State Government Up to Its Eyeballs in Pension Debt

Michigan Capitol Confidential ^ | 6/28/2016 | James Hohman

[MichCapCon]

Unlike Washington D.C., Michigan’s state government is constitutionally prohibited from spending more than it takes in each year and borrowing to make up the difference. Yet state taxpayers are still liable for large amounts of state debt, for purposes both practical and problematic.

The debts of greatest concern to residents are general obligation bonds, backed by general taxpayer dollars. Payments come right out of the annual general fund tax revenue the state uses to support the rest of what it does.

Michigan’s recently passed budget includes $137 million to make payments on this debt, paid from state’s general fund (largely composed of money from the state income tax).

There is other debt that gets paid by taxpayer dollars without being general obligation debt. Some $3.1 billion borrowed to build or improve state offices and college buildings is also of concern because it will take another $247 million from the new budget — more money that won’t be available for other uses.

But other portions of the state’s $26.6 billion official debt are less of a concern to taxpayers. The Michigan State Housing Development Authority, for instance, borrowed $2.0 billion and then lent it in turn to housing developers. Taxpayers will not be liable as long as developers make their payments.

That level of debt is worrisome, but it is the semi-off-the-books debt that poses the major threat to taxpayers, not only in Michigan but all around the country — and pensions are exhibit No. 1.

Michigan state and local governments have promised their employees far more in pension benefits than can be supported by the amount set aside for that purpose. There may be no official mortgage or bond offering for this debt, but every taxpayer is on the hook for it nonetheless.

The state-run school pension system is largest pension system in Michigan. Lawmakers have promised teachers and school employees $67.7 billion in pension benefits, but set aside and invested only enough to cover $41.0 billion. Taxpayers carry the burden for the $26.7 billion difference, and it is a heavy lift: $2 billion of the amount paid in state and local school taxes goes to fill this hole.

And even these numbers are less firm than they appear. The underfunding came about two ways. As auditors have noted, state officials and lawmakers made overly optimistic assumptions about future returns from pension fund investments and payroll gains. The actual debt owed to retirees in this system may actually be higher than $26.7 billion.

And then, even after basing annual pension contribution amounts on imprudent predictions, officials still haven’t made full payments.

Moreover, the pension figures ignore billions of quasi-liabilities represented by health insurance benefits that have been promised to school and government retirees. Unlike its treatment of pensions, Michigan’s constitution does not prohibit trimming those insurance benefits, or even eliminating them altogether.

Because the pension underfunding has gone on for decades, more money is owed to government employees and retirees than any other class of creditor. That is a bad situation for those workers and for taxpayers alike. To prevent the problem from getting worse, governments should stop providing pension benefits that can and have been underfunded and instead offer employees defined contribution benefits.

[equaviator]

Time for a good old-fashioned (however unsustainable) Michigan State Police crackdown on (fill in the blank).

[Paulie]

How can these pensions be so underfunded? The Fed’s been priming the pump, so to speak, for eight years - where did these fund managers put the money?

I’m sure the word was out from the beginning that Bernake, and now Yellen, are going to backstop stocks; the so-called ‘Bernake put’.

Now that the jig is almost up they’re in real trouble.

[soycd]

They seem to have plenty of money to support the import of islamic trash and set them up for a lifetime of welfare.

Idiots.

[hal ogen]

“jig”? Isn’t that raciss?

[arl295]

Are the people the property of the government?

If not, the pension debt is illegal and need to be annulled immediately

If we are property of the government, then we slaves better work harder so our government masters can live a great retirement

[Hardastarboard]

even after basing annual pension contribution amounts on imprudent predictions, officials still haven’t made full payments.

The answer is in this statement, even though it's not clearly spelled out.

Whoever manages the pension funds has to make assumptions about what their investments will earn over the course of time, in addition to estimating the overall pension obligation based on actuarial data and so forth. What happens is that they estimate rosy growth predictions (say 7 percent rates of return) when in fact they got a lower rate of return. Unfortunately this isn't illegal, it's just a "mistake" since no one can really predict what any given investment is going to return.

In addition to that, as noted in the last phrase, they didn't make payments to make up the difference between actual and anticipated returns. Again, to the best of my knowledge, this isn't illegal (but should be).

This kind of fiscal mismanagement is a cancer on our body politic (kinda like the whole Democrat Party in general), but no one ever tackles it. It's going to hurt EVERYONE eventually, but of course the scumbag politicians that started this ball rolling, and the ones that let it run for their own political advantage, will never pay the price. Ever.