have to budget for it,” Hohman said in an email. “But if the state misses its payments on a defined contribution system, employees would know exactly what happened and would be up in arms about it.”

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State Employee Public Pension Liability Jumps $900 Million in One Year

29 percent hike excludes new workers hired since 1997 who were put on 401(k) plans

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