Michigan’s school administrators are right to complain about the high costs of state-mandated pensions for school employees, but they make the wrong prescriptions for remedying the problem. A recent article by Kalamazoo Gazette education reporter Julie Mack gives an illustration of the problem.
In the piece, Mack points out that the 24.46 percent of payroll that schools are required to contribute to the Michigan Public School Employees’ Retirement System is unsustainable and is draining school resources. But the legislators and school officials she interviews are wrong when they propose the system could be fixed by corralling public charter schools and school contractors to pay into MPSERS.
Currently, most charter school employees, because they are not technically employed directly by charter school boards, do not participate in MPSERS. Nor do any other school employees who are employed by private contractors. In lieu of participating in MPSERS, most charter school and support service contractors offer employees retirement benefits through 401(k) retirement accounts or some other defined-contribution retirement system.
Michigan’s large and growing unfunded school pension liabilities are the primary cause of high MPSERS contribution rates. Payments on unfunded liabilities are half of the total contribution. The state has unfunded liabilities for a couple of reasons, but the most significant is inaccurate assumptions about investments growth. The state assumes a return of 8 percent on pension funds it invested, but in the past 14 years these funds have only yielded an average annual return of 5.4 percent. The disparity between what the state has saved and what it is required to pay out in retirement benefits is now $17.6 billion.
Indeed, the unfunded liabilities have grown 6,500 percent since 2000, when MPSERS maintained a relatively-modest $246 million gap.
There’s no way around the fact that the state has to come up with this $17.6 billion. It doesn’t need to do this right away, however, and it is currently spreading the payments out over the next 26 years. But even under the state’s backloaded method for paying down this debt, the annual payment is still $1.05 billion, according to the state’s most recent actuary report.
And this $1.05 billion needs to be paid regardless of how many employees are in the system.
Current state policy is to charge it as a percentage of payroll, but there are alternatives. For instance, the state could directly pay MPSERS unfunded liabilities, perhaps with money otherwise directed to districts’ foundation allowances. (This is not unprecedented — prior to proposal A, the state directly paid most MPSERS contributions.)
Still, the fact that there are fewer employees in the system does not impact MPSERS’s unfunded liability problem that the state created for itself.
In fact, more parents choosing charter schools and districts opting to contract out for noninstructional services have actually lowered MPSERS’s total unfunded liabilities. Had employees at charter schools and school contractors been part of the pension system from day one, the state would have developed a larger school pension liability.
But pointing to the charter schools and contractors is a convenient excuse for established school interests. They’ve both been bogeymen for school unions, and school officials frequently gripe about charter schools — charters threaten the monopolized school market school officials have grown accustomed to.
Partially to their credit, however, pension reforms take a long time to have material fiscal effects. The state’s calculated costs to prefund benefits are small compared to the costs to provide benefits already earned and underfunded. It is also difficult to address the benefits already earned: pension benefits are protected by the state Constitution. Requiring others to pay for those benefits is a way to instantly lower MPSERS contribution rates, but it does not fix the unfunded liability problem. It ignores the structural problems and shifts responsibility for the costs of the problem.
Michigan’s school pension policies allow the state to get service from employees now and pay for it later. Unfortunately for the state and for school districts, later has arrived. Over the long term, this can be fixed by converting to a defined-contribution retirement system, which does not allow the state to pass pension costs to the next generation.
Public school officials, their employees and taxpayers alike should support a plan that fulfills the promises that are made to employees without becoming an excessive burden.
James M. Hohman is assistant director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.