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Original article URL: http://bridgemi.com/2012/07/millions-at-stake-for-schools-as-senate-considers-teacher-retirement-change/

Public sector/Talent & education

Millions at stake for schools as Senate considers teacher retirement change

David Campbell, superintendent of the Livingston Educational Service Agency, has been watching the debate over reform of the Michigan Public School Employees Retirement System (MPSERS) for years from multiple perspectives, as a public school administrator charged with spending scarce resources, and as a future pensioner himself who will feel the effects of the reforms. All of which makes advocating for MPSERS reform more complicated and less gratifying than, for instance, advocating for direct spending to benefit students.

The Legislature has grappled this session with fixes to the system, currently underfunded by $45 billion. Senate Bill1040 includes a wide range of reforms, affecting workers across the spectrum from new hires to retirees. However, some in the Senate are balking, asking for the system to be switched to defined contribution-only for new hires, rather than the hybrid system now in place. The Senate returns for a session on Wednesday (July 18).

Bridge asked Campbell, who is president-elect of the Michigan Association of School Administrators, for his take on the reform efforts so far.

Bridge: What are your thoughts at this point in the process?

A: I think the House has a pretty good plan. It is balanced and fiscally responsible. It is by far the most substantial pension reform we have seen to MPSERS and puts it on a much more sustainable course. I would recommend they re-evaluate their recommended switch from funding the system based on a percentage of payroll to the cost of operating expenses (COE), as that will have harmful unintended consequences. However, they built time into the bill to study it in more depth, so I support the House bill.

Veteran school administrator David Campbell argues that the Michigan Senate should follow the House's lead in reforming the state's teacher pension program -- a move that would save millions of dollars for local school districts.

Bridge: What about the Senate’s plan?

A: The Senate would like to convert us to a defined-contribution plan only. That’s two fundamentally different proposals. The House and Governor’s Office have significant concerns with (that), because they say the conversion costs are just too high. And it will end up being more expensive in the long run. The hybrid pension plan that new educators hired since July 1, 2010, are on is fiscally responsible, so I am not sure the defined contribution accomplishes much.

Bridge: Because you need a large amount of pre-funding?

A: Yes. And that’s the issue. The House Fiscal Agency projects the cost to converting to a defined contribution plan to be about $8 billion. I talked to two Republican senators, and they don’t think it is that high. The cost projections they are looking at are different than what the House is seeing, so they need to study the cost projections of either change in more depth. I hope the budget projections are being done without political agendas, so wise decisions can be made.

Bridge: Why is it so much higher?

A: It has to do with funding the pensions of those currently in the system while new employees would not be in the system. But … if the House plan passes, next year’s savings to Livingston County public school districts is nearly $4.5 million. We’ll be paying 27.37 percent of payroll (in MPSERS contribution) if they don’t do anything. If it’s capped at 24.46 percent (under one version of the House plan), that’s substantial pension reform. It’s not something to laugh off.

The 2010 pension reform was less than effective. It ended up giving a 7 percent higher pension to tens of thousands of retirees while giving a 3 percent pay cut to those still working. The total savings for all Michigan school districts is about $250 million per year, if the House plan passes. You can’t say that’s not substantial pension reform. Where’s that coming from? It’s coming from the core of the reforms, which means less generous benefits for retirees, current employees and future employees.

Bridge: Do you think support of the House plan is shared by most people at the district level?

A: My sense is that most district administrators support the House plan, for a lot of reasons: It’s fiscally responsible, in that it pre-funds the health care, and that helps the state’s credit rating and protects promised benefits. It requires retirees to pay more. And it puts it on a path of sustainability. That’s responsible. It keeps the pension plan in place, but a less generous system.

My biggest concern with all this is that I don’t want Michigan to lose the most talented and marketable educators to other states. Compensation is all about attracting and retaining talent. And the ones that we lose when you put yourself at a competitive disadvantage are your sharpest and most marketable educators. Always. That’s the way the labor market works.

And if we put ourselves at a competitive disadvantage with neighboring states by not having a pension system at all, we don’t lose our people who are easy to replace, we lose the most marketable. That means math, science, special education, foreign language, counselors and administrators. There are just not enough qualified and talented people going into those very important areas.

I have a friend who says, ‘I’m sure there’d be 100 applications for any job you’d post.’ Are you kidding? For an occupational therapist or speech therapist? Maybe three. We are competing with hospitals, who pay well for those. 

If you go to defined contribution only, we will put ourselves at a disadvantage with other states. I was talking to a senator who said private companies are all defined-contribution now and have been for years. I said, ‘Yes, but I bet those CEOs did a comparison and benchmarked what the competition is doing before their conversion.’

Bridge: What is the benchmark for neighboring states?

