Michigan lawmakers did the right thing by tackling the state’s school employee retirement system last month. But now that that is off their plate, they should put reform of local government pensions at the top of their priority list.
A report presented to the West Michigan Policy Forum last fall highlighted why it is essential to make changes. The state has an estimated $51.4 billion of unfunded retirement liabilities. And the forum has continued to raise concerns over these growing costs to the state.
As the group warns on its website: “Massive tax increases and drastic cuts to services are coming or promises of benefits will be broken, unless changes are made now.”
In reforming the Michigan Public School Employees Retirement System, the Legislature designed a proposal that will place all new school staff into 401(k)-style retirement savings accounts, but it also offers teachers the ability to move into a newly designed hybrid pension system if they wish.
This tackles the $29 billion in unfunded liabilities that was eating into classroom funding, while limiting risk and increasing stability in years ahead.
It was a solid plan, earning the status of the “most innovative teacher pension reform in the nation” from the Reason Foundation.
Local government pensions also need attention, including those of the Michigan State Police. And the reforms to teacher pensions should serve as a model.
Only 20 of Michigan’s 100 largest cities have put enough money away to meet pension obligations. Of Michigan’s 83 counties, just two are fully funded.
Local government leaders must make tough decisions to ward off bigger problems down the road. That includes paying more now to meet required contributions and switching new workers into defined contribution systems. This is the best way to stop unfunded liabilities from accumulating further.
For now, most local government retirement benefits are decided locally, meaning they are subject to collective bargaining when employees are unionized, says James Hohman, fiscal policy expert at the Mackinac Center for Public Policy.
But if these local leaders don’t act on their own, the Legislature should step in. The state can provide guidelines for how local pension benefits are accrued — just as it has limited employer costs for public worker health insurance benefits.
Michigan State Police employees also face shortfalls with their retirement benefits, after years of underfunding. Michigan Capitol Confidential reports that the state is now spending nearly as much on police pensions as it does on police gross wages.
And a Senate Fiscal Agency report found a fifth of the money spent by the state police last year went to retirement benefits — with the majority of that funding going toward pension debt. The Senate report also found the system is $1.2 billion short of what’s needed to cover pensions and health benefits.
Yet the Legislature can’t touch these pensions, as state police are specifically listed in the constitution and have to collectively bargain over “conditions of their employment, compensation, hours, working conditions, retirement, pensions, and other aspects of employment.”
That doesn’t mean these shortfalls can be overlooked.
Government at all levels has failed its employees by not fully funding pensions each year, allowing them to accumulate more and more debt, and expecting the taxpayers to pay the difference.
It’s not a sustainable model, and one that deserves immediate attention.