Wednesday, April 21, 2010

Manhattan Institute Confirms Michigan's $60 Billion Pension Nightmare

The true scope of Michigan’s unfunded teacher pension (MPSERS) disaster has been verified by Josh Barro and Stuart Buck. The two researchers examined fifty-nine state run teacher pension plans and have quantified the massive underreporting of pension liabilities.

While recent losses in market values contribute to the problem, the authors focus on the aggressive assumptions buried deep in the financial footnotes. The authors conclude that the assumptions employed by pension funds conceal the magnitude of the funding problem. It is a problem which falls squarely on the shoulders of taxpayers, students, and teachers.

Their analysis highlights the deeply flawed and misleading pension reporting of the MPSERS Audit. The numbers for Michigan are sobering, but are consistent with what I have been writing about for years.

From their report (page 16 of Civic Report No. 61), Michigan discloses an unfunded pension liability of $8.9 billion. The realistic* unfunded pension liability is nearly $35 billion.

Adding the unfunded pension liability of $35 billion to the $26 billion in unfunded OPEB liabilities (the health care component of the pension fund) totals $61 billion in unfunded pension liabilities for MPSERS. Unless the system is reformed, these unfunded promises will be paid for with money that comes out of school operating budgets. In context, this is an ADDITIONAL $1,362 per student, per year, for 28 years! That is money which squeezes out teachers, programs, and student support. It represents a total that is equal to 148% of Michigan's ENTIRE ANNUAL budget. In a word, it is unsustainable.

This is very bad news for teachers, for students, and for tax payers. It will require honest disclosure and aggressive solutions that call for shared sacrifices from all stakeholders. The MEA cannot run and hide from this problem, the legislature cannot continue to kick the can down the road, tax payers cannot wish it away, teachers cannot count on unrealistic (and unfunded) promises made decades ago, and the Pension Board cannot continue to manipulate their financial statements to obscure the problem.

Here are links to specific articles:

Executive summary of report is here.

Full report In PDF format is here.

Josh Barro’s story is here.

Stuart Buck's blog post is here.

* What’s realistic? Use of a 6% investment return (instead of the MPSERS assumed rate of 8% - note: the 5 year actual rate is only 4.2%), and the elimination of the accounting trick called "smoothing" to start with actual current investable assets.

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