'Stranded Costs' Will Always Be Paid by Taxpayers

Michigan’s government unions are attempting to use the pension fund as another way to nerf public charter schools and school contractors.

The unions would like charters and contractors to pay for the underfunding of pensions earned by school employees (their members), saying that these capture the “stranded costs” of the system. But corralling additional members into the pension system will create more long-term pension problems without fixing any of the system’s short-term challenges.

Pension contributions consist of “catch up” payments for previous pension underfunding, the costs of nonobligatory retiree health benefits and “normal costs,” which are the assumed amount needed to pay for the benefits earned by members in a year. Currently, 86 percent of pension contributions go to catch up on underfunding and to pay retiree health insurance. But the costs for benefits already earned must be paid regardless of how many people are in the system and how much those members are paid.

Taxpayers will be paying for this regardless of whether charters or contractors are included. Both charters and school contractors are ultimately funded with taxpayer dollars. Forcing these groups to pay into the pension system does not change the equation from the perspective of taxpayers. Ultimately, there is no escape for taxpayers on these “stranded costs,” outside of reducing retiree benefits for public school employees (something most taxpayers do not receive at all).

What matters to taxpayers is the open-ended promises made by politicians now to pay someone with their money in the decades to come. The perennially underfunded pension system makes those promises, and should be phased out.

In fact, roping charters and school contractors into the system will be a net negative for taxpayers, as adding more members to the system will create new underfunded long-term liabilities for which taxpayers will ultimately be responsible.

Instead, as has been stated frequently, the state should convert to a defined-contribution system that would limit Lansing’s ability to pay for benefits with future taxpayer resources.

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