State Report Shows Status of State Employee Pension Plan Worst in 15 Years: Less Than 80% Funded, With More Than $3 Billion in Unfunded Liability

Slight improvement in status of state employees’ retirement health care benefits makes these costs ‘only a little less daunting than they are otherwise’ and still unlikely to be fixed by reform currently discussed in Lansing, says Center adjunct scholar

For Immediate Release
Friday, May 28, 2010
Contact: Richard C. Dreyfuss
Mackinac Center Adjunct Scholar

MIDLAND — Richard C. Dreyfuss, an actuary and Mackinac Center adjunct scholar, today responded to new state data showing substantial unfunded liabilities in state employees' pension and retiree health care plans by calling on Michigan legislators to "address state employee retirement cost burdens now, rather than later, when they will become even worse." The state data comes from annual actuarial reports released Thursday afternoon by the state Office of Retirement Services. The reports show the audited financial status of the Michigan State Employees' Retirement System and the Michigan State Employees' Retiree Health Benefits plans as of Sept. 30, 2009.

Regarding the MSERS "Tier 1" pension plan, which promises predefined benefits to retirees in the future, Dreyfuss observed, "The situation is deteriorating further." He noted that the pension plan now has a funded ratio of just 78 percent, meaning that at the end of the last fiscal year, the plan had assets that were worth only 78 percent of the benefits earned to date and payable in the future. "The projected future payouts earned but not covered by the plan's assets exceed $3 billion," said Dreyfuss, who is working on a Mackinac Center study of the state's public employee retirement plans.

"This may get worse in the next couple years," Dreyfuss added, "as past market declines are reflected in the plan's stated asset values, which are currently based on an average of the past five years. If the calculations had been based on the actual market value of the pension plan's assets, the funded ratio would have dropped to just 60 percent. The only good news is that this plan has been closed to new employees since April 1997, meaning the problem is quarantined and doesn't involve state employees hired since then."

Regarding the state employees' retiree health care benefits, Dreyfuss acknowledged that the plan had performed a bit better than expected in 2009, reducing slightly the state's annual required contribution. Nevertheless, he cautioned that the slight improvement was driven by a 2009 health care cost increase that wasn't quite as high as projected, and by assumptions that annual health care cost increases will decline every year over the next decade, reaching a low of just 3.5 percent in 2021 and the years after. "That's not necessarily something you want to count on," he observed.

"In any event," Dreyfuss added, "the slight improvement makes the costs of the state employees' retirement health plan only a little less daunting than they are otherwise. The simple fact is that unlike the pension system, the retiree health plan is being funded on a pay-as-you-go basis. That keeps costs down for the moment, but they are going to swell over time compared to what you would pay if you were properly prefunding them."

Dreyfuss noted that even if state employees were required to contribute 3 percent of their pay toward retiree health care benefits, as some in Lansing are proposing, the amount would still fall well short of what the state would need to set aside to cover future costs. "Having state employees contribute some portion of their pay toward post-employment benefits certainly makes sense," observed Dreyfuss, "but it won't fix the larger problem. Essentially, past legislatures have pledged to provide very expensive health care benefits that they never really made financial provisions for. Lawmakers will have to decide whether those pledges can be fulfilled."