While the state should consider embracing the switch to a level-dollar payment schedule, policymakers could also note that in the past, the Legislature has not met the annual required contribution computed under GASB guidelines.

For instance, in 2007, Michigan legislators voted to skip the calculations for paying down MPSERS’ defined-benefit plan’s unfunded liability and simply pay “4.5 percent of the unfunded actuarial accrued liability.”[*] This essentially equated to paying the interest on the debt, but not any of the principal.[58]

Similarly, legislators have twice marked the MPSERS and MSERS defined-benefit plans’ assets to market values since 1997. This revaluation had to be done legislatively, and it resulted in increasing the stated value of MPSERS and MSERS pension fund assets by $4.6 billion and $1.3 billion, respectively, in fiscal 1997, and by $3.1 billion and $779 million, respectively, in fiscal 2006. This bumped the total of the stated asset values of the two defined-benefit plans by 17.8 percent in fiscal 1997 and 7.8 percent in fiscal 2006.[59] These moves were made specifically to temporarily lower pension contributions at the expense of future costs and violated the rationale for the five-year smoothing process, which ensures smaller year-to-year fluctuations in the state’s annual pension contributions.

Despite manipulating the rules to policymaker’s advantage, and even aside from intentional underfunding of the pension system, the state’s funding policies have proved insufficient to ensure payment of the actuarially determined annual required contributions to MPSERS or MSERS anyway (see Graphic 3).[†]

Graphic 3: MPSERS and MSERS Annual Payments and Required Contributions, 2000-2011

Graphic 3: MPSERS and MSERS Annual Payments and Required Contributions, 2000-2011 - click to enlarge

Source: “Michigan State Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2009,” (Michigan Office of Retirement Services, 2009), 44, http://goo.gl/LKl6O (accessed Feb. 15, 2012); “Michigan Public School Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2009,” (Michigan Office of Retirement Services, 2009), 47, http://goo.gl/Y7tfQ (accessed Feb. 15, 2012); “Michigan Public School Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2011,” (Michigan Office of Retirement Services, 2011), 47, http://goo.gl/hyUcr (accessed Feb. 15, 2012); “Michigan State Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2011,” (Michigan Office of Retirement Services, 2011), 44, http://goo.gl/0drvN (accessed Feb. 15, 2012).

Graphic 3 shows the ARC and the actual payments for both MPSERS and MSERS since 2001. Note that in most years, the actual payments are less than the ARC. In other words, the “annual required contributions” are not legally required — or perhaps more to the point, missing the ARC does not appear to have material consequences, especially if the “underpayment” is not a gross departure and the normal cost is paid.

Thus, the state has ignored GASB’s implied funding policy when convenient; in some cases, the state has simply failed to pay the ARC. Hence, if the state has departed from paying the ARC in pursuit of questionable policies, it can consider departing from paying the ARC in pursuit of better policies.

Specifically, the Legislature could just decide to adopt the level-dollar payment schedule, but fail to meet the payment schedule, just as it has in the past. The “transition costs” could be zero if the Legislature decided to make them so.

There are potential downsides. The state would note its failure to pay the ARC in its financial statements, and bond raters and buyers could react negatively to this departure from the implicit norm.

Still, small changes to the unfunded liability payment method could well be considered somewhat inconsequential by the bond marketplace if the state is finally pursuing a legitimate defined-contribution strategy to cap and retire its huge unfunded MPSERS pension liabilities. In fact, following the Legislature’s 2007 underpayment and a second departure from standard practice, there was a note in the MPSERS financial statements that remarked on the changes.[60] If there was a notable reaction in the bond market, it was too small to have a material impact on the rest of state policy.

This is not to say there is no value to GASB standards, and there is every reason for the state to abide by those standards in its reports, even if it does not make the ARC. As Andrew Biggs of the American Enterprise Institute has written, “[G]iven governments’ track record of underfunding their pensions I think these rules (however badly designed they currently are) have some purpose.”[61] Nevertheless, GASB is simply suggesting an accounting change. Allowing this to prevent significant and necessary pension reforms is penny-wise and pound-foolish.


[*]  “Public Act 15,” (Michigan Legislature, 2007), 3, http://goo.gl /zSIem (accessed Jan. 23, 2012). A similar interest-only payment was made that year for the MSERS defined-benefit plan as well. Kirk Sanderson, “H.B. 4766: Floor Analysis,” (Michigan Senate Fiscal Agency, 2007), http://goo.gl/o0jYx (accessed Feb. 14, 2012).

[†]  In addition, the state has revised its actuarial assumptions four different times. While adjusting assumptions to reflect recent experience is appropriate to ensure that the system is properly funded, this complexity and unpredictability is inherent in a defined-benefit plan, and it can be costly. Revisions made since 1997 increased actuarial liabilities by about $1.7 billion, though the 2004 revisions were not quantified in state financial reports. “Michigan State Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2010,” (Michigan Office of Retirement Services, 2010), 42, http://goo.gl/1U8oA (accessed March 17, 2011); “Michigan Public School Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2010,” (Michigan Office of Retirement Services, 2010), 46, http://goo.gl/CZivR (accessed June 14, 2010); “Michigan Public School Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2000,” (Michigan Office of Retirement Services, 2000), 31, http://goo.gl/LzHpV (accessed Feb. 15, 2012); “Michigan State Employees’ Retirement System: Comprehensive Annual Financial Report for the Fiscal Year Ended Sept. 30, 2000,” (Michigan Office of Retirement Services, 2000), 29, http://goo.gl/xljq1 (accessed April 20, 2011).