Michigan lawmakers are proud of their fiscal prudence for putting an extra $1 billion into the school employee pension fund. But the extra state payments have been insufficient to pay even the interest on the debt, let alone catch up on the $26.7 billion of unfunded liabilities in the system.
The state determines the amount of money the pension system needs each year based on an actuarial assessment that looks at how much is being earned in benefits by employees and how much the state still owes in pension debt. This is different from Social Security and Medicare, where the government sets a contribution rate and leaves it unchanged.
The amount the state is supposed to pay for the school pension system has increased with the system’s growing unfunded liabilities. The recommended inputs increased from $1 billion in 2009 to $2.2 billion in 2015, as unfunded liabilities increased from $12.0 billion to $26.7 billion. (This is in addition to other contributions made to provide subsidized medical insurance to school retirees.)
The recommended amounts are assessed onto school districts as a percentage of payroll. Since 2012, the state gives districts extra money to help them pay these growing costs.
But this extra money only pays the assumed annual costs of running the pension system — it does nothing to improve the overall financial condition of it. If not for this extra money, school districts would be paying an even higher amount of their payroll for pensions. More money dedicated towards pension costs means less money for other school programs and vice versa.
And both the state payments and school district contributions are not enough to catch up on the debt. Unfunded liabilities increase at the state’s assumed rate of return, which is one of the dynamics of underfunded pensions. That means that the $26.7 billion in liabilities needs $2.1 billion a year just to keep from growing larger.
The extra money plugged into the school pension system has a number of effects on state and school finances. But it will not decrease the unfunded liabilities that someone is going to have to pay eventually.
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