(Source: MIRS.news, Published 02/09/2024) During Wednesday's budget presentation, Gov. Gretchen Whitmer trumpeted that her administration will have paid off $21 billion in public employees and school employee retirement debt by the end of Fiscal Year 2025, according to Department of Technology, Management and Budget numbers.
However, these payments will not have resulted in reducing the state's unfunded liability by $21 billion. That number may end up 35% lower because the assumptions used to estimate how much the state should pay for future pension checks and retiree health care coverage changed, said Craig Thiel of the Citizens Research Council of Michigan.
The projected 8 percent return on the state's pre-funded payments of future retiree payments was reduced gradually to around 6 percent. As a result, in Whitmer's first three budgets, the amount of unfunded liability in the public school pension program (the Michigan Public School Employees Retirement System) actually went up more than $1 billion, even though the state made its required payments, according to a Senate Fiscal Agency chart.
The SFA doesn't have final unfunded liability numbers for Fiscal Years (FY) 2023 and 2024, yet. However, in FYs 2020, 2021 and 2022, the state made $9.8 billion in payments to MPSERS, State Employees' and Michigan State Police pension/retiree health care funds, resulting in a drop of just $6.02 billion in the state's unfunded liability between FY 2020 and FY 2022.
So, when Whitmer said during her State of the State address that her administration cut out $18 billion in state government debt, Thiel was left scratching his head.
“I was trying to reconcile the $18 billion debt payment and I couldn't square it,” he said during a taping of the upcoming MIRS Monday podcast.
In the end, Michigan still owes at least $40 billion to successfully pre-fund the pension and retiree health care costs of school employees, state of Michigan employees and the Michigan State Police employees, which have their own system.
Regarding the Governor's $18 billion or $21 billion number, might it be possible the state is reducing its debt load somewhere other than the pre-funding of retiree health care and pensions?
Not significantly, no.
State government carried $27.263 billion in debt during Whitmer's first budget year, according to this report from the Department of Treasury. Outstanding bonds for road programs, university building projects, Michigan State Housing Development Authority projects, environmental projects and a few other things are thrown into the soup when calculating that number (See Table 9 on page 17).
By FY 2022, the state retired six different road bonding projects from previous administrations. That's the year the Whitmer administration ramped up four new road project bonding issues. Remember, the Governor felt she needed to use bonding (as prior governors had done) to “fix the damn roads” because the Legislature denied her a sizable gas tax increase.
The overall impact on the state's debt load was a wash (See Table 10 on page 18).
As of FY 2022, the state was carrying $27.201 billion in debt, $61 million less than FY 2020. A review of the maturity date of the bonds listed in that document doesn't show a significant number of obligations falling off any time soon.
Plus, Whitmer isn't proposing a massive increase in debt service payments, either. Whitmer’s current budget lowers the amount paid to debt service by about $5,000 to more than $95 million.
The state government itself is completely obligated to pay more than $1 billion in outstanding debt as of 2022, according the SFA economist David ZIN.
The good news is that it doesn't all have to be paid off tomorrow. If it became due tomorrow, every Michigander would end up owing about $2,711 to pay it off, or $407 to make a yearly payment if the state were flat broke.
“Everyone realizes no one is going to say:‘ Hey, State of Michigan you owe $28 billion in debt. You have to pay it off today,” Zin said.
Zin said there was no magic level of too much debt, because it all depends on how the state budgeted for debt, and that was set in the budget by a line in the treasury called debt services.
“How much debt is a problem depends on how much you have to pay on the debt service and how much you pay on the debt service is a problem depending on how you want to do your budgeting,” he said.
It's certainly nothing to be alarmed about.
University of Michigan-Flint Economics Professor Chris Douglas said Michigan's overall debt is low. Compared to other states, it's middle of the pack, according to this ranking.
“States have to balance their budget every year, regardless. If there’s a recession, if there is no recession, the state has to balance its budget,” Douglas said.
He said this was the reason Michigan was not carrying a tremendous debt like the federal government.
Douglas said it was common for bond debt, like the $3.5 billion Rebuilding Michigan program, for infrastructure projects.
He said unfunded liabilities were also a good thing to pay down and pointed to Illinois, which was in financial crisis for nearly a decade because of an underfunded pension system.
“Illinois just can’t tack-on that unfunded pension debt to the state debt. They somehow have to cut spending or raise taxes… and it’s been a tough way to have to try to close that hole,” he said.
