On May 17, the Michigan Senate voted for a transformational fiscal reform by closing the defined-benefit school pension system to new hires starting in 2013, and instead giving these workers generous 401(k) contributions.
This came as a surprise, because the only reforms on the table before the vote were useful, if comparatively minor tweaks, to the existing defined-benefit system, which creates an additional layer of long-term taxpayer liabilities every time a new school employee is hired.
What changed in the hours before that vote was that Sens. Mark Jansen, R-Gaines Township, and Phil Pavlov, R-St. Clair Township, two legislators with reformist aspirations on this issue, convinced a barely sufficient majority of their GOP colleagues to go along with the much more meaningful reform. The vote stunned Lansing insiders, because for the previous 16 months it had been House Republicans taking the lead on various reform bills, with the Senate frequently watering them down.
Indeed, it was so unexpected and momentous that Senate Majority Leader Randy Richardville (who voted “yes”) said to reporters, "Tell the Mackinac Center that, OK?" By "that" he meant a Senate vote to adopt what could be the current legislature’s biggest reform of all.
Among the special interests shocked by the vote was the Michigan Education Association teachers union, whose power would be diminished by the reform. Not surprisingly, the MEA circled the wagons and sent in its lobbyists to prevent the House from following the Senate’s lead.
The union's method was to sow confusion and muddy the waters with an interpretation of a Government Accounting Standards Board rule being promoted by career civil servants in the state pension office (who, like the union, also have strong incentives for preferring an open and growing defined-benefit system). They put forward the claim that this reform would require the state to pay more than a billion dollars in so-called transition costs.
This has been disproved by real world examples of states that closed their pension systems without paying these transition costs. In June, the GASB itself published a statement affirming that its rules don't mandate these massive up-front payments.
Nevertheless, key House Republicans swallowed that claim and continue to promote it, in particular Rep. Chuck Moss, R-Birmingham, and Rep. Rick Olson, R-York Township.
Although the Mackinac Center has published the evidence refuting it, most legislators are not experts in these issues and have regarded the claim as some kind of irresolvable "he said/she said," in effect giving victory to the union by making inaction on the Senate bill the default position.
This is the context for the House vote of June 14, which included some of the Senate's earlier proposed tweaks plus some new ones, but failed to embrace the much larger reform.
One key player with a notably low profile in the debate has been Gov. Rick Snyder. This contrasts sharply to the situation in 1996, when under the engaged leadership of Gov. John Engler the legislature closed the defined-benefit system to new state employees. This was the second largest component of gradually putting the state on a glide path to eliminating most government-employee legacy costs.
Engler didn't attain the largest component — the same school pension reform passed by the Senate in May of this year — because then, as now, a majority of GOP legislators feared the MEA's political power. Nevertheless, the reform that passed has saved taxpayers from as much as $4 billion in unfunded liabilities.
Gov. Snyder's only involvement appears to be promoting a plan to prefund optional school retiree health care benefits. Even though the state has no obligation to provide these benefits, the government pension establishment pretends otherwise, and under its accounting rules, prefunding gives the appearance of strengthening the state's balance sheet. The House-passed bill authorizes this gimmick, but includes no appropriation for it. Annual state payments of $50 million to $100 million have been mentioned.
On July 18 the Senate again surprised Lansing insiders by not automatically surrendering to the House position. Since then, however, it appears that reformers Sens. Jansen and Pavlov have lost momentum, with the upper hand shifting to Republican Sen. Roger Kahn, R-Saginaw, well-known to CapCon readers as the politician who for 10 months prevented the Senate from enacting a House-passed bill to end a notorious SEIU "dues skim" of home health care aides.
Along with 11 other Senate Republicans, Sen. Kahn voted for the transformational reform on May 17 before voting against it on July 18. On Monday, Sen. Kahn was the "special guest" in a conference call convened by the coalition of union interests working to torpedo the Senate-passed reform. He told them the bill the Senate is expected to pass Aug. 15 essentially goes along with the House version, in effect giving the teachers union a big win.
The measure will also include a face-saving fig leaf, the commissioning of a rigged study designed to confirm a flawed "apples to lemons" analysis of the costs of continuing an open defined-benefit pension system versus an unnecessarily generous proposed 401(k) system. This is intended to make it appear less costly to keep creating additional taxpayer liabilities with each new school employee hired.
However, once the Senate approves the House-passed tweaks, the short-term budget pressures will be removed and the current system can creak along a few more years before overly optimistic investment growth assumptions almost inevitably lead to another crisis. In other words, this legislature's path of least resistance will be letting the most meaningful reform die, rather than take up the issue again in November.
Given that the Republicans' candidate for president has chosen to hitch his wagon to a transformational reform agenda by selecting Congressman Paul Ryan, R-Wisc., as his running mate, the quiet death of a historic reform opportunity in Michigan will be even more poignant.
In sum, the Michigan Legislature appears on the verge of fumbling a magnificent opportunity for a reform that would pay dividends to taxpayers for decades into the future.
Failing to follow-through on a Senate vote to close the school pension system to new employees will put taxpayers at risk for billions of dollars of additional unfunded liabilities, and save the MEA teachers union from what would have been a substantial diminishment of its outsized power and influence.