It had better be bold if Michigan wants to avoid Illinois’s fate. Chicago caught a case of “the Detroits” after all.
Really, even Michigan’s efforts are probably not enough. The pensions that politicians promised state workers so that they could get elected aren’t based in reality. The truth is those pensions are probably going to need to be cut substantially.
And don’t cry government workers. You know (and knew) your pensions weren’t sustainable. We all knew they weren’t. But you wanted to believe that it would all work out somehow.
Well, time to get real. It’s not going to work out.
Illinois is in a state of crisis, with $15 in unpaid bills, a $6 billion deficit, and a pension liability that is now upwards of $130 billion. The state’s finances are so bad that it elected a Republican as governor to reform the state’s out-of-control pensions but who has met fierce resistance from the Democratic legislature.
Other states are hurtling toward an Illinois-style crisis. As of 2015, California’s pension liability was $174 billion, which is more than its annual budget. New Jersey $135 billion pension liability is more than twice the size of its state budget. Pennsylvania’s unfunded liability is $61 billion.
Needless to say, this is unsustainable.
So what did Michigan do to avoid Illinois’ fate? It embraced bold pension reforms that will protect taxpayers and provide a solid retirement benefit to teachers.
First, it’s shifting its public school teachers toward defined contribution plans. All new hires will be automatically enrolled in a 401(k)-type plan with a default 10% contribution rate. Teachers will still be able to opt for a traditional defined benefit pension, but one that splits costs 50-50 between workers and the state, and includes safeguards that will prevent the funding ratio from dropping below 85%.
The California-based Reason Foundation, which provided technical assistance to Michigan officials, says that while these reforms won’t by themselves close the current funding gap, they will prevent it from getting any bigger. Michigan, it says, is now “a model for teacher pension reform in other states.”