In a move to prevent future generations from being burdened
by the unaddressed costs of previous generations, Michigan Gov. Rick Snyder has
proposed lowering the assumed rate of investment return for the state’s retirement
systems from 8% to 7.5%.
“This more conservative assumption will require additional
state investments into the retirement systems now, but will ensure that pension trust funds will be sufficient
in the future to pay the benefits that have been earned, ” said the governor’s proposal, which
was released last week.
But will it be enough? Snyder said that a more conservative
rate of return on investments will help Michigan pay off its long-term
liabilities. In his proposal, the governor said the state would eliminate the
liability entirely in 20 years, and “protect the retirement systems that many
older Michiganders will be relying on in their senior years.”
However, according to Joe Nation, a professor of public
policy at Stanford University who researches public employee pensions, this
conservative assumption isn’t nearly conservative enough.
“Public pensions systems across the country are far too optimistic,”
Nation said. “Lowering the discount is a good thing, it’s a step in the right
direction, but in this case, it’s a step that’s probably inefficient,” he said.
“If they were to go from 8% to 5%, then that’s where they
need to be to make sure they can fund benefits over next 10, 20, or 50 years.”
Nation says that it’s a stretch to assume a 7.5% return with
any degree of confidence, and that fund managers should only be about 50%
confident they will hit that. “You can assume a 7.5% return, but the odds of
that are a coin flip,” said Nation. “Then if you don’t make it, you have all these obligations that you
And that’s only if a fund is 100% invested in equities,
which would be a pretty big risk for a pension fund. “But they don’t only
invest in equities,” says Nation, “they invest in bonds where yields are much
lower,” which makes hitting that 7.5% target more difficult.
According to Michigan’s Municipal Employees’ Retirement
System (MERS), its Total Market Fund returned 11.1% in 2016, which appears to
have been an exceptional yea. Over the past 10, 20, 30, and 40 years, the fund
has returned 5.38%, 7.07%, 8.47%, and 8.95%, respectively, according to MERS.
Earlierthis week, Gov. Snyder formed a task force to address
the problems retirees and municipalities are having with pension and healthcare
“My goal for this task force is to have collaboration among
legislators, state and local government officials, and employee representatives
to ensure the financial stability and effective delivery of local government
services for the coming decades,” Snyder said.
The total unfunded pension liability is estimated to be
around $4 billion, according the governor’s office. The task force =contains experts
who represent labor and management, investment managers, insurance and finance
professionals, and legislators. They have been directed by Snyder to provide
recommendations on pension reforms by this spring.
Included on the board is Chris DeRose, chief executive of MERS.
MERS is an independent professional retirement services company operating on a
not-for-profit basis, and is governed by an elected board. It covers about 84%
of local units of governments, but does not include teachers or state workers
“Our hope is to bring municipal retirement administration
expertise to the discussions,” said Jennifer Mausolf, a director at MERS of
Michigan. “In fact, over the last five years 73% of our customers have taken
additional steps to reduce their unfunded liability. We are hoping this
experience can help guide the group in its deliberations.”