Funding for Public Employee Retirement Plans and Post-Retirement Benefits Under Pressure

Negative investment returns after September, 2007 have increased the challenges to proper funding of public employee retirement plans in Michigan, as well as the rest of the U.S. For a full analysis, see Michigan State and Local Government Retirement Systems, July 2009, Report 356 by the Citizens Research Council of Michigan

The report says:

“Michigan is one of nine states in which the constitution states that participants in a public retirement system have a guaranteed right to a benefit that has been promised, and that accrued financial benefits cannot be eliminated or diminished. . . .

In Michigan, state and local government pension plan benefits are protected by Article IX, Section 24 of the 1963 State Constitution, which provides that "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities." Benefits that have been earned by covered employees for work performed are a contractual obligation of that unit of government. . . . Michigan public employers are required to set aside funds to pay pensions as those pensions are earned. Future pension benefits may be changed, both for new hires and for the future service of current employees, as long as benefits accrued are not impaired or diminished.”

However, an issue arises concerning the post-retirement benefits of health, dental and vision insurance.

“Health benefits are promised, but various courts have ruled that they are not obligations in the same sense as pension benefits. (That could change, though, as this spring the House of Representatives adopted legislation that would give state employees, including school employees, a contractual right to retiree health care.)

The health plan is a “pay-as-you-go” system. Instead of setting aside money in advance, it uses each year’s school contributions to pay each year’s bills. At this point, according to the MPSERS report, the state has promised the equivalent of about $25 billion in health care to current and future school retirees.” Retirement fund losses will cost schools, but how much?, April 20, 2009, from the Mackinac Center for Public Policy

The legislation mentioned is House Bill 4073, which would create a contractual right of state employees to post-retirement health benefits and which passed by the House with all Democrats voting for it against unanimous Republicans opposition on March 4, 2009 and sent to the Senate, where it has not moved due to the Republican majority in that chamber.

The Constitution rightly protects vested contractual rights in retirement plans. The bill would create additional vested rights. When state and local governments are pressed financially, this is no time to decrease the flexibility of the state to balance its budgets by guaranteeing post-retirement health benefits to state employees.

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P.S. Michigan State and Local Government Retirement Systems, July 2009, Report 356 by the Citizens Research Council of Michigan is an excellent source of information on the various state and local public employee retirement plans. It contains options for cost control, but does not make any recommendations.