The Michigan proposal to bring more accountability to public pension funds in the state should be welcomed. Public retirement plans often consume a huge amount of government budgetary spending. A 1993 report of Chicago's four public pension plans, for example, noted the city spent 42.6% of its $621 million in property tax revenue in contributions to those plans. So a little improvement in management - whether in investments, brokerage transactions or custodial work - could redound to greater effectiveness of the fund in financing benefits.
Performance audits, in fact, should be established as standard operating procedure, suggested Brian Sontag, auditor of the state of Washington, in a 1999 commentary in Pensions & Investments. He argued the generally high budgetary costs of public pension plans and the increased complexity of the investments of the plans, among other reasons, all necessitate better oversight.
Michigan and other public funds generally are well run, officials point out. But there is room for improvement, especially as the knowledge of pension financing has become more sophisticated over the years. The Michigan review has produced a host of recommendations, some of which are expected to be introduced as part of a legislative proposal in May. One recommendation would seek to make more information about the plans available to the public. Another would seek to produce a statewide report card, posted on the state's website, including information about investments and funding levels for the state and local plans.
Other recommendations in Michigan would require actuarial evaluations of the impact of pension benefit increases before they are granted. As Jonathan Barry Forman, a law professor, pointed out in a P&I commentary about Oklahoma's entrenched pension funding problems, legislatures have been notorious for granting pension benefit increases without regard to funding them. Funding levels are more closely regulated at corporate and other private plans under the Employee Retirement Income Security Act of 1974. Because public plans aren't under ERISA, there is all the more reason for scrutiny.
It's a wonder such recommendations as those made in Michigan weren't adopted years ago. Michigan ought to see what other states have done, looking for any models to adopt, such as the one Mr. Sontag suggested. All states that haven't already, ought to conduct the review Michigan is undergoing.
