State on Required Payments for School Employees' Pension: 'The Check is in the Mail'

Michigan Capitol Confidential ^ | 3/18/2015 | Tom Gantert

[MichCapCon]

For the past few years, public school administrators, officials and Democratic politicians have complained of alleged school budget “cuts.” Although spending has actually gone up, an ever-larger share of the state's education budget is being consumed by growing shortfalls in the school employee pension system.

Nevertheless, only twice in the past 10 years has the state of Michigan met the "annual required contribution" that the pension system's own accountants say is needed each year to eventually close the underfunding gap, given assumptions about the future growth of its resources.

Specifically, net contributions fell short by $2.2 billion from 2005 to 2014, including a combined $1.08 billion in 2013 and 2014 alone, according to the annual audited financial statements. The system's overall unfunded liability grew by $8.2 billion from 2010 to 2014, and now stands at nearly $26 billion. In 2014, the “annual required contribution” was pegged at $2.1 billion. Instead, the state contributed just $1.6 billion. The required payments are based on estimates of how much is needed to cover another year's worth of service credits for each employee, plus an extra amount to “catch up” on, or amortize, the unfunded liability past underfunding has allowed to accumulate.

“I have found it interesting that the state of Michigan owns this retirement system and controls all aspects of it and yet the unfunded debt is passed onto the School Aid Fund,” said Michael Sharrow, the superintendent at Midland Public Schools. “I do believe the corrections made over the last several years will result in the long run in a healthier retirement system, but in the short term more needs to be done.”

Republican majorities in the Legislature enacted some reforms in 2010 and 2012, including requiring that employees make larger contributions toward their retirement benefits. Despite the reforms, the system's unfunded liability grew from $17.6 billion in 2010 to $25.8 billion in 2014.

“Setting aside any thoughts about 'is the program sustainable,' the reality is they have this system. People are relying on that for their retirement,” said Kyle Olson, founder of the Education Action Group, a nonprofit based in Muskegon that promotes education reform. “They should be making the payments. That’s their obligation. It is a real disservice to public employees if they are expecting that and the state is not funding it.”

[SauronOfMordor]

The need to phase out pensions and put all new hires on 401K

[jimpick]

Just wait till the bubble in the stock market pops. If we put the money in now it will disappear when that bubble pops.

[MSF BU]

Rely on the dividends and don’t worry about the principal. It makes investing a bit easier on a micro level. On a macro level, I agree with you, the system is heading for a default.

[jimpick]

I am referring to us in Michigan putting money into the teacher pension fund. When the market tanks we will lose everything that will be put into it with the new gas tax and sales tax. So we are screwed either way.

[MSF BU]

True, as will most others. This is an argument to buy bonds but then there are legitimate inflation concerns. It is not a bad idea to have an acre or so to be able to grow your own food.