Michigan House Republicans have declined the invitation extended by the state Senate to close the school employee pension system to new hires, a transformational reform that would gradually eliminate the state’s 50-year pattern of chronic pension underfunding.
Reportedly they have also watered down other Senate-passed reforms, such as one requiring current retirees to pay a little more for their own optional health insurance benefits that successive Legislatures have generously allowed taxpayers to provide.
As part of their cop-out, House Republicans have ordered up a "third-party study" to look at the consequences should they eventually find their way to accepting that one real and permanent reform. Unfortunately, the proposed study is rigged to make that outcome less likely, creating a victory for the state “Pension Industrial Complex” bureaucrats who may well have contributed to the biased procedures it is required to follow.
Specifically, the rigged study requires that the "normal costs" of the school employee pension fund — the amount deemed necessary to prefund future pension benefits earned by current employees in a given year — be compared to the costs of very generous 401(k) plan contributions that are now provided to all state employees hired since 1997.
However, the obvious benchmark is the optional 401(k) system that the House voted on for school employees, a plan with smaller employer obligations. In addition, the employer contribution rates in a defined-contribution system are flexible and legislators can set whatever terms they want.
Even more egregious is the fact that this "study" is also required to ignore the fact that the current pension system has been a lemon, and treats those "normal cost" estimates as if they honestly represent the system’s total costs. They do not. If they did, Michigan taxpayers would not be burdened with a $22.4 billion unfunded pension liability.
An honest study would compare the predictable and controllable costs of a 401(k) system to what really happens when politicized government defined-benefit systems fail to meet their overly optimistic investment assumptions. This failure is the largest reason that Michigan's unsustainable and unaffordable school pension system is so underfunded.
The House GOP's call for a biased study is an extra reward to the entrenched pension bureaucrats who have succeeded (for now) in stalling the only guaranteed real and permanent reform for this system, which is gradually eliminating it.
Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.
Permission to reprint any comments below is granted only for those comments written by Mackinac Center policy staff.