August 8, 2017

Like many states, Michigan has tens of billions of dollars in unfunded liabilities relating to its public pension system, clocking in at $29.1 billion. However, its state legislature recently passed reforms aimed at introducing sustainability to the system – reforms that have been championed by the Mackinac Center for Public Policy since 2006.

“There are two ways the reforms to the teacher pension system work toward our goal,” said John C. Mozena, vice president for marketing and communications for the Mackinac Center. “The first is that we’ve been warning since 2006 that unfunded teacher pensions would divert resources from the legitimate public purpose of educating children, which did in fact happen to the tune of taking up a third of our public schools’ payrolls. The other is that we gave teachers control of their retirements, freeing them from the consequences of mismanagement by politicians and bureaucrats.”

The reform legislation presents future teachers with choice: a new, defined-contribution 401(k)-style retirement plan or a defined-benefit pension (where they would assume half of the responsibility). If the latter plan does not maintain 85 percent or higher of the required funding for two consecutive years then it will be closed to new members.

“One half of new public school teachers in Michigan never [invested] in their pensions,” Mozena continued. “That means far too many young professionals ended up not saving for retirement during one of the most critical periods of their careers. Now, they start saving from day one. That difference will play out – and pay off – over decades to come.”

The Michigan Public School Employees Retirement System (MPSERS) had grown to constitute 37 percent of school payrolls – 89 percent of which was going directly to paying down the unfunded liabilities and only 11 percent being set aside for current school employees’ pensions. It accounted for just 12 percent of the payroll back in 2002. James Hohman, assistant director of fiscal policy at the Mackinac Center, estimates that the Michigan could have more than $1,700 per student in the state’s public schools if the state legislature had passed the reforms to MPSERS earlier.

The Mackinac Center has been widely credited for its role in bringing about this legislative reform: “…the Speaker of the House Tom Leonard said, ‘The Mackinac Center was a terrific partner to the Legislature during this debate and provided expert financial and historical analysis at key moments,’” continued Mozena. “And legislative sponsor Senator Phil Pavlov said, ‘The Mackinac Center has been on the front line of this battle for as long as I can remember. The air cover and deep analytical support played a significant role in the process.’”

This victory for pension reform in Michigan follows on the heels of a similar win in Pennsylvania. The Pennsylvania state House of Representatives voted 143-53 to approve a package of pension reform on June 8 of this year. The law implements a side-by-side hybrid plan with a defined benefit component and a 401(k)-style component for new state employees and school teachers, while providing the option for employees to enroll solely in the latter plan and allowing current employees to opt in to the new system. Pennsylvania’s Independent Fiscal Office estimated that the pension risk the state’s taxpayers face will be reduced by approximately two-thirds.

Unfunded pension liabilities in Pennsylvania had swollen nearly tenfold from $7.6 billion in 2006 to $71 billion in 2016. The Commonwealth Foundation – an Atlas Network partner based in Harrisburg, Pennsylvania – had been fighting for pension reform that entire time, proving influential in shaping the climate of opinion in the state with a 2016 poll showing 67 percent of Republicans, 51 percent of Independents, and a plurality of Democrats in support of the introduction of a 401(k)-style retirement plan.

On the heels of its most recent success in Michigan, the Mackinac Center is poised to make a difference in Michigan's intellectual and sociopolitical climate: “For 30 years, we’ve been doing the hard work of research, policy development and education that builds the foundation for good public policy,” Mozena stated. “We’ve expanded our policy portfolio by adding energy and environment as well as criminal justice initiatives; and we’ve grown our marketing and communications capabilities to make us more effective in bringing public opinion around to our side.”