News Story

Delayed Payment On Granholm Early Pension Gambit Raises Costs To Taxpayers

Michigan pension office helped pass costs to future taxpayers

In a 2010 gambit to reduce overall public school expenses, Michigan Gov. Jennifer Granholm proposed an early retirement incentive for the state’s highest-paid teachers. While the move would temporarily increase pension expenses, it would also reduce school payroll costs.

Specifically, the bill that ultimately passed was projected to add $1 billion in new pension liabilities, which would be paid off within five years.

That’s not what happened though. The state's Office of Retirement Services, which manages the school pension system, waited for three years to start making payments on the increased pension debt, greatly increasing the long-term burden. Then lawmakers eager to avoid spending cuts elsewhere in the budget extended the repayment period from five years to 10 years.

Delaying and lowering payments has caused this debt to increase. Even though the state has made roughly $275 million in payments, the total debt from the early-retirement incentive has increased by an additional $150 million to $200 million over and above the original estimate of $1 billion.

Despite three years of payments from 2012 to 2015, the state still owes about $1.2 billion on the maneuver, according to an analysis by James Hohman, assistant director of fiscal policy for the Mackinac Center for Public Policy. These added costs contributed to the $26.7 billion in unfunded liabilities the school pension system carried as of 2015, the most recent year for which numbers are available.

Among other negative effects, having to catch up on this debt is placing a heavy strain on the budget of every public school district in the state.

The Office of Retirement Services defends its decision to draw out the repayment of costs incurred by the 2010 school pension benefit sweetener:

“The decision to lengthen the payoff period for the early retirement incentive was absolutely the right decision because it allowed the state to prefund retiree health benefits,” said Kurt Weiss, spokesperson for the Office of Retirement Services, in an email. “Prefunding future retiree health costs, rather than using the flawed pay-as-you-go method, is another example of the smart fiscal practices that have been utilized to put Michigan on the path to paying off its long-term liabilities in a fiscally responsible way.”

“It’s also important to remember that these decisions are not made in a vacuum at the Office of Retirement Services; they are recommended in the governor’s budget and ultimately approved by the Legislature,” Weiss said.

Hohman says he is not convinced the office did the right thing.

"The decision to defer payments on the early retirement incentive is unrelated to prefunding retiree health care," Hohman said. "It was a matter of budget prioritization. But it underscores that the Office of Retirement Services is happy to pass costs to future taxpayers, so long as new employees still get a defined benefit pension plan that lacks this protection."

Hohman also noted that the pension obligations the retirement office chose to delay funding are guaranteed by the Michigan Constitution. In contrast, the post-retirement health insurance benefits it gave priority to are not an enforceable taxpayer obligation and can be eliminated or trimmed at any time. They were cut in 2012.

The state has a long history of underfunding the Michigan Public School Employees Retirement System. Records reveal that in the 1970s, the state was using a 50-year amortization window, which is 20 years longer than what accounting experts recommend.

“The state is perfectly happy deferring payments into the pension system to the future when it finds it convenient,” Hohman said. “That’s why the state ought to put new employees into a 401(k)-style plan that doesn’t allow the state to put the costs on future taxpayers.”

This is part of series of stories looking into how the public school employees’ retirement system has ended up with $26.7 billion in unfunded liabilities while under the stewardship of the Office of Retirement Services.