Vote Seen as Referendum on Pensions

Published February 1, 2007

School employee pensions are widely cited as a major reason for Michigan voters’ landslide rejection of a November ballot initiative that would have mandated automatic annual increases in funding for public education in the state.

The initiative, Proposal 5, lost by a whopping 62-38 margin. (See “Michigan Voters Reject Education Spending Mandate.”)

“Proposal 5 was a referendum on the cost of public education pensions,” said Ken Braun, a policy analyst for the Mackinac Center for Public Policy in Midland, Michigan, who wrote an extensive policy study about the issue prior to the election. “Its resounding defeat demonstrates that Michigan taxpayers are cost conscious and demand reform of the teacher pension system, not papering over the problem with more dollars.”

While it was well known that Proposal 5 would have mandated annual funding increases for public schools, community colleges, and public universities at an amount equal to the rate of inflation, the greater costs would have been tied to shifting future increases in pension funding to the state.

$1 Billion Pension Shift

Various analyses pegged the total cost of the proposal at as much as $700 million in the first year. That could have skyrocketed to more than $1 billion in additional funding per year, due largely to the pension-funding shift.

“There are only two ways to pay for that,” said Tricia Kinley, director of tax policy and economic development for the Michigan Chamber of Commerce. “You either increase taxes or cut services.”

Kinley said voters also realized shifting pension and retiree health insurance costs to the state could harm local schools.

“It ultimately removed any incentive for school boards to make tough decisions at the bargaining table,” Kinley said. “They would have been absolved.”

Reform Possible

Given the prominence of pension funding during the election season, many now think policymakers will more seriously consider reform. Some have suggested switching public education employees from a defined-benefit pension plan to a defined-contribution plan.

Legislation that passed in the state Senate last year but failed by a half-dozen votes in the House would have created a defined-contribution pension plan for new teachers, while keeping current teachers and retirees in the same defined-benefit plans they’ve always had.

“This should send a message and embolden the legislature that it’s okay to vote for this change,” said state Rep. Jack Hoogendyk (R-Kalamazoo), a member of the state House Tax Policy Committee.

“The people want it,” Hoogendyk continued. “This kind of change wouldn’t take anything away from anyone; it would simply ask future employees to accept what is the standard in the private sector and is fast becoming the standard in the public sector.”

Like ‘the Real World’

Braun noted many public- and private-sector pensions are moving from defined-benefit to defined-contribution systems. Most Michigan state employees have already made the change.

“Conventional defined-benefit pensions are being rapidly phased out because of their substantial cost,” Braun said. “If there is a message in the lopsided vote against Proposal 5, it is that Michigan taxpayers want the cost of public school employee benefits brought back into line with the rest of the real world.”

Ryan Olson and Ted P. O’Neil