Diverting Michigan’s pension debt payment would be costly to taxpayers and put retirees at risk

In state budget plans that threaten the state’s long-term financial stability and the retirement security of current and retired teachers, Gov. Gretchen Whitmer and the Michigan House of Representatives have proposed redirecting over $630 million in annual payments away from the state’s underfunded public school employees’ pension plan to other spending priorities.

The Michigan Public Schools Employees Retirement System, MPSERS, is currently $29 billion in debt, according to the latest figures from the plan’s 2023 actuarial valuation. To address Michigan’s significant unfunded public pension and health care liabilities, the state legislature passed a comprehensive reform in 2017. The law requires the state to make extra pension payments to reduce and eventually eliminate MPSERS’ debt. The reform set a funding floor to ensure the government could not lower its debt payments until the pension and health care plans were fully funded.

After Gov. Whitmer’s budget proposal, State Sen. Thomas Albert (R-Lowell), one of the leading architects behind the MPSERS reform in 2017, said the budget “flagrantly disregards the law by underfunding the pension system.”

Albert, who introduced the funding floor provision into the law, questioned the governor’s Office of Retirement Services about its intent to remove this funding and explained that it did not conform to the legislative intent of the law. “The whole point of the plain language of the statute was that once we start making progress on our debt, it just keeps going into the MPSERS system,” Sen. Albert wrote.

The good news is that as of MPSERS’ 2023 actuarial valuation, the unfunded liabilities in the health care portion of the pension plan have been eliminated. However, the $29 billion in pension debt remains, so the $630 million a year should go towards paying down that outstanding debt.

Instead, Gov. Whitmer is shifting that money to expand a universal pre-K program and boost public school spending to make up for the expiration of federal COVID-19 aid that has filled the state’s public school coffers in recent years.

The House’s proposed budget would also redirect pension funds and actually go even further in undermining efforts to pay down the pension debt. The budget calls for eliminating the amount of unfunded liabilities that local public school districts must pay, allowing districts to spend more money now while shifting their pension debt to state taxpayers. In court cases across the country, these public pension benefits have been found to be constitutionally protected, so state taxpayers are ultimately on the hook for paying for them.

The House budget gets even more expensive by recommending a costly new direct benefit for active teachers. The budget would force state taxpayers to partially reimburse teachers for the 3% they contribute to their own health care plans each year, costing taxpayers approximately $51 million in year one. The House intends for taxpayers’ costs to increase in future years until the full 3% contribution amount is reimbursed to teachers.  

These proposals not only divert over $630 million a year away from needed pension debt payments but would also impose an additional burden of $1.4 billion on state and local school budgets thanks to increased interest payments on the debt and the loss of expected investment earnings.

With federal COVID-19 aid expiring, it may be understandable to many that Michigan lawmakers are seeking ways to provide public school districts with temporary financial relief and fund larger government education programs. Unfortunately, their proposal is expensive, risky, and unwise.  

Gov. Whitmer’s and the House budgets treat MPSERS as though its funding problems are over. Unfortunately, the pension plan is still $29 billion short of having the necessary money to pay for the pension benefits already promised to workers and retirees. Until that debt is eliminated, the state should prioritize making the pension payments required by law.