by Scott McClallen
State Rep. Thomas Albert (R-Lowell) (pictured above), sponsored a proposal on April 30 to update the assumptions for state employees, police, judge and public school employee pensions (MPSERS).
House Bills 4530–4533 would adjust actuarial tables to include more recent data for life expectancy, pay future unfunded liabilities faster and mandate the state pay required contributions.
Ryan Frost, a pension analyst at The Reason Foundation, told The Center Square that, under Albert’s proposal, costs would go up for the short-term, but will produce better long-term stability.
1. Require each retirement system to use up-to-date mortality tables.
Frost cited a study from the Society of Actuaries showing that public employees, on average, have lower mortality rates and longer life expectancies than private-sector pension plan members. That means more pension payments to retirees, requiring higher contributions.
2. Require each system to use layered level-dollar amortization to pay off any new debt within a new, fixed 10-year period.
Most underfunded pension plans adopted an amortization schedule that was too lengthy, left the amortization schedule open, or used assumptions that didn’t hold in reality, Frost said.
“This leads to negative amortization (pension debt growing faster than amortization payments),” Frost wrote.
3. Require any difference in the actuarially determined contributions and actual retirement contribution to be paid off within one year by the state instead of the current five years.
Frost cited a 2015 National Association of State Retirement Administrators (NASRA) publication that showed states with the most significant pension underfunding crises had consistently failed to pay their plan’s actuarial required contributions, but the states that paid 95 percent or higher were less likely to have pension problems.
4. Cap the assumed rate of return and discount rate at 6 percent down from 7.5
The discount rate is used to calculate the net present value of benefit payments and the expected rate of return, which partly determines the actuarial assumptions.
The assumed rate of return estimates the plan’s projected return on investment and is used to calculate the plan’s required contributions.
A high discount rate and a high assumed rate of return lower required contributions, raising risk when rates aren’t met, Frost said.
Pension plans must update their assumptions when it suffers actuarial losses such as longer life expectancy, spiked pensions, or lower returns than assumed.
Iron Mountain, population 7,400, owes $48 million in unfunded legacy debt and nearly $1.5 million a year in retirement health care alone, Bridge reported.
The city spends another $650,000 a year on pensions for retired non-public safety workers.
That’s one of about 250 public bodies flagged for significant unfunded debt under a new Treasury law.
“It’s important for states to take steps to keep their plans healthy,” Frost said. “It’s never easy or popular to ask for more money to pay for your pension. A lot of municipalities have unfortunately had to lay off employees to pay for some of these rising pension costs.”
HB 4534 creates the position of a retirement system auditor responsible for the state’s retirement plans.
FY 2017-18 Unfunded Liability: Funded ratio
MPSERS: $7.659 billion: 44.3%
State Employees: $8.068 billion: 24.1 %
State Police: $586 million: 24.6 %
Judges: $7.3 million: 13.1 %
Legislative: N/A
“These proposals will put in place best practices to fund pensions when research has shown that some retirement plan finances are struggling,” Albert said in a statement. “Retirees are living longer and we need to make sure funding ability reflects that. Less debt in the long run makes plans more sustainable and we can create more responsible ways of paying off new debt.”
The plans also will remove remaining retiree healthcare access for the positions of Governor, Lieutenant Governor, Secretary of State, Attorney General and Supreme Court Justice.
The bills have been referred to the House Appropriations Committee for consideration.
Michigan ranked No. 32 in the 2018 State Fiscal Rankings from the Mercatus Center with $184.08 billion in unfunded pension liabilities, beating out Illinois in dead last, which has “Total unfunded pension liabilities that are guaranteed to be paid are $445.79 billion, or 67 percent of state personal income,” senior research fellow Eileen Norcross wrote.
Frost said these bills would help protect pension promises.
“The bills would continue Michigan’s efforts to make its pension plans financially sustainable for the long-term while keeping the promises the state has made to employees and retirees,” Frost said.
– – –
Scott McClallen is a staff writer covering Michigan and Minnesota for The Center Square. A graduate of Hillsdale College, his work has appeared on Forbes.com and FEE.org. Previously, he worked as a financial analyst at Pepsi.
