The Coming $50 Billion Budget Battle

The state is currently wrestling with how to close a budget for fiscal year 2010 that overspends revenues by $2.8 billion. Some of the proposed cuts to state spending are significant and debate over them may be holding up completion of the budget, which must be passed by midnight Sept. 30 to avoid a government shutdown.

One way the state has balanced its budget in the past (and we suspect it will for 2010, too) is to defer responsibility for funding current and future government employee pension obligations. Based on publicly available actuarial reports as of September 30, 2008 from the state Office of Retirement Systems, the authors extracted estimates that show the present value of accrued pension and retiree medical benefits is currently underfunded to the tune of more than $50 billion (emphasis added).

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Specifically, the "unfunded accrued liabilities" that have been earned to date by state and public school employees and retirees break out as follows:

State employee pension obligation: $2.4 billion

State employee health obligation: $13.5 billion

Public school employee pension obligation: $8.9 billion

Public school employee health obligation: $26 billion

As staggering as these numbers are they don't tell the whole benefits story. There are unearned benefits for current employees not included in these figures. Including them would drive the totals much higher.

The state faces an obvious problem here: How will it fund such a massive obligation? The answer depends on how quickly the Legislature addresses the issue. However, funding strategies alone will not close these deficits, as part of the answer must address the over-promised nature of the benefits themselves. A corollary to this would be to enroll new public school hires in a defined contribution pension plan and redefine eligibility and benefit levels for retiree health care for school and state employees.

Failing to change state policy now could mean massive tax hikes or spending cuts in the future.

The Mackinac Center will discuss the problem of Michigan's unfunded liabilities at greater length in its forthcoming study on the subject.