Editorial: State can’t shirk pension reform

The Detroit News

Flint is facing another crisis — but this one doesn’t involve its drinking water. The city’s pension system is severely underfunded and getting worse, and that leaves the future viability of the city uncertain, no matter what happens with its water lines.

Flint’s defined benefit pension fund has just 38 percent of the money it needs to pay promised benefits to future retirees. The fund has an unfunded liability of $345 million, which is up $60 million from last year, according to Flint’s 2016 audit report.

If the shortfall is not addressed soon, and in a sustainable way, Flint will face additional cuts in government services, something it has already been doing for nearly a decade. Since 2008, Flint has lost roughly 160 police officers and 50 water maintenance employees, part of a reduction that has seen its workforce fall to 470 employees from 1,156 in just eight years.

The basic problem is that promised benefits can’t be met with current municipal revenues, unless there are drastic changes to retirement packages. The state Legislature tried and failed to make those changes in last year’s lame-duck session. It must try again.

Defined benefit pensions, which are most common at the local government level, guarantee a specific amount of income after retirement and requires the government to save money to make those future payments.

An unfunded liability occurs when the government is not saving enough.

Sometimes the communities divert money to today’s spending needs. And sometimes they simply err in estimating life expectancy, the rate of return on investment and payroll growth.

The problem goes beyond Flint. Only a handful of Michigan’s cities and counties have adequately saved for their employees’ retirement benefits, according to a study by the Mackinac Center for Public Policy. Just 20 of Michigan’s 100 largest cities have enough money to meet pension obligations. Of Michigan’s 83 counties, two are fully funded — Bay and Kalamazoo.

The statewide pension system has big problems, too. The Michigan Public School Employees’ Retirement System has the largest unfunded liability in the state at $26.7 billion. MPSERS has not met its “annual required contribution” since 2009.

When the contributions are not fully paid, unfunded liabilities grow at a faster rate. In 2010, MPSERS’ required annual contribution was $1 billion. After 5 years of failing to save enough, the requirement is now more than $2.2 billion. The reason: Money is now going directly from the paychecks of current employees to pay for benefits of today’s retiring, instead of being invested in an interest-bearing fund that will grow to pay future pensions.

Today, only about 10 percent of money that Michigan teachers contribute is being invested for them.

The first solution is to force governments to pay required contributions. This will be tough for many struggling communities. But if they don’t pay now, they’ll have to pay much more later, or face insolvency.

The second step is to close pensions to new hires. A system that can’t support its current obligations should not be adding more.

The Legislature should pass a bill that puts all newly hired public employees into 401(k)-style defined contribution retirement plans. These are private accounts that can’t accumulate unfunded liabilities.

These are reforms that can’t be avoided. If steps aren’t taken now, Flint and other financially strapped communities will be out of business.