Pension Reform News: Michigan legislature pushes to undo pension reforms

In This Issue:

Articles, Research & Spotlights 

• Michigan Legislature Pushes to Undo Pension Reform
• Webinar on 2024 Public Pension Debt, Trends
• Mississippi’s Public Plan Needs More Options
• Pennsylvania Considers Granting Costly COLA Benefits
• Louisiana Directs Funds to Teacher Pension without Fixing Source of Underfunding 

News in Brief
Quotable Quotes on Pension Reform
Reason Foundation in the News
Data Highlight
Contact the Pension Reform Help Desk

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Articles, Research & Spotlights

On Their Way Out of House Control, Michigan Democrats Seek to Undo Several Crucial Public Pension Reforms

As a result of the November election, control of the Michigan House of Representatives will soon flip from Democrats to Republicans, leaving just one more week for Democrats to pass legislation using their trifecta majority advantage. Democrats will still control the state senate, and Democratic Gov. Gretchen Whitmer will remain in office. On their way out, some members of the House Democratic caucus are targeting past major reforms to the state’s public pensions, seeking to undo policies that have been crucial to controlling runaway costs. 

Last week, the Michigan House unanimously passed House Bill 6060 without granting any opportunity for testimony or cost analysis, leaving the legislation up for consideration in the Senate. The bill would roll back a landmark 2017 pension reform of the Michigan Public School Employees’ Retirement System, which established risk-balanced options (a hybrid pension plan or a defined contribution plan) for new hires. The proposed legislation would remove the crucial cost-sharing function of the past reform, transferring colossal costs from the employee to the employer. Reason Foundation’s actuarial evaluation of this bill indicates that this could cost employers (and, therefore, taxpayers) up to $20 billion over the next 30 years. Another set of bills—Senate Bills 165-167—would move a group of existing employees from a defined contribution plan to one of the state’s existing hybrid pension plans, but the full cost of this has received almost no consideration. Before placing massive costs and risk burdens on the state and its taxpayers, legislators need to evaluate the actuarial impact of reversing course on previous reforms.
Testimony on HB 6060
Testimony on SB 165-167

Webinar: 2024 Public Pension Solvency and Performance Report

Reason Foundation’s Pension Integrity Project recently published our annual Public Pension Solvency and Performance Report, which shares a unique analysis of the funding and investment outcomes of 296 public pension plans sponsored by state and local governments. In a webinar this month, Reason Foundation’s Ryan Frost and Mariana Trujillo showcased key findings, trends, and the report’s tools and interactive capabilities, which allow anyone to see the funding history of every pension plan and funding estimates for 2025. The analysis also shows how nearly all public pension systems fell short of investment targets over the last two decades, driving up unfunded liabilities and, consequently, annual costs.
Webinar: Key trends and findings on public pensions
Public pension solvency and performance report
Analysis: Pension fund size doesn’t improve investment performance

Reforms That Could Fix Mississippi’s Public Pension

With Mississippi’s pension debt ballooning to $25.5 billion, only 56% of assets needed to fulfill promises, and expected annual costs on the rise, the Mississippi Public Employee Retirement System, PERS, is in dire need of a new approach to providing and paying for public pension benefits. In a multi-part series in the Magnolia Tribune, Reason Foundation has laid out the challenges policymakers face in the state, as well as some solutions that could improve the solvency and cost of the system. Using actuarial modeling of the plan, it’s clear that a new tier of benefits for new hires—one that better balances risks and costs—would help dig PERS out of its funding shortfalls and save taxpayers billions in the long run.
Modernizing PERS to serve Mississippi’s public workforce
Modernizing PERS (Part 2): The state of play after the 2024 legislative session
Mississippi municipalities should brace for higher public pension contributions
A new and necessary approach for Mississippi’s public pensions

Pennsylvania’s Proposed Public Pension Increases Would Be Costly to Taxpayers

Pennsylvania’s two main public pension systems, the Public School Employees’ Retirement System and the State Employees’ Retirement System, are a combined $61 billion underfunded. Despite that, state lawmakers are considering granting unfunded cost-of-living adjustments to retired teachers and public workers. Reason Foundation’s Rod Crane explains how the one-time benefit boost will add about $1.19 billion in liabilities, which is expected to add to already growing annual employer costs. Rather than passing these costs on to future budgets and taxpayers, Pennsylvania policymakers should fund these new benefits upfront.

