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CRC Column

The right to criticize government is also an obligation to know what you are talking about. 
-Lent Upson, 1st Executive Director of CRC  

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Michigan State and Local Government Retirement Systems
July 2009
Report 356

In fiscal year 2006-2007, Michigan state and local government retirement systems had $105 billion in assets. Initial financial reports for some of the largest of those retirement systems for fiscal year 2008 reflect portfolio losses in the 20 to 25 percent range. If that experience extends to all of the public pension systems in the state, the resources available to fund constitutionally guaranteed pensions have deteriorated by $21 to $26 billion. These losses can be expected to change the policies and practices of federal, state, and local governments.

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Nationally, in fiscal years ending in 2007, a total of 2,547 state and local government public pension plans distributed $162.7 billion in benefits to 7.5 million retirees, disabled employees, and beneficiaries, paying an average annual benefit of about $20,800. Although they are focused on the long term and designed to withstand short-term fluctuations of the financial markets, public sector pension plans (which are not insured by the Pension Benefit Guaranty Corporation) are thought to have lost more than $1 trillion since the market peaked in October, 2007. This loss substantially reduced the total cash and investment holdings (valued at $3.4 trillion in 2006-07) available for benefits.

State constitutions and local charters, as well as state law and local ordinances, may include explicit protections for pension benefits, such as guarantees that pensions earned by state and local government employees cannot be eliminated or diminished. Michigan is one of nine states in which the constitution states that participants in a public retirement system have a guaranteed right to a benefit that has been promised, and that accrued financial benefits cannot be eliminated or diminished. Michigan is one of 14 states in which the constitution contains certain standards for how the retirement system should be funded.

In Michigan, state and local government pension plan benefits are protected by Article IX, Section 24 of the 1963 State Constitution, which provides that "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby. Financial benefits arising on account of service rendered in each fiscal year shall be funded during that year and such funding shall not be used for financing unfunded accrued liabilities." Benefits that have been earned by covered employees for work performed are a contractual obligation of that unit of government. The State "guarantees" the pension benefits that have been earned by employees of local governments, but the Michigan Attorney General opined in OAG, 1975-1976, No. 5076, p. 563 (August 9, 1976) that the State is not a funding or benefit guarantor for local government pension obligations; those payments remain the obligation of the local public employer. Michigan public employers are required to set aside funds to pay pensions as those pensions are earned. Future pension benefits may be changed, both for new hires and for the future service of current employees, as long as benefits accrued are not impaired or diminished.

In April, 2009, there were approximately 640,700 public sector (federal, state, and local government) workers in Michigan’s workforce. Government employees are more likely to be covered by pension plans than are private sector workers; nationally, Bureau of Labor Statistics data indicate that 84 percent of state and local government workers had a defined benefit plan available, while only 22 percent of private sector workers had a defined benefit plan available. While 30 percent of government workers had a defined contribution plan available, 62 percent of private sector workers had a defined contribution plan available. The funding of pension plans is a major cost pressure for state and local governments, including school districts, in Michigan. This burden is exacerbated by recent losses in the value of assets, at the same time that the burden of funding all retiree benefits will be better defined as a result of new standards for financial reporting of other retiree benefits such as health, dental, vision, and life insurance.

Public pension systems are focused on long-term investment returns. Nationally, public pension systems have moved aggressively away from secure U.S. treasury bills to private equities including stocks and derivatives. But in 2008, the Dow Jones Industrial Average lost 33.8 percent (its third worst performance since 1901); the S&P 500 index fell 38.5 percent (the third worst performance ever); and the Nasdaq composite plunged 40.5 percent (its worst performance ever). College endowment funds lost an average of 24.1 percent in the last six months of 2008.7 In Michigan, net assets held in trust for defined benefit pensions and other postemployment benefits for members of the Michigan Public School Employees’ Retirement System declined by $9.2 billion and those for the Michigan State Employees’ Retirement System decreased by $2.3 billion between September 2007 and September 2008, due primarily to investment losses. The Detroit General Retirement System reported a net decrease in assets of $429 million for the Fiscal Year ended June 30, 2008; the Detroit Police and Fire Retirement System lost $507 million in the same period. Those losses continued into 2009. While taxpayer funded public pension systems are managed for the long term, investment losses may well result in diverting resources that would otherwise provide services to residents, as well as accelerating the shift from defined benefit to defined contribution plans, the reevaluation of other postretirement benefits, and other changes.

This report will describe Michigan’s 138 state and local pension systems in aggregate, provide details for several of Michigan’s major state and local public pension systems, compare key metrics to national averages, and explore the possible ramifications of the current economic situation on public defined benefit plans and on state and local governments.

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