The Source of Schools' Pension Problems

In a recent Mlive.com article, Michael Rice, the superintendent of Kalamazoo Public Schools, places the blame for skyrocketing school employee pension costs on policies enacted by current and past state Legislatures. In particular, Rice disapproves of policies that encourage privatizing noninstructional services, expanding charter public schools and authorizing early retirement incentives for school employees. He’s right to target the Legislature, but does so for the wrong reasons.

Superintendent Rice’s implication that the state forces districts to contract out for noninstructional services is wrong: these decisions about privatization remain in the hands of local schools boards. In addition, the alleged causal relationship between school employee pensions and privatization is backward. The overall cost of the pension system does not increase when districts contract out for services. Many districts seek savings from privatization because of the high cost of pensions.

More than half of Michigan’s 550 school districts contracted out for one of their three main noninstructional services in 2011 (transportation, janitors and food). Kalamazoo Public Schools itself saved money by contracting out the last two in each of the last seven years.

The complaint about charter public schools is also misleading. Charter schools are not prohibited from participating in the state-run school pension system (called the Michigan Public School Employees' Retirement System, or MPSERS). Charter schools pay into MPSERS at the same rate as conventional school districts for employees who work directly for the charter school.

The difference is that most charters contract out not just noninstructional services, but also the actual instruction itself. The private employers of charter school teachers generally provide them with 401k-type retirement plans that create no new taxpayer liabilities.

In fact, since the state consistently underfunds the school pension system, both charter schools and privatization actually reduce the pension system’s long-term liabilities by enrolling fewer future beneficiaries than there otherwise might be.

Moreover, no state policy requires any student to attend a charter school. If parents were perfectly satisfied with their children’s state-assigned schools, there would be no charters. Therefore, it is parents who ultimately determine how many charter schools are created, and how many employees they hire.

In contrast to those spurious claims, Superintendent Rice is correct that a short-sighted early retirement incentive enacted by the Legislature in 2010 has increased the pension system’s cost, and so increased the mandatory contribution rates imposed on districts. Starting next school year, they’ll be required to pay 2.66 percent of payroll to fund this cost-shifting tactic.

That comes on top of the 12.49 percent required to catch up on the gap between the pensions earned by employees and what the state has set aside to pay for them. This rate will increase to 16.24 percent for the 2013-2014 school year. Another 8.75 percent of payroll expense comes out of school district budgets to provide (optional and completely unfunded) health insurance benefits to current retirees. These are the real drivers of skyrocketing MPSERS costs.

Theoretically, the early retirement incentive provided districts an opportunity to reduce payroll expenses in the short term by replacing high seniority teachers who cost more with new lower-paid ones (seniority is the primary determinant of individual teacher compensation).

However, because the Legislature has failed to replace the “defined-benefit” school pension system with a 401k-type system for new hires (as was done for state employees starting in 1997), and because the state consistently underfunds it, each replacement teacher adds another long-term liability to the system.

Misleading readers about the real causes of regular school district’s financial difficulties as it relates to pensions is a disservice to taxpayers. Among other things, it undermines efforts to properly fix  the unsustainable school pension system.

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