Louisiana Legislature Wants to Use Education-Related Funds to Pay for Teacher Pensions Without Fixing Core Problem

The Louisiana state legislature approved a proposal to direct $2 billion from education-related funds to help pay down the $8.5 billion debt owed by the state’s teacher pension. Reason Foundation’s Steven Gassenberger explains that, while this will certainly have a positive impact on the funding of the pension, doing so without addressing the underlying cause of the debt does teachers and taxpayers a disservice. Reason Foundation’s modeling of the system shows that the cash infusion does not protect the teacher plan from falling short of lofty investment return expectations, which remain above national averages.

News in Brief

Making public pensions part of ERISA could straighten fiduciary obligations

A recent DePaul University Law Review article argues that the exemption of public pension plans from the Employee Retirement Income Security Act (ERISA) is no longer justifiable given their widespread underfunding and ongoing issues with mismanagement, lack of transparency, and conflicts of interest. Author Gurkaran Singh Bhatti argues bringing public pensions under ERISA would impose minimum funding standards, fiduciary duties, and transparency requirements, reducing administrative risks and protecting retirees and taxpayers from financial mismanagement. The full article can be found here.

Underfunded pensions and politically appointed boards take more risk with private equity but don’t achieve higher returns 

 A National Bureau of Economic Research working paper finds that underfunded pension plans, particularly those with boards dominated by state officials/politically appointed members, tend to take on more risk in private equity investments. Despite their increasing reliance on alternative investments to adequately grow their assets, these pensions underperformed public equity markets when adjusted for risk. The authors believe this suggests that political or governance factors may drive these decisions, as underfunded plans might be more likely to pursue risky investments to recover from financial shortfalls, rather than making sound investment choices—a practice referred to as “gambling for resurrection.” The full working paper can be found here.

Quotable Quotes on Pension Reform

“But right now we don’t send any good signals to the public, we don’t send any good signals to the rest of the country as far as us being an economic growth engine because we refuse to touch pensions.”
— Ted Dabrowski, Wirepoints President (Illinois research group), quoted in “Illinois’ pension debt grows,” The Center Square, Dec.12, 2024. 

“She [Rep. Debbie Lesko (R-Arizona)] worked on the pension reform […] and anyone who ever done it knows it’s one ugly thing, and it takes a lot of courage.”
— U.S. Rep. Andy Biggs (R-Arizona),  quoted in Rep. Lesko’s farewell address in the House, Dec. 5, 2024. 

“Missouri pension systems funds should never be used to make contributions to political campaigns.”
— Missouri state Rep. Dirk Deaton (R-Noel), quoted in “Missouri state pension board bans use of fund for political donations” Missouri Independent, Nov. 21, 2024.

Reason Foundation in the News

“The pension debt was caused by poor and risky investment decisions, not by shrinking hours or a growing retired population.”
— Zachary Christensen, Pension Integrity Project Managing Director, quoted in “Federal bailout gives $635 million to carpenters union pension plan” CapCon, Nov. 22, 2024. 

Actuarial analysis by Reason Foundation and Yankee Institute was cited in a National Review article on the value of Connecticut’s “fiscal guardrails.”
— “Connecticut’s Fiscal Death Wish,” National Review, Dec. 9, 2024.

Data Highlight

Each month, we feature a pension-related chart or infographic created by our team of analysts. This month, we highlight Mariana Trujillo’s analysis of how the fiscal year-end month affects public pension fund returns. Short-term investment returns can vary significantly depending on when a fund closes its books due to market volatility. Read the full analysis here.

The post Pension Reform News: Michigan legislature pushes to undo pension reforms appeared first on Reason Foundation.

Source: https://reason.org/pension-newsletter/michigan-legislature-pushes-to-undo-pension-reform/