Large state pension gap continues

By MATTHEW HALL

Capital News Service

LANSING – The state government’s obligations to its public employees are increasingly unfunded, according to Senate Fiscal Agency data.

The state employees’ pension fund, for example, was about 99 percent funded in 2002. That’s decreased to little more than 60 percent in 2012, leaving a liability of $6.2 billion.

That amount could buy the U.S. Navy a twelfth aircraft carrier.

Data about the shortfall comes at a time when most public and press attention is focused on the pension liabilities of financially troubled local governments, especially Detroit.

The numbers mean that the state has enough assets on hand to cover pensions for only 60 percent of the workforce if it had to be all paid out today.

“It is extremely alarming,” said Ken Moore, the president of the Michigan State Employees Association, “especially in the climate with this administration and the situation in Detroit.”

The union represents 4,500 state employees.

 Many factors may have contributed to the trend, experts say.

One may be that the 2008-09 financial crisis lowered investment returns.

“The stock market didn’t perform with an 8 percent return, and that’s what’s assumed in a lot of these systems,” said Kathryn Summers, an associate director at the Senate Fiscal Agency. The nonpartisan agency advises the Senate on tax and budget issues.

“The system is going along assuming an increase of 8 percent every year. When that doesn’t happen, then you have a shortfall,” Summers said.

Some of the largest drops in funding levels occurred after 2008-09, but the trend goes back further with drops of about 5 percent a year in the mid-2000s.

“Other things that can happen: You may have more people retire and start drawing pensions earlier than they were supposed to, or people can live longer than they anticipated,” Summers said.

Michigan State University economist Eric Scorsone said investment losses from both the early 2001 recession and the 2008-09 crisis may have been spread out over the years, which may give an impression of a growing problem.

He said the state’s liability for retiree health care is largely unfunded and is bigger than its pension liability.

Combined with state-employed teachers, judges and state police, the state’s health care liabilities for future retirees are upwards of $31 billion.

“I mean you’re talking $30 billion right there with almost no funding,” said Scorsone. “So not dissimilar to local governments, the state also has a big issue on this unfunded health liability.”

Asked if the situation in Detroit would set a precedent for how the state handles its own liabilities, Scorsone said, “Only indirectly. A state can’t declare bankruptcy, but there are states out there that have cut pension benefits, have been sued and won.

“In Colorado’s case, they said, ‘Look, we’re going to pay you this amount of money each year and increase that by some inflation or cost-of-living adjustment’ and Colorado eventually said, ‘We can’t afford that. Whatever we promised we’re going to cut it.’

“They were sued and it went all the way to the Colorado Supreme Court where they won. They had the right to change the benefit — not just like the inflation factor but to cut the actual payment,” he said.

“That’s kind of what a lot of this Detroit bankruptcy is about. Can the bankruptcy court there essentially change these pension benefits?” Scorsone said.

Rebuilding the pension fund is not quite as worrisome as the rising cost of retiree health care benefits, he said.

Kurt Weiss, the public information officer for the Department of Technology, Management and Budget, said, “The good news here is that the Snyder administration has reversed this trend and we have cut more than $20 billion from our long-term liabilities in the past two years.”

The department’s Office of Retirement Services oversees the budget for public employee benefits.

There was a $6 billion reduction in the state employees’ system health care liability just last year, down from $14 billion the year before.

Weiss said, “Costs for retiree health climbed and outpaced the state’s ability to pay mostly because the skyrocketing costs of health care.” As a result of legislation passed in 2011, remaining state employees now pay more for their health care, which is helping to reduce the liability.

“The state pays 90 percent, the employee pays 10 percent – keeping it in line with what much of the private sector is doing,” Weiss said. “Bringing down those long-term liabilities really helps the state’s overall financial health.

“It helps our credit rating when the credit-rating agencies in New York look at us. Whether it be Moody’s or Fitch or Standard & Poor’s, they like to see the fact that the state is addressing its long-term liability problem.

“It’s a problem not unique to Michigan. All states are dealing with this, but the difference is Michigan is taking action and doing something about it,” he said.

Moore, the union president, said, “I realize Gov. Snyder has not been there for that full decade, but in the absence of funding, with the mindset of this administration, it’s quite alarming that their priorities are the ‘rainy day fund’” rather than ensuring there is enough money to cover future pensions.

“They’re more concerned about the credit ratings of the state range and it appears that this isn’t high on the priority pole.

“It’s throwing a red flag.”

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