Michigan lawmakers look to plug the big gaping hole in government liability.

1997 was actually a good year for Michigan.

It could have been better however.  It was the year that Governor Engler signed off on pension plan changes for state employees, but not including the school retirement system. For those it did affect, It adjusted the way in which pensions are funded from defined outcomes at high risk for taxpayers, to defined contribution with real ownership to the recipients.

It also saved the state billions in the last 2 decades. 

The change to the Michigan State Employees’ Retirement System saved the state an estimated $2.3 billion to $4.3 billion in unfunded state employee pension liability from 1997 to 2010, according to the report, authored by public pension expert Rick Dreyfuss.

Seven years later we are still benefiting (no pun intended) from this change.

This 20 year anniversary could well produce the finishing touch and allow Michigan to move toward a predictable liability scenario for good.  School employees somehow remained outside of the course correction in 1997.  House Bill 4647 and Senate Bill 0401 being nearly identical, provide the mechanism for the fix to that problem that has been long overdue.

It will be interesting to see if the Governor who fears any agenda that he does not set, will deny Michiganians the ability to craft a more reliable future.  He has already indicated he may not be quite ready yet:

GOP lawmakers — who were praised by conservative groups — said the bills would prevent Michigan from continuing to accumulate debt in the pension system and ultimately save more money for classrooms. But they acknowledged that Republican Gov. Rick Snyder, who is concerned about the upfront transition costs of closing the hybrid plan to new people, is still not on board after they met again Tuesday.

The emboldened text is a fair truth.

There is a bit of a spike in operational costs associated with such changes.  Its been used as the boogeyman to slow the spread of this kind of common sense by retirement systems for some time.  It was certainly presented to the Traverse Area District Library in that way 2 years ago as we were planning our transition.  We completed this late last year, and will save county taxpayers Millions in the next few decades.

The rationale for the spike is the decrease in contributions funding the retirement plan in total, while the retirement obligation to the municipality (or state) remains the same for a while.  As an example and based on my experience, I have constructed a chart below which illustrates the timeline, and expected spike due to decreased contributions to the overall plan, and then the corresponding drop due to employees (eventually dying) falling off the obligation rolls.

Note that initially, the cost is close to the same.  New hires don’t require additional contributions, and unless there is a mass retirement immediately, existing DB employees continue to fund their own plans as before.

Eventually, retirements of the DB employees causes the declination of overall employee contributions into the plan, requiring the government entity to make-up the difference.  The cost (as seen with the red line) continues to increase until the DB employees start dropping off the rolls, because the liability for the funding remains with the institution that had the plan.

It ultimately eliminates the overall liability to the taxpayer resulting in more predictable budgets, providing for good government.  It also provides a way in  communities can uphold easier, the state constitutional mandate of providing pensions as-promised, sans the threat of draconian cuts.

The blue line represents a static employment number with a two percent average increase yearly in cost. (Cost of living increase)  It remains on a slow but constant trajectory upward, and does not reflect the actual liability still being accrued (and usually under reported) to the pension plan.

The state has this problem.

For the Michigan Public School Employees Retirement System, we have been following along with the blue line.  The line, as noted already, does not demonstrate any level of connection to the actual liability (debt) to the pension system however.  As communities are finding out on a much smaller scale, pension promises that might one day be considered fully funded, are not as easily tracked and kept.

Of course, our kids have always had our backs.  While politicians and over bloated bureaucracies spend away the future, they all too easily have looked away

Ask current Grand Traverse County Commissioners about how well its worked for them.  Better yet, ask the 20+ year tax-and-spend veterans of that board like Larry Inman, Wayne Schmidt, or the last holdout Sonny Wheelock how well it worked for them.

Michigan MUST swallow the pill now, and hope it is not too late.

Pension reform is tough business.  Its especially tough if the last stop on the reform train is reluctant at the get-go.  But it needs to be done soon or we WILL face higher taxes, down the road.

The bills that are being submitted now are a good step in addressing our long term liability.  As the largest part of unfunded debt the state is carrying it would take a very large monkey off the backs of our children going forward.

And its truly is about damned time.