Unfunded Pension Liabilities A Huge Threat
State's finances worse than governor reveals
Michigan's continuing budget problems have dominated news out of Lansing. But there are other ways than an annual budget to look at a state's financial position. When Michigan's overall financial picture -- in essence, its balance sheet -- is examined, the state's condition is even more dire.
State government is required to issue a comprehensive annual financial report. It looks at state government as a whole -- its assets, its liabilities and all of its funds. Viewed as a single entity, Michigan's governmental activities at the close of the 2006 budget year had an accrued deficit of $1.7 billion, up from $932 million in 2005. Deputy Oakland County Executive Robert Daddow has looked at the report, and he is alarmed. According to the financial report, the School Aid Fund at the end of the last fiscal year owed $1.7 billion to other state funds.
State officials contend that this is simply a matter of timing, with School Aid revenues coming in after the close of the budget year, necessitating borrowing from other funds. Daddow, however, argues that it reveals that the state is in a serious cash-flow bind. For several years, the state has not made full payments to its pension funds. According to the notes to the state's financial statement, unfunded liabilities for the state employee pension system have grown to $2.5 billion at the end of the 2005 budget year from $1.3 billion at the end of the 2003 fiscal year For education employees, the unfunded liabilities have grown to nearly $10 billion from $6 billion. Local school districts have the obligation to fund school retirement, according to Daddow.
But the two most recent annual financial reports indicate that over the last four years they have under-funded their pension systems by more than $800 million, he notes. State budget officials contend that the pension funds are in good shape. And it's true that pension systems are like mortgages -- they don't have to be paid off immediately. But if they are consistently under-funded, there will be a day of reckoning, not unlike a foreclosure.
The state doesn't yet have to account for its total liabilities for retiree health benefits. Those cost the state and school districts more than $1 billion last year. Unlike pensions, retiree health care costs can be funded on a pay-as-you-go basis. But if the state and schools wanted to put aside money for future health care liabilities, according to Daddow, they might have to spend three times as much each year. All of this information could be used to argue for a tax hike. But should a government that has let its financial situation slide to this situation be given even more money to mismanage? Instead, the state's grave financial condition must be used as a lever for drastic changes -- pay freezes, hard bargaining on benefits, spin-offs of government programs to the private sector and whatever else is needed to bring Michigan's government operations in line with its revenues.
This government should not be rewarded with a bailout. Or nothing will change.
http://detnews.com/apps/pbcs.dll/article?/20070430/OPINION01/704300312/1008


