How well are Michigan public pensions funded?

Cities and states across the country have been in the news lately for pensions on the brink of bankruptcy. How do Michigan’s state and local pensions compare? Because of a new rule implemented last year, state and local governments now have to report their full pension debt on their balance sheets. The Chicago-based nonprofit Truth in Accounting (TIA) recently surveyed 237 municipal pension plans across the country, in addition to state pension systems in all 50 states, and found disturbing news based on the new data being reported for 2015.

How well-funded are Michigan’s state retirement systems? On average they are only 64 percent funded, and received a grade of D. Local pension funds in Michigan are doing somewhat better although there is quite a range. The Michigan Municipal Employees Retirement System received an A+ for being 106 percent funded, but the two Detroit general retirement systems are only 72 percent funded if all assets and liabilities are averaged together. Detroit’s police and fire retirement systems were given C grades for being funded at 87 percent. (For a full explanation of the SDL grading scale see its pension methodology).

These figures may not sound bad in comparison to other states, especially nearby Illinois, where state retirement funds are only 40 percent funded. But that’s not the full story according to TIA: “While the state of Michigan has unfunded pension debt of almost $31.3 billion, its unfunded retirees' health care debt is an additional $20.8 billion. The state has put away 64 cents to pay for each dollar of promised pension benefits and only 17 cents has been set aside to pay for each dollar of retirees' health care benefits promised.” This could be compared to someone putting aside money for the mortgage, but not enough to pay credit card bills.

Thanks to the new reporting rules, the truth is coming out about how states have been under-reporting their future debt and not funding their pensions systems adequately. However, the new reporting standard issued by GASB does not require the cost of promised retiree health care benefits to be reported. TIA’s study found 72 percent of these benefits were not included in 2015 reports.

The newly collected data from TIA are available at its State Data Lab (SDL) where you can search by state for statistics on state and local pensions, which are graded from A to F based on how well-funded they are. Terry Savage noted recently in an article in the Huffington Post, that of the 237 plans studied for the 100 largest cities in the country, “29 received an ‘F’ grade, reflecting a funding ratio of less than 35 percent. Those plans cover many thousands of workers who cannot possibly be paid their full promised pensions, absent a huge tax increase (which would also come out of their pockets as workers).”

Detroit’s underfunded pensions are not as bad as some in other large cities. The city of Chicago has the highest unfunded pension liabilities at $62 billion and is less than 35 percent funded. New York City comes in second with just over $61 billion of unfunded promises, but its pension systems are, on average, 71 percent funded. When state or local funds cannot meet their pension obligations, there is no backstop, such as private companies have in the Pension Benefit Guaranty Corporation, which pays out a percentage of promised pension payments if a company goes bankrupt. If the states’ government pension systems can’t pay their bills, taxpayers are on the hook--including the pensioners who are owed benefits.