News and analysis from The Center for Michigan • http://thecenterformichigan.net
©2014 Bridge Michigan. All Rights Reserved. • Join us online at http://bridgemi.com
Original article URL: http://bridgemi.com/2012/04/teacher-retirement-fund-has-45-billion-hole/
24 April 2012
When something once vital and secure dies, it must be mourned. And so David Campbell, superintendent of the Livingston Educational Service Agency in Howell, likes using the language of a funeral director when discussing Michigan’s retirement program for school employees.
“We’re in the middle of a grieving process,” he said recently, going through stacks of white papers and other documents detailing the sad state of this state’s, and other states’, public-employee pension funds, a topic he’s studied with the dedication of a born policy nerd. “And we have to go through the stages — anger, denial, bargaining, depression …”
The last stage is “acceptance” — and all acknowledge we’re still pretty far from that.
Here’s what is acknowledged: The Michigan Public School Employees Retirement System is underfunded to the tune of $45 billion.
Funding pensions is basically math, calculating such factors as money going in and out, number of people in the system, the performance of the fund’s assets in financial markets, as well as how long pensioners are expected to live. Much of the cost is borne by the state’s public school districts, which, under Proposal A, are the system’s major funders, paying a bill determined and submitted from Lansing. Ten years ago, they paid around 12 percent of their payroll costs to support the retiree system. This year, the rate is 24.46 percent — and it’s projected to rise to above 27 percent next year and 31 percent the year after that.
And with each increase, the retiree costs eat into the state’s per-pupil foundation grant to districts, forcing difficult decisions at a time when schools are under pressure to raise students’ test scores and college prospects.
It goes on: As the state’s enrollment has declined, fewer teachers are employed, which means fewer paying into the fund, a problem compounded by years of cost-trimming through privatizing and outsourcing school services, which have also cut employee contributions. Incentive programs have encouraged the oldest, best-paid teachers to retire, in part to ease districts’ payroll costs, infusing the system with even more people claiming benefits. (Today, 236,660 active employees pay into the system, while 192,435 draw out of it, on trend lines that have been steadily creeping toward one another for a decade.) The system’s investment portfolio has suffered along with millions of others, and health-care costs for retirees are doing what health-care costs always do — rising.
It adds up to a perfect storm of stress and recrimination, and a bill introduced in the Michigan Senate to address it hasn’t helped. A hearing April 11 featured teachers complaining that system reform would upend years of planning and might not even fix its problems.
“Senate Bill 1040 doesn’t fix the problem, it moves a bunch of costs to our side of the ledger and kicks the can down the road,” complained John Olekszyk, a retired teacher from Roseville who spoke on behalf of the Coalition for a Secure Retirement. Health-care costs will continue to rise, he said, while retirees and others counting on the system see the rules change, again and again.
Campbell points out that problems of MPSERS are hardly unique — or unanticipated.
In 2010, the Pew Center on the States published “The Trillion Dollar Gap,” a report blaming the nation’s policy-makers for “failing to make annual payments for pension systems at the levels recommended by their own actuaries; expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and providing retiree health care without adequately funding it.”
All the way back in 2004, the Citizens Research Council of Michigan published its own report on MPSERS in the wake of the early-decade stock-market downturn, neatly outlining all of today’s problems. “The outlook for MPSERS contributions and the effect on school district budgets is decidedly gloomy,” the report concluded. And that was before the financial crises of 2008.
Of the $45 billion in unfunded liability, the state estimates about $17 billion comes from the pension side of the benefit package. Such pensions are constitutionally protected. The rest comes from health care, which is not funded actuarially, i.e., pre-funded according to statistics and estimates of demand, but on a pay-as-you-go basis, a decision made in the 1990s during the administration of Gov. John Engler.
“School districts are not to blame for this situation,” said Rep. Rick Olson, a Saline Republican who served on the Republican legislative working group that analyzed the problem this year. “This problem has really been caused by state policies in the past.”
Or, as Campbell puts it, “They wrote checks they couldn’t cash.”
Now that the checks are arriving, Senate Bill 1040 requires participants at all levels of the MPSERS system to pay more. The proposed changes led to teachers, in the April 11 hearing, telling legislators that reforming the system now will force them to scrap plans to retire at an age when most private-sector workers are settling in for another decade or more of employment. One teacher said her intent to retire at 47 will have to be put off until 60; another said reform would “fundamentally alter our plans, our hopes and our dreams” to retire at 54, according to reports in the Detroit News and Gongwer News Service.
Olekszyk says teachers are only playing by rules set up by the state.
“We didn’t make the rules,” he said. “They dumped 17,000 more retirees into the system (in 2010, a move designed to save districts money). I don’t think they thought about the unintended consequences. Why do we have to pay for that?”
Michigan’s specific rules of retirement eligibility exacerbate the problem. Employees need only 25 years of service to retire with a full pension, if they choose to buy another five years’ worth according to a formula based on salary.
(That’s less likely now than in the past. A law passed in 2008 requires teachers to have two years of employment before they can start buying service years.)
“These things need to be pointed out,” said Campbell, “to help us with our grieving process. This system was built for a different economy. Now it’s a global economy. It used to be affordable. Now it’s not.”
The Office of Retirement Services estimates SB 1040’s fiscal impact thusly: The cumulative first-year pension savings would be $260 million and cumulative first-year health savings would be $120 million, with long-term pension liability reduced by $1.6 billion and long-term health liability reduced by $6 billion, for an estimated total reduction in unfunded liability of $7.6 billion (out of the $45 billion total).
Michael Moloney, an aide to Sen. Mark Jansen, co-sponsor of the bill, said the savings would accumulate over time. The reforms would “mitigate the growth curve,” for a “draining the swamp solution” to the problem, he said. Deborah Drick, Jansen’s chief of staff, said the extra funding will sustain the system as its oldest members leave it over the next few decades, eventually leading to equilibrium. Employees hired after June 1, 2012, would receive deposits to a health savings account for use in buying health insurance in their retirement.
“To people who say this kicks the can down the road, I’d say that if we do nothing, we’d be bankrupt in 10 years,” Drick said. “That is kicking the can down the road.”
Staff Writer Nancy Nall Derringer has been a writer, editor and teacher in Metro Detroit for seven years, and was a co-founder and editor of GrossePointeToday.com, an early experiment in hyperlocal journalism. Before that, she worked for 20 years in Fort Wayne, Indiana, where she won numerous state and national awards for her work as a columnist for The News-Sentinel.