Saturday, May 8, 2010

How Greek’s Debt Crisis Can Inform Michigan’s Pension Debate

Michigan’s teacher pension fund (MPSERS) is underfunded by nearly $61 billion. This massive debt is split between an unfunded pension liability of $35 billion (supported by Manhattan Institute study) and an unfunded health care promise, known as OPEB, of $26 billion (from MPSERS financial statement). Michigan's total budget is $43 billion (seehere, slide 19). MPSERS unfunded liability equals 142% of Michigan's total budget.

The Greek debt crisis is fueled by debt levels that will exceed 120% of Greek’s gross domestic product. While not an apples to apples comparison the message is clear, spending more than you make is not sustainable.

The debate regarding proposals to mandate new MPSERS entitlements for health care is irresponsible. MPSERS funding requirements are crippling school budgets with a tax on districts approaching nearly 20% on every salary dollar. The proposed amendment to enshrine health care in SB 1227 will add to that burden for generations. Greece, along with the rest of Europe, is paying for its history of financial malfeasance. Unless legislators wake up, Michigan faces a similar fate. Making good on the pension promise will be challenging enough, adding to that burden with a guaranteed health care mandate will make it impossible.

SB 1227, Winners and Losers

Currently the Michigan House is contemplating language which will increase the retirement multiplier from 1.5 to 1.7. This will, without offsetting cuts, add to a pension fund which has seen it’s funded status fall from the high 80% mark to an abysmal 51% (after pulling back the curtain of “smoothing” and the application of realistic investment assumptions). A $60 billion dollar unfunded pension liability is bad, enacting legislation to increase the size of this unfunded burden by $4.3 billion is very bad.

How would this change have an impact on the interested constituents? Here are just a few possibilities.

The Winners:

  • All teachers that choose to retire this year (assuming they were already considering retirement).
  • The MEA which will claim this a “victory” for its members.
  • Legislators that will claim a “cost savings” for schools.
  • Short term school budgets that will see lower cost teachers replace higher cost teachers.

The Losers:

  • All teachers that do not chose the retirement option this year.
  • The MEA because rapidly escalating legacy costs will consume an even higher percentage of operating budgets.
  • New teachers which will be the first to lose jobs as accelerated pension contributions force future teacher layoffs.
  • School operating budgets which will face pension costs approaching 30% per salary dollar.
  • Legislators that will have to unscramble the mess created by adding more burdens to an already overburdened pension fund.
  • Michigan students which will eventually pay for short sighted budget decisions.
  • Taxpayers (which includes working teachers) that will be forced to pay for these unfunded promises.

The House should reject an increase on the pension multiplier from 1.5 to 1.7. While the impact may be a short term “savings” the long term costs will add to the fiscal pain of Michigan’s schools, teachers, tax payers, and students. We cannot afford the pension plan we have, and an unfunded increase to the multiplier will magnify the problem. Call your Michigan House Representative and urge them to NOT INCREASE THE PENSION MULTIPLIER in SB 1227. Click here to get your Representatives phone number.