Report: Billions in liabilities are trouble for state

Michigan has at least $51.5 billion in unfunded liabilities for state pensions and retiree benefits which could require a tax increase or cuts to services if not corrected, according to a new Pew Center on the States report.

The shortfalls represent what the state was obligated to pay current and retired state employees as of the 2008 fiscal year.

Nationwide, there is a $1 trillion shortfall in the public sector's retirement benefits, according to the report that was released Thursday.

The report states Michigan has an $11.5 billion shortfall in unfunded pension fund liability, and a $40 billion shortfall in health-care and other retiree benefit contributions.

However, Michigan is far from being rated worst in the 50-state assessment.

By 2009, half of Michigan's state employees were on a defined-contribution, 401(k)-style plan, but public schoolteachers remained in a defined-benefit, or pension, plan, the report states.

Gov. Jennifer Granholm has proposed requiring state workers and teachers to pay more toward their retirement benefits in the fiscal year starting Oct. 1.

State data suggest Michigan won't be on the hook for $51.5 billion in any one given year, considering the relatively young state employee work force and its retirement eligibility, said David Zin, analyst for the Michigan Senate Fiscal Agency.

The average age of a Michigan state employee was 46.1 during the fiscal year that ended Sept. 30, according to the state Civil Service Commission's most recent report.

A total of 34.1 percent of state workers were eligible to retire in five years; 25.8 percent were eligible in three years; and 17.3 percent in one year.

A total of 1,543 state employees retired that fiscal year.

Zin said the state's pension and retiree health-care and benefits costs continue to rise while state revenue continues to decline, however. He said that makes it challenging for the state to meet required pension obligations.

Combined state pension and retiree health-care benefits are expected to increase from 33.3 percent of payroll this fiscal year to 37.4 percent next year. For someone making $50,000 per year, that amounts to an $18,700 state contribution next year.

The state faces a nearly $2 billion deficit in the fiscal year that begins Oct. 1.

"That is an expense that relates to the $1.8 billion budget deficit. That's money that the state has to come up with just like it has to come up with money to pay for a paycheck for somebody," Zin explained.

Granholm's office said it's important to take note of the hit pension took as a result of the market downturns in 2008 and 2009.

Spokeswoman Megan Brown said reforms, including reinstating a 3 percent contribution for state employees on the defined-benefit plans, and eliminating state-subsidized retiree vision and dental coverage for state employees retiring after Oct. 1, will help cut costs.

"Adequate pension funding is achieved by consistently making the annual required contributions over time, which the state has done. Additionally, reforms proposed by Governor Granholm will improve the sustainability of state pension systems," Brown said.

"The system remains financially sound and is positioned to meet its ongoing benefit obligations over time due, in part, to a prudent investment program, cost controls and strategic planning," she added.

Zin said it's little surprise the state's retirement health-care costs continue to rise, considering health-care costs rise much faster than pension contributions.

He noted that Michigan isn't constitutionally required to provide retiree health benefits. In other words, the state could chose not to pay its $40 billion retiree health-care deficit.

"If the state can't afford them, they can simply stop paying them," he said.

The state's pension costs are just one more demand on dwindling revenues, along with growing Medicaid, state assistance and unemployment compensation costs, however, Zin added.

He said Granholm's plan to have more than 6,000 state employees retire will work toward reducing the pension burden.

Starting in 2002, Michigan "consistently failed" to meet annual actuarially required contributions, dipping below 70 percent in 2004, according to the Pew report.

As of 2008, states had $2.4 trillion to meet $3.4 trillion in promised pension, health-care and other postretirement benefits, according to the report.

The gap may even be wider because the study didn't account for the full blow of investment losses in late 2008 during the stock-market downturn, and because many plans employ multiyear smoothing techniques to lessen the effect of a single year's losses.

"We have a significant problem now, but it's a problem that can be solved by taking relatively modest steps," said Susan K. Urahn, the center's managing director.

"If they don't do anything, if they wait, eventually, they will have an unmanageable crisis on their hands," Urahn said.

The cost of the trillion-dollar shortfall, which will be paid over the coming decades, is about $8,800 for each American household. The study did not include many city, county and municipal pension plans, which are thought to have similar underfunding.

About one in five private sector workers have traditional defined benefit pensions, compared with about 90 percent of public sector employees — including some that do not get Social Security.

The Associated Press contributed to this report.