The Legislature has systematically failed to provide the contributions necessary to fully fund the MPSERS defined-benefit pension plan. If the state hasn’t insisted on meeting its payment schedule under current rules, then a temporarily more demanding payment schedule after switching rules should be an immaterial concern. Nevertheless, this paper has offered a number of ways for legislators to mitigate any concerns they may have in closing the MPSERS defined-benefit plan.
The size of the so-called “transition costs” is determined entirely by how legislators choose to close the MPSERS defined-benefit plan. In essence, outside of the relatively small costs for setting up a defined-contribution system, legislators face “transition costs” only if they choose to, as this Policy Brief makes clear. There are viable ways to eliminate, mitigate or accept the additional cash required by GASB rules when closing a defined-benefit system.
State Sen. Dan Liljenquist of Utah, the legislator who spearheaded pension reform in his state, has remarked that pension funds are like chemical spills: They can be long-term problems, take years to clean up and have disastrous consequences. Defined-contribution reforms are necessary for containing this pension “spill,” since in time they stop the problem from spreading.
Though the five reforms discussed above range from comprehensive to limited, each has trade-offs. Two of the ideas — cutting back on OPEB, and freezing and closing the defined-benefit plan — would do more to contain the problem than just closing the system would. Reducing the MPSERS OPEB would scale back a post-employment benefit the state is not obligated to pay under the state constitution and use the proceeds to solidify the pension commitments the state is obligated to pay under the state constitution.
Freezing and closing the MPSERS defined-benefit plan, on the other hand, would substantially lower the long-term commitments in the pension system, since the state would no longer incur new pension liabilities for current public school employees, not just future public school employees. Even if freezing and closing the plan left residual “transition costs” for paying unfunded liabilities, the additional containment of liabilities in the system would even more substantially limit taxpayer exposure than simply closing the plan would.
Implementing these two ideas, in other words, would include some clean-up efforts as well as containment.
If policymakers feel unable to pursue these, they could simply embrace make the higher upfront payments suggested by a level-dollar amortization schedule. Catching up on unfunded liabilities more quickly means that future taxpayers will not have to contribute as much to cover promises that were made when many of them were too young to vote. A level-dollar payment approach would simply change the time that the liabilities are paid; it would not constitute an additional liability.
Two of the other ideas — not paying the ARC or applying amortization payments to all employees — would still provide containment while avoiding upfront cash contributions. They would not be as comprehensive a reform, but they would deal with much of the opposition to closing the pension system.
MSERS remains a case study of the benefits of transitioning to a defined-contribution plan. While the state has developed additional unfunded liabilities in the MSERS defined-benefit plan since closing it March 31, 1997, a recent estimate by Mackinac Center Adjunct Scholar Richard C. Dreyfuss indicates that closing the plan reduced the unfunded liabilities by between 36 percent and 51 percent from what they would have been otherwise.73
Of course, there were no “transition costs” for amortization payments when the MSERS plan was closed; the plan was fully funded. But the unfunded liabilities in the MPSERS plan do not mean the reform no longer makes sense; rather, they are powerful evidence of the need for reform.
Michigan policymakers have a range of options to deal with the shift in accounting rules that comes when a defined-benefit plan is closed to new entrants. So-called “transition costs” should not prevent the state from following the private-sector’s lead and offering new public school employees a defined-contribution plan that is current, affordable, predictable and constitutional. By closing MPSERS defined-benefit plan, the state can help ensure that it meets the promises it has made to retirees and vested employees while capping the state’s open-ended and expensive obligations in the future.