Whitmer rolls out the budget today, and state debt could get its own spotlight

LANSING — Billions of dollars in annual payments to reduce government pension liabilities are finally resulting in the state having more available cash to spend on programs, Gov. Gretchen Whitmer is expected to announce when she presents her sixth state budget Wednesday.

The state's financial position has improved significantly since Whitmer took office in 2019. But Whitmer's claim in her January State of the State address that she has paid down $18 billion in state debt since taking office is not supported by data from the State Budget Office.

And critics say that Whitmer's plan to save about $670 million by reducing state payments to the Michigan Public School Employees' Retirement System (MPSERS) is premature and a sign the governor is searching for revenues to fund programs she launched or expanded with the help of short-term federal COVID-19 funding and huge budget surpluses that have since largely dried up.

Has Whitmer reduced state debt by $18 billion?

Whitmer, a Democrat, said in her Jan. 24 speech at the Capitol that her administration has "paid down $18 billion of debt" since she took office.

How much a state government owes is important because interest payments on debt can take money away from other priorities. Having too much debt can also restrict a state's ability to borrow money when it needs to do so, and/or significantly increase the cost of borrowing. In the case of pensions, excessive unfunded liabilities can result in retirees receiving fewer benefits than they were promised and/or increased contribution requirements for government workers and/or retirees.

Asked to provide a breakdown of Whitmer's debt reduction number, the State Budget Office provided a summary of annual payments the state has made into three state pension funds since 2020 — the first budget year impacted by Whitmer's policies.

Since the 2020 fiscal year, the state has paid $11.3 billion into the Michigan Public School Employees' Retirement System, just under $6.3 billion into the State Employees Retirement System, and a little over $792 million into the State Police Retirement System, for a total of just under $18.4 billion, said Lauren Leeds, a spokeswoman for the Department of Technology, Management and Budget.

But equating annual payments with annual reductions in overall pension fund liabilities is a little like equating annual mortgage payments with reductions in an overall mortgage. They don't track one for one. For example, the State Budget Office said the state paid just under $5.4 billion into MPSERS between 2020 and 2022. But during that time, unfunded MPSERS health care liabilities decreased by just over $3.6 billion while unfunded MPSERS pension liabilities increased by more than $1.2 billion, to nearly $35 billion, for a net overall reduction of about $2.4 billion, according to data published by the Senate Fiscal Agency.

Also, looking only at three pension funds provides no information about overall state debt. Long-term bonded debt, for example, increased to about $6.4 billion in 2022 from about $6 billion in 2020, according to the most recent annual comprehensive financial reports published by the state.

Leeds has not responded to questions sent Jan. 26 about the debt reduction breakdown she provided and changes in overall state debt.

Does that mean reducing pension payments is misguided?

Not necessarily.

Though MPSERS unfunded pension liabilities remain significant, the state calculates that unfunded MPSERS health care liabilities, which were reduced from $3.7 billion in 2020 to $88.6 million in 2022, are now about to hit zero, Whitmer spokesperson Bobby Leddy confirmed Tuesday.

That means the state can save about $670 million by reducing its overall MPSERS payments, reinvest that amount in schools, and still meet its statutory requirements and continue to reduce unfunded liabilities, Leddy said. Whitmer is proposing a MPSERS payment of about $1.8 billion for 2025, he said.

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The Michigan Education Association, a union representing teachers, supports the plan.

Robert Dwan, executive director of Michigan School Business Officials, said Monday he has not heard enough details to express an opinion.

What are the arguments?

Whitmer, in remarks prepared for her budget presentation, said steps her administration has already taken and continues to take to reduce pension liabilities allow for "freeing up hundreds of millions of dollars for students now while shoring up the retirements of our educators.”

She said the state's Rainy Day Fund, which is money Michigan can draw on in the event of an economic downturn, is already at a record high of just over $2 billion and would increase to more than $2.2 billion under the budget she will propose Wednesday. A separate Rainy Day Fund she created just for Michigan schools holds an additional $450 million.

"Let’s keep making smart financial investments to set up future generations of Michiganders for success," said Whitmer, whose budget plans include expanding free preschool to all Michigan 4-year-olds, not just those whose families qualify based on their income.

But Jase Bolger — a Republican who was House speaker in 2011, when former Gov. Rick Snyder launched a plan to reduce unfunded public pension liabilities in Michigan — said now is not the time to ease off.

Whitmer and lawmakers have largely spent a record state surplus that was pegged at $9.2 billion in January 2023 and Whitmer is now looking for other ways to finance a larger state government, Bolger said.

"Unfortunately, it's an error that often gets repeated," said Bolger, a policy adviser to the West Michigan Policy Forum. "When money gets tight, people will rob from pension funds to spend on today's issues."

If the unfunded MPSERS health care liability has been reduced to zero, that's something to celebrate, he said. But instead of redirecting that money to new programs, it should instead be used to reduce what is still a significant unfunded MPSERS pension liability, he said, adding: "We're still in a deep hole."

How much debt does the state of Michigan have?

There is no uniform standard for measuring state debt, but most surveys place Michigan neither among the most debt-ridden states nor among the most debt-free ones.

A recent study from Forbes Advisors, using data from the fourth quarter of 2022, pegged state government debt in Michigan at just over $80 billion.

As a percentage of state gross domestic product (GDP), 30 states had a lower debt than Michigan in the Forbes Advisors study. Measured on a per-capita basis, Michigan was in the middle of the pack, with 23 states having lower government debt.

The U.S. Census Bureau publishes an annual survey of state government finances, though its data is typically 2 or more years old. The survey, which does not include non-pension, post-retirement benefits such as health care in its calculation of state debt, pegged outstanding state of Michigan debt at $33.6 billion for 2021.

Contact Paul Egan: 517-372-8660 or [email protected]. Follow him on X, @paulegan4.

This article originally appeared on Detroit Free Press: As taxpayers tune into state budget, what to know about state debt