Pension Costs Eating Up Extra School Money

In the four Michigan budgets approved by a Republican-controlled Legislature under Republican Gov. Rick Snyder, revenues at the Dexter Community Schools have moved in line with many public school districts throughout the state: The Washtenaw County district gets more state dollars now than it did under Gov. Jennifer Granholm’s last budget in 2010-11, even though it now serves fewer students than four years ago.

However, Dexter Community Schools Superintendent Chris Timmis says his district isn’t experiencing any real spending increase. Timmis calls the total of $1.8 million extra the district has collected from the state in those four years a “shell game.”

The reason is the increasing costs of the underfunded school employee retirement system, which has consumed all the extra dollars the district gets.

“Considering this an increase in funding is no different than if the Legislature passed a law sending a $2,000 check to you then mandated you pay an additional $2,000 in taxes, due immediately,” Timmis wrote in an email. “In the end, it was a shell game. Hence, we actually had approximately $700,000 less to operate last year than in 2010-11, with regard to dollars available to educate students and serve our community.”

The rising cost of paying to the Michigan Public School Employees Retirement System (MPSERS) is not a new development for school districts.

Dexter's payments into the pension system escalated from $4.9 million in 2012 to $5.4 million in 2013 and then to $6.1 million in 2014. The district's total revenue from all sources was $46 million last year. The pension burden is not likely to go down soon, given that MPSERS has accumulated $26.5 billion in unfunded liabilities.

Earlier this year, John Rakolta, the CEO of Walbridge construction company, called the current defined-benefit retirement plans a “budget killer.” He participated in the Coalition for the Future of Detroit Schoolchildren, which recommended ways to address the broken finances of the Detroit school district.

“It’s a society killer,” Rakolta said about defined-benefit pensions. “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.”

One proposal to gradually unwind the MPSERS burden is to no longer offer defined-benefit pensions to new employees, and instead give them contributions into a 401(k)-type system. Such a system has been in place for state employees hired since 1997. A 2011 study published by the Mackinac Center showed it has relieved taxpayers of up to $4.3 billion in unfunded liabilities.

School employee unions such as the National Education Association have campaigned against switching new employees to a defined-contribution plan, saying 401(k)-type plans are not as good a deal for teachers. Not all public school officials agree, at least in part.

“Conceptually, a 401k system makes sense,” Timmis said. “Logistically, MPSERS has a structural problem. What is the solution to the current structural problem while shifting to a new system? The math just doesn't work. If you know of a sound financial projection and model that shows how much money would be needed upfront to make the change, please send it my way.”

Timmis is referring to a “transition costs” argument promoted by unions and officials who work in government pension offices, among others. They say that schools will incur these costs by closing the defined-benefit system to new employees. Current government accounting standards, they add, require the system to make up past underfunding at an accelerated pace, which would mean larger pension fund contributions for several years.

James Hohman, the fiscal analyst who co-authored the Mackinac Center study cited above, says this argument is based on a misinterpretation of the accounting standards.

“These costs are completely avoidable,” Hohman said in an email. “New employees should be given a plan where their employers pay for benefits as they are earned. That way we can prevent our current $26.5 billion pension debt from happening again.”