Michigan’s public pensions are at risk

Jarrett Skorup and James Hohman

It’s been a bad couple of weeks for those who oversee Michigan’s public employee pension systems. The evidence of mismanagement coming out of Michigan’s Office of Retirement Services is starting to pile up and lawmakers should respond by rolling back the agency’s power.

A recent report from the state’s auditor general found that ORS understated retiree liabilities by $143 million. This would further add to the $17.7 billion it would take to pay for our retiree health insurance policies. That is in addition to the $33.3 billion in unfunded liabilities in pension systems overseen by ORS. Because of this pension underfunding, government employees and retirees are the state’s largest creditors.

Lawmakers are ultimately responsible for this because they are the ones who delegate authority to pension administrators. But ORS has done a bad job with the authority they’ve been given.

The state teacher pension system has been underfunded for at least 41 out of the past 42 years. Part of this is because of bad assumptions from the state pension managers, which hide the true cost of the system. Officials assume an investment rate of return of 8 percent on the bulk of their assets, and falling below these returns has been a prime reason why liabilities have grown. They also assume a growth in schools’ payrolls — even as the number of school employees has been on the decline for more than a decade. ORS uses other accounting tricks, like long amortization windows, that punt the costs to future taxpayers.

The costs have piled up. Those assumed investment returns never materialized and as school payrolls continued to decline, pension liabilities have soared. And while those short-sided assumptions helped hide the cost of the system in the short-term, the chicken has come home to roost. Taxpayers are now having to pay for those faulty assumptions.

Today, taxpayers are spending about $2 billion to try to catch up on pension liabilities. This means that 36 cents out of every dollar schools use for paying teachers today goes instead to pay for pensions. And when lawmakers last year tried to finally stop giving the agency the ability to kick the can of pension costs down the road by offering new school employees only 401(k)-type retirement plans — plans that cannot be underfunded and that limit taxpayer liability — ORS deceived them with claims about phantom upfront costs.

But ORS has other problems and these were accidentally exposed when the Mackinac Center for Public Policy, Michigan Press Association and Michigan Coalition for Open Government relied on the agency’s data to create a publicly available database containing the salaries of nearly 300,000 government workers in Michigan. Thanks to this effort, taxpayers can now see exactly how much they are paying their public employees at www.MichiganGovernmentSalaries.com.

The response to the database was fast — it got hundreds of thousands of hits in just a few days — but also furious — it quickly became clear that some of the data ORS had provided was incorrect. Turns out that of the hundreds of thousands of employees, ORS had inflated the salaries of about 4,500 government workers.

The agency claimed it was just a “technical error.” But it caused us to wonder: Is the agency sending out bad information to others who request it? Or worse, is it calculating pension benefits based on salaries that are incorrectly inflated?

Legislators should do more to oversee the responsibilities they entrusted to ORS. The agency needs to answer for why Michigan’s pension systems continue to appear poorly-managed. Ultimately, lawmakers should remove much of their responsibility over government employee pensions. The surest way to do that would be to transfer this responsibility to the employees themselves by offering new workers only 401(k)-style, defined-contribution retirement plans instead of badly-managed and massively underfunded pensions.

Jarrett Skorup is marketing and strategic outreach manager at the Mackinac Center for Public Policy. James Hohman is the assistant director of fiscal policy for the center.