State's Cost of Teacher Pension System Quintuples

Payments by the state of Michigan to cover the costs of its school employee retirement system have more than quintupled in just the past three years, and are approaching $1 billion in the current year.

In the 2011-12 fiscal year, the state capped the amount that individual school districts must pay to the Michigan Public Schools Employees’ Retirement System (MPSERS) and kicked in $155 million toward the annual cost of the system, which currently has an unfunded liability of $25.8 billion. State payments have increased since, reaching $796 million this year, according to the Senate Fiscal Agency.

The stress the system is placing on school districts can be seen in one of the recommendations of the “Coalition for the Future of Detroit Schoolchildren." The group says the state should exempt the Detroit school district from its share of these costs, which is estimated at around $100 million this year. Coalition co-chair John Rakolta has called these committments “a budget killer.”

“It’s a society killer,” said Rakolta, the CEO of Walbridge construction. “Society can’t afford them anymore. Who gets penalized? Kids. … These kids are being penalized for all the retired teachers. This is on a statewide basis, not just Detroit.”

Such a move would shift the costs from the Detroit district to other school districts and statewide taxpayers. Rakolta said the coalition did feel some pressure to not make any mention of the retirement system in its proposal, and it never considered calling for the state to replace the defined-benefit pension with a 401(k)-type defined-contribution plan for new employees.

But Detroit is hardly the only district feeling the pinch from pension obligations, and there are some indications that the costs are causing other public school officials to begin thinking about alternatives.

Christine Stead, an Ann Arbor school board member, said switching to a 401(k)-type plan could be done, but only if teachers’ compensation were increased.

“Moving to a defined contribution retirement benefit model makes sense if we address the compensation model in a comprehensive manner,” Stead said in an email. “Moving toward private market models should include retirement and compensation. We often hear that we need to run our schools more like a business. Businesses pay competitive wages, control their revenue and costs and contribute to retirement savings plans, often in the form of a 401(k) savings account.”

John Ellsworth, a high school teacher at Grand Ledge Public Schools, said he wants the defined-benefit annual pension plan that he signed up for when he became a teacher. He also said the entire compensation of teachers should be considered if there were any switches required under a reformed pension system.

“I felt called to be a teacher, and I accepted the financial deal: moderate salary, good benefits, and a secure retirement,” Ellsworth said in an email. “In Michigan, that financial deal is eroding. The moderate salary is deteriorating (especially for new teachers). Instead of being provided good benefits, teachers are now contributing more and more to maintain okay benefits (and thus deteriorating take-home pay even more). The secure retirement is now under assault too. Instead of the retirement benefit being something that was earned, it often is called a ‘legacy cost.’ So, when you ask what would it take for teachers to sign off on switching to a defined-contribution plan, I have to look at the entire financial deal.”

“Personally, I'm not interested in switching; I made my career and life choices based on the financial deal that existed. I still bristle with the negative changes that have already happened to that financial deal. I want my secure defined-benefit retirement because that was part of the financial deal. If Michigan wants to attract the best and the brightest into the field of education, then the financial deal must be good enough to do so. I think looking at retirement in isolation will not lead to teachers signing off on a switch. Besides, teachers like security, routine, and independence; teachers would be more uncomfortable having to rely on the stock market for their retirement,” Ellsworth said.

James Perialas, a teacher and president of the Roscommon Teachers Association, said he understood that defined benefit retirement programs are unsustainable but said that the state should continue them since that is what was promised.

“If you think about it, they either have to run like a ‘ponzi’ scheme where new employees finance the old ones or they have to be supported (subsidized) by the taxpayers,” Perialas said in an email. “If we were starting from scratch, in today’s economic climate, pensions would never have been created. But, because they were and are a ‘promise’ and in someways like a long-term contract, as a teacher currently under the system, I want what’s coming to me.”

Perialas said teachers have made retirement plans based on being told they would have a lifetime pension.

“Plans have been made for my retirement. I don't put nearly as much into a 403(b) as my private sector friends have. They have no pension, so therefore, they save more, or have employer contributions into a 401(k),” he said. The state should “bite the bullet” and continue to pay pensioners what has been promised until “the last one is standing,” Perialas said. “I want nothing less than what was promised.”

None of the reform proposals to date, including one that passed the Michigan Senate in 2012, would require current employees to switch to a defined contribution system. They all apply to new employees only.