McHugh Reponds to Chuck Moss on Pension Reform

Bottom line first — a personal note: I believe Rep. Chuck Moss, R-Birmingham, is sincere, and don't think he has "sold out" to the MEA teachers union. People can agree to disagree on down-in-the-weeds interpretations of GASB rules, etc., and time will tell who is correct. However, even if it involves some relatively minor risks, Michigan will be well served if its leaders enact what would arguably be the most transformational fiscal reform since 1996, closing the school pension system to new employees. That would be a real feather in the cap of this Legislature, whereas failure to realize the oh-so-close opportunity would be a black mark — and a victory for the union.

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Rep. Chuck Moss has published a piece in The Michigan View responding to my article posted here Wednesday criticizing the House for failing to follow through on a Senate-passed pension reform bill. (The Senate voted to close the “defined-benefit” pension system to new employees starting in 2013).

However, there are several incorrect statements or mischaracterizations in Rep. Moss's response.

1. “…closing out our (defined benefit) retirement system (to new employees) incurs an up-front cost of $700 million-$1.4 billion over five years, with $400 million due the first year.”

This is not correct. Closing the system in fact incurs no new costs. The “costs” have already been incurred — they are the price of chronic “low-balling” of the annual pension fund contributions needed to prefund future annuity benefits earned by employees during each year. This has been done by retirement system officials and politicians using gimmicks to avoid paying-in a correct amount.

Actually, Rep. Moss knows this and is just using a sloppy shorthand term to describe something else: A mistaken notion that when a pension system is closed to new members the state must accelerate the repayment of all that past underfunding, or “catch up quicker.” This is the interpretation that has been promoted by state retirement system officials who belong to what an American Enterprise Institute scholar has aptly labeled "the pension industrial complex."

In fact, the GASB rules Rep. Moss refers to apply to accounting reports, not actual appropriations. In the real world, the Legislature would not actually have to appropriate a dime for faster amortization (it is already paying billions to execute a reasonably-paced “catch up” plan.) GASB itself reports that its schedules are not “about acceptable public policy with regard to an employer’s contributions to a pension plan.”.

2. “MPSERS has an unfunded liability of about $45 billion.”

No it doesn’t. As the representative acknowledges, only $17 billion of this is in the constitutionally protected “annuity” portion of the retirement system — the monthly pension checks sent to retirees. The remaining $28 billion is nothing more than politicians’ promises to a powerful special interest. Specifically, to provide some level of extra health benefits to school retirees (who like the rest of us are already eligible for federal Medicare at age 65). This is not an enforceable obligation on taxpayers, which the bill Rep. Moss defends implicitly acknowledges by cutting the benefit’s value by 11 percent.

Realistically, the state is unlikely to eliminate this optional benefit entirely, but we could. That’s why this is not a real “liability” comparable to a home mortgage. We could also cut it even more than the proposed 11 percent. For example, why not 50 percent? That would reduce the future cost from $28 billion to $14 billion, and wouldn’t cost taxpayers a dime. (Incidentally, the proposed 11 percent cut will already trigger the lawsuits Rep. Moss cites to justify not making more substantial reforms.)

Moreover, the hundreds of millions of taxpayer dollars Rep. Moss wants to place in a prefunding account to cover these optional benefits will almost certainly be “raided” by a future Legislature for other spending. It amounts to a slush fund for future spenders, which is why my Mackinac Center colleagues have dubbed it “Rainy Day Fund 2.”

Finally, “hybrid pension” is like “a little bit pregnant” – there’s no such thing. Either a system creates new taxpayer liabilities or it doesn’t. “Hybrid pension” is a cute political term invented to hide the fact that they do create new liabilities, just at a slightly lower rate.

That brings us back to the key issue, the "forest" Rep. Moss has lost sight of among all the trees: The opportunity to close the defined benefit school pension system to new hires (as was done for state employees in 1997). This would be a permanent and transformational reform making Michigan just the second state in the nation to put itself on a glide path to complete elimination of government employee legacy costs (Utah was first).

The magnitude of this reform cannot be overstated, and dwarfs all these other issues. It would mean immeasurably more to prospective investors, job providers and even “the bond market” than a GASB-rule footnote in the state’s accounting statements.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.