With road funding stuck in a political logjam, Michigan Gov. Gretchen Whitmer opened the door this week to extending the payment schedule to reduce the school retirement system's unfunded liablities as a means to free up cash.
Extending the amortization schedule to pay down the roughly $30 billion of unfunded pension obligations was first introduced last month by the West Michigan Policy Forum as part of a $10 billion pension obligation bonding scheme.
The original proposal had two components: a pension obligation bond and a change of the amortization period. The proposal estimated almost $1 billion of savings with the change.
Whitmer rejected the bonding component but said this week she is willing to discuss with lawmakers the idea of extending the payment schedule.
"Some of these pieces that we're hearing about from internal Republican conversations are maybe something worth keeping on the table," Whitmer said.
Extending pension payments would free up cash flow at a time when the state budget is very tight, said Eric Lupher, president of the Citizens Research Council of Michigan, an independent policy research organization.
“There are a number of cost drivers coming down the pike that require funding,” Lupher said. “State revenues are basically flat once those come off the top. Freeing up funding would allow the state to take motor fuels out of the sales tax base and dedicate some existing money to roads.”
But extending the payment schedule would kick more of the costs of the pension system on to future taxpayers and generate more interest expense, according to James Hohman, director of fiscal policy at the Mackinac Center for Public Policy, a think tank focused on Michigan issues.
Michigan’s school retirement system is a closed system and is on schedule to pay down the roughly $30 billion in unfunded liabilities by the end of September 2038, a deadline set by former Gov. Rick Snyder's administration.
“There would be no savings from extending payment schedules,” Hohman said.
“It would only save some cash over the short term while increasing payments over the long term. Lawmakers tend to think that there higher valued uses for cash than putting it in the pension system, which is one reason why we have so much pension debt in the first place,” he said.
"Intergenerational equity always is an issue when discussing pension funding, but the fact that the teacher pension system is closed means that current or future education services are not part of the mix,” Lupher said.
Whitmer proposed a 45-cent-per-gallon hike in the fuel tax to raise the extra $2.5 billion the Michigan Department of Transportation said is needed annually for roads. The fuel tax increase is a key component of Whitmer’s $60.2 billion budget proposal for fiscal year 2020 which begins Oct. 1. Republican lawmakers are against the idea of raising taxes.
The Legislature has been in a summer recess for nearly five weeks without a deal in place on road funding and the state's $57 billion budget for the fiscal year that begins Oct. 1.
The Senate has proposed a plan to divert $600 million in state income tax revenue to road repairs in 2020, a year earlier than planned. House Republicans have proposed shifting sales tax revenue from gas sales — worth about $540 million annually — to road repairs from general state funding.
Another idea that has been floated by Republican lawmakers is to allow local governments more flexibility to levy local gas taxes, possibly up to a nickel, and vehicle registration fees. The local taxes would come on top of the state and federal gas tax drivers already pay, as well as state fees to register vehicles that are collected annually.
“A pension bond proposal, which was a recycled idea from the previous administration, doesn't solve the critical problems that our deteriorating infrastructure is facing," said Tiffany Brown, Whitmer’s spokeswoman. "Any solution that doesn't educate our children and fix the roads, isn't a real solution, we have to do both. The governor remains open to hearing alternative viable solutions, as long as those solutions can fix the real issues that Michiganders are facing."