A: Nobody’s going to defined contribution only, except Alaska, I believe. States around us have less generous systems or are putting pensions on a diet, like the House is trying to do and was partially done with the hybrid plan in 2010. We have to work longer, take smaller pensions and pay more for our health care to stay competitive. Implementing those changes takes time, as it is important to be fair to people who have been in the system for many years.

Bridge: What does $4.5 million mean to a district like yours?

A: Each district will make the decisions that are best for them. Some may take their savings and hire more teachers to lower class sizes. Some may hire back counselors or assistant-principal positions that had been eliminated. Others may take the savings and reduce their deficit, or use it to not charge parents “pay to play” fees for athletics. The bottom line is thatMichigan’s public schools spend far more money sustaining the pension system than most states and it needs to be brought under control.

Bridge: What created this unsustainable system?

A: It evolved over the years and was built on the strength of the auto industry when it was at its peak.  The system became more generous than was sustainable when the global economy caught up to Michigan and permanently changed our economy. If our leaders in Lansing had implemented the reforms the House is considering years ago, we would be in far better shape and some of the reforms may not need to be as drastic.

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.

Previous coverage on MPSERS

Teacher retirement fund has $45 billion hole

GOP fix for MPSERS calls for bigger checks from teachers, retirees

Educators see violation of trust in pension proposal

Teacher pension gaps pop up around Great Lakes

5 comments from Bridge readers.Add mine!

  1. Jeffrey L Salisbury

    Talk about a manufactured “crisis” – the “unfunded liability” owes its existence to state lawmakers who refused to increase the retirement contributions over the years as it became increasingly clear the pension fund was in trouble and needed an infusion of deposits not withdrawals and a boost in contributions at the state level during the housing crisis and overall recession causing the market (pension fund investments) to fall. Instead, the state itself along with local school districts offered early retirement and privatization incentives for public employees, further eroding the retirement fund and then passed along any “losses” to local districts forcing them into larger and larger payroll contributions. All of this only points out the short-sightedness of “leaders” in Lansing.

  2. Rich

    I would like to see a few provisions in any new plan. One is that employees not be allowed to buy years of service. Money put into a plan at the end of a persons career is not the same as money put into a plan at the beginning of a career, or put another way, the money contributed to buy years does not enjoy the power of compound interest. The second provision would be in the amount paid as pension when a person has not reached a certain age. Like social security, there should be significant reductions in pension if one chooses to start taking their pension at 51 as opposed to 61 or 65. And last, accumulated pay should not be used to boost a pension. Accumulated vacation pay can be paid as a lump sum at retirement, but in no way should it be used to boost the pension. Likewise, any vacation days not used at the end of the year should be forfeited. Sick pay is a benefit for sick people. There should be no accumulation of sick pay.

    The private sector operates like this. There should be no difference for the public sector.

    1. Glenn

      Rich obviously has no understanding of MPSERS because in effect his provisions already exist. First of all, the cost of purchased years is actuarily determined and it is the amount a school employee would have contributed naturally. Therefore, the system is protected and the cost to the employee who purchases time just before retiring is prohibitively high. Secondly there is a direct correlation between the length of time a school employee works and the amount of his or her pension since the amount is based on years of service and final average compensation. I retired at 56 with 35 years of service. My pension is at least 15% less than it would be if I retired at 66. That figure is base only on years of service as there is no way of knowing what the increase in my final average would be, if any. Finally, pay for unused sick days is specifically excluded from calculating final average compensation, as are a dozen or so other forms of pay that have the specific purpose of increasing final average compensation. By the way, pay for unused sick days is a type of deferred compensation that districts account for in their total compensation package, so if employees receive it, then they have probably given up something else in return. It all evens out in the end.

  3. T.W.Donnelly

    During the Engler years, there was a rush to cut taxes of all kinds. Pre-funding of the pension system was put on the chopping block, causing some of the present day shortfalls. Initially putting the charge-back for pensions out of per-pupi state aid was a form of smoke and mirrors, since the legislature was off the hook for financing pensions. It became one more bill that school districts had to pay. When it was only 2-5%, it might have been sustainable, but now about 25% of per-pupil state aid goes to the pension fund. This system was set in motion by Engler and company, now long gone. School employees had NO part in creating this system. Yet now, school employees are being hit with more deductions for the pension system shortfalls THROUGH NO FAULT OF THEIR OWN. General state revenues should fund the pension system, not squeezing dollars out of school district state aid payments. This is another attack on the teaching profession in Michigan.

  4. Charles Richards

    “If you go to defined contribution only, we will put ourselves at a disadvantage with other states” This is a meaningless statement. It all depends on the level of contribution. A sufficient contribution will buy as good a pension as a defined benefit. It is true that the employee does bear investment risk rather than the employer, but there have been cases, such as Rhode Island, where having a defined benefit wasn’t a protection. And what really counts is total compensation.

    Mr. Campbell is absolutely right about losing more marketable people. That results from being in the strait jacket of a union contract where everybody with equivalent seniority and certification.

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