Lost in Transition

A Pension and the Public Trust

Last year, Gov. Rick Snyder and the Michigan House rebuffed a Michigan Senate proposal to close the state’s public school employee pension system to new workers. Their decision had grave consequences: The state continues to add unchecked obligations to a system whose unfunded liabilities already exceed $22 billion.

This figure may decline one day, depending on the pension fund’s investments, but it still represents an astonishing long-term risk to Michigan taxpayers. A key reason many legislators perpetuated this risk and opposed reform was “transition costs” — a forbiddingly technical objection perfectly amenable to our research.

To grasp the basic issue, assume you’re young; you’re earning $3,000 per month; and your university treasurer calculates you have two ways to defray a big student debt. The first is to mail in a level percentage of each paycheck — say, 10 percent — every month for 30 years. The second is to mail in a level dollar amount — say, $600 — every month for 30 years.

Each approach has advantages, depending on your needs and projections. One clear difference is that the level-percentage method, at $300 per month, costs less at first (though more later if your wages grow).

Now consider pension reform. Currently, state taxpayers, through state government, are saving to provide pensions to every public school employee. Closing this costly system means future school hires would receive 401(k)-type accounts instead. Many state policymakers worry, however, that the state would then have to switch from level-percentage to level-dollar payments on the $22 billion debt for existing pensions and immediately spend more — a “transition cost.” This shift, they assert, is required by the nonprofit Governmental Accounting Standards Board.

But James Hohman, our assistant director of fiscal policy, has pored over GASB publications and discovered that GASB itself doesn’t argue this. Whatever the benefits of a level-dollar approach, GASB specifically states that its accounting rules are not “about acceptable public policy with regard to an employer’s contributions to a pension plan.” Policymakers can choose the payment schedule that makes sense.

Hohman further noted the irony that state officials have violated GASB standards for years by repeatedly contributing too little to the pension fund. Indeed, Gov. Snyder and the Legislature underfunded the school pension plan last year.

The state’s pension mismanagement makes a hash of the 1963 Michigan Constitution. The framers labored hard to prevent pension underfunding — a fact Patrick J. Wright, our senior legal analyst, unearthed in a review of the state constitutional debates.

Again, research matters. It shows state leaders that their tunnel vision on transition costs weakens not just a pension trust, but the public trust as well.

Thomas A. Shull is the Mackinac Center’s director of research quality.