Republicans in the Michigan House have let alleged “transition costs” attached to closing the state’s defined-benefit school pension system plan to new hires halt what would be a transformational fiscal reform. The issue is how the state “catches up” on current shortfalls in underfunded state pension funds. Paying huge upfront “transition costs" is one way, but it’s not the only way - incurring these costs is entirely optional.

Utah gives a recent example. The state closed its defined-benefit pension plan to all but judiciary employees in 2010, and did not impose “transition costs” on itself. Instead, the state is paying to amortize those pension fund shortfalls by assessing their cost against total payroll for all employees, regardless of whether they are in the old retirement system or the new one.

In its financial statements, Utah’s actuaries write:

Employers will continue to contribute the amortization rate to the current systems on the pay for Tier II members. Therefore, SB 63 did not affect the benefits provided to current URS members, and it creates a mechanism for ensuring that the UAAL is amortized over the payroll for both current and Tier II members. Therefore, this law had no effect on this actuarial valuation.

To read more about Utah’s reforms, see the Arnold Foundation report on transition costs.

Credit rating agencies continue to rate Utah government bonds highly. In fact, its pension reforms were cited favorably in one rater’s affirmation of its triple-A rating.

Michigan legislators should feel free to close the school employee pension plan without fear of large upfront costs, just as Utah did.

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