Michigan state Rep. Thomas Albert, R-Lowell, says that Gov. Gretchen Whitmer’s 2021 budget proposal “raids the public-school pension fund to pay for other programs.”
He’s referring to her administration encouraging the state to put less money into the debt-saddled pension system and use it instead to fund other programs.
In 2018, the Michigan Public School Employees Retirement System (MPSERS) Retirement Board and the Department of Technology, Management, and Budget adopted a 2.75 percent payroll growth assumption, down from 3.5 percent to reflect declining K-12 enrollment and ballooning pension debt.
Albert on Monday said the Office of Retirement Services claimed it didn’t have to lower the payroll growth assumption from 3.5 percent yet because of Public Act 181, which required the payroll growth assumption to be lowered by 0.5 percent annually starting in fiscal year 2021-22.
Both parties plan to lower the assumption, but Albert wants to drop that number more quickly.
“The Office of Retirement Services’ failure to follow state law would have resulted in chronic underfunding of the retirement system,” Albert said in a statement. “Failing to address a broken pension system is no different than robbing the next generation of its wealth and spending it today. This is both unsustainable and unfair to our kids who will eventually foot the bill.”
The House Fiscal Agency estimated that dropping the payroll growth assumption to 2.75 percent would increase the annual retirement system payment by about $166 million.
James Hohman, director of fiscal policy at the Mackinac Center, told The Center Square that lowering the payroll growth assumption would ensure Michigan pays off its unfunded liabilities more quickly than if it assumed a higher payroll growth.
The state had assumed 3.5 percent payroll growth since 2006. But “the value of paychecks covered by the system have fallen from $10.4 billion to $8.3 billion from 2004 to 2018,” Hohman wrote.
This isn’t a new problem. MPSERS assumed payroll growth of 4 percent from 2000-2006, but the actual long-run payroll growth over this period was negative 0.5 percent, said Daniel Takash, a policy analyst for the Reason Foundation’s Pension Integrity Project.
“To put this into more concrete terms, overestimating the growth in payroll has contributed about $1.4 billion to MPSERS’s total unfunded liability since 2000,” Takash testified last year.
Inaccurate assumptions such as payroll growth balloon costs because contribution rates are based on that assumption and will generate less than what’s required to pay for earned benefits and pay down unfunded liabilities, Hohman said.
“So it’s just another way that the pension system can be shortchanged,” Hohman said, adding that the MPSERS pension debt as of 2018 is $32.7 billion.
Hohman cited Article IX, section 24 of the Michigan Constitution, which was written to protect pensioners and taxpayers by ensuring the state pays for pensions as people earn them.
“We shouldn’t have accidentally made schools the state’s largest creditors,” Hohman said. “But given that we have, we need to take those obligations seriously and make sure we do what we can to pay down our pension debts.”