Incomplete Analysis of Pension Scheme Bill Paints False Picture

Fiscal Agency ignores benefit spiking costs, underfunding risks

A bill now pending before the Michigan Senate would prevent former school employees like Michigan Education Association union president Steve Cook and others from continuing to accrue benefits in Michigan’s school employee pension system. Yet a Senate Fiscal Agency summary of Senate Bill 279 claims the change would not save any taxpayer dollars. This is incorrect, because the analysis ignores the risks of underfunding pensions and the “benefit spiking” costs associated with this scheme.

What is muddying the waters in this unusual situation is that the union reimburses the district for the pension fund contributions made on behalf of Cook and others involved in the scheme. When one of these individuals leave the system two things happen: The person stops accruing (increasing) future benefits and the union stops contributing.

A proper analysis of this bill would assess the potential taxpayer gains, losses and risks associated with this event, but the Senate Fiscal Agency only considered the potential loss. But there are other fiscal considerations and taxpayer costs.

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When an employee earns benefits under a defined-benefit pension system the employer must contribute a certain amount to cover the future payouts. Determining the correct contribution amount requires estimating various factors such as potential pension fund investment returns, life expectancies and more.

Getting those estimates right is tricky, and getting them wrong means that taxpayers are on the hook for the eventual shortfalls.

In the case of Michigan’s school pension system this risk is more than just hypothetical — the system has a $26.5 billion unfunded liability. This is not a temporary blip, either. According to state auditors, in 29 of the past 30 years the assets held by the system were not sufficient to cover future benefits. A long history of inadequate contributions makes it very likely that the union reimbursements in these deals are also inadequate — and that taxpayers will end up paying a price.

Yet this ongoing risk is not even mentioned in the fiscal agency’s summary of the bill. It instead discusses a separate issue — that the union’s reimbursements are being used to pay down the system’s unfunded liabilities, which is a positive for the state. Currently, 83 percent of pension contributions go toward “catching up” on past underfunding. Thus, the agency argues that stopping this arrangement will cost the state money.

The fiscal agency also ignores other critical factors. It fails to consider that the union president and others involved in these deals are also “spiking” their eventual pension benefit payouts.

In Steve Cook’s case, the years during which he earned a modest paraprofessional salary count as much in the formula used to calculate his benefits as his years of collecting a six-figure union official salary — yet it is that high salary that will determine the size of his eventual benefit checks.

The estimates used to determine proper pension contribution rates do not attempt to pay for this benefit spiking scheme. Those rates are set for the workforce as a whole, and do not try to calculate the correct contribution amount for particular individuals on a person-by-person basis. Union reimbursements based on those rates are unlikely to cover the difference between benefits based on the six-figure salary of a high ranking union official and benefits based on the modest pay of a public school parapro. That is true even if some of the reimbursement amounts go toward catching up on the system’s unfunded liabilities.

And even if the Senate Fiscal Agency wanted to estimate the contributions required for a beneficiary like Steve Cook, the state’s Office of Retirement Services has not maintained individual member accrued benefit and contribution records that would allow the agency to do so. (A Mackinac Center Freedom of Information Act request to the office was rejected for this reason.)

If such records did exist they could be used to estimate exactly how much these special deals have cost taxpayers and how much they have contributed to the system’s unfunded liabilities. The lack of such records raises additional questions about the costs claimed in the fiscal agency’s summary.

Here’s what we can say, however: Given that there are only 60 cents in the system for every dollar’s worth of pension benefits earned by its members, the taxpayer savings from this bill are likely to be substantial, even if they cannot be precisely quantified. The Senate Fiscal Agency’s analysis should reflect this.

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