Why Pension Reform Failed and How to Move Forward

Over the past few years, state revenue in Michigan increased significantly. But instead of delivering on a promised tax cut, the Legislature has kept feeding an ever-growing budget. In the meantime, groups like school administrators, state employees and unions claim they are feeling the pain and want more money. 

In many cases, this is just political posturing. As Thomas Jefferson said, "The natural progress of things is for liberty to yield and government to gain ground." Everyone wants more money, and government agencies want it more than most, since they are spending other people's money rather than their own.

Even though Michigan taxpayers are spending an increasing amount of money on state and local governments and public schools, public employees are feeling the squeeze, too. 

How can that be? Blame the ever-increasing burden of the school pension system.

It has a debt of nearly $27 billion, meaning the system is taking up a larger part of school budgets each year. Fifteen years ago, only 12 percent of school payroll was spent on pensions. Today, it is 37 percent. And it still hasn’t been enough to chop down the liability.

The state and many local governments, not to mention nearly all private sector employees, have moved away from a defined benefit pension plan. That’s what Michigan has kept for its public school employees, however. In other words, the state has been racking up liabilities for years, pushing the cost onto future generations. Unfortunately, we are the future generation; today’s taxpayers are paying yesteryear’s mistakes.

Decades of underfunding and mismanagement led to this problem. We’re trying to solve it now. The solution is simple: Stop the bleeding. Close the plan to new workers and continue paying the debt so current employees and retirees are protected. That’s what the Mackinac Center has been advocating, and the Legislature was set to do it. A fiscally sound solution was working its way through the Senate during the end of the 2016 legislative session.

But wouldn’t you know it — the arm of the state that oversees the pension system stepped in, lobbying hard against reform. Michigan’s Office of Retirement Services — which has grossly mismanaged the system for decades, leading to today’s problems — misled lawmakers and the public about the cost of the plan.

This was a setback, but the problem isn’t going away. As long as Michigan politicians can underfund and borrow from a large pool of pension funds, they will. It’s up to true reformers to solve the problem. Legislators should tackle this again in 2017 — and we’ll be there to help.