School Pension Costs Have Increased by $622 Per Pupil

In the spring of 2011, when Gov. Rick Snyder proposed what was characterized as a $470 per pupil reduction in public school funding, media reports described this as so “massive” that it left school officials “in a state of shock.”

"This is going to be potentially devastating," declared David Martell, the executive director of the Michigan School Business Officials organization.

Yet, those who advocate for spending more on public schools have been nearly silent about a growing and far more severe threat to budgets — the skyrocketing cost of the school employee retirement system.

In 2010, the pension system cost $1.2 billion. In 2014, just four years later, this had risen to $2.1 billion. The increase alone cost schools an estimated $622 per pupil over that period.

The drain has increased despite two attempts by the Legislature to rein in the cost of the defined-benefits school pension system.

Gary Naeyaert, the executive director of the Great Lakes Education Project, said the growing costs are no surprise and have been projected going back to 2011 and before.

“These were known and they are coming home to roost,” Naeyaert said. “We hope people will be startled by this tremendous increase. When you are in this deep in a hole, the first thing you should do is stop digging. We have to reform MPSERS and put an end to defined-benefit retirement plans.”

“We have to stop new employees from getting defined-benefit plans. We have to stop it. Or this liability is going to grow even further. We can no longer afford to allow new teachers to be in the system,” he said.

James Hohman, the Mackinac Center for Public Policy's assistant director of fiscal policy, has co-authored or contributed to several studies of the problem, and agrees that new employees should no longer be enrolled in the system, and should instead get employer contributions to individual retirement savings accounts.

One of those studies examined the separate pension system for Michigan state employees, which was closed to new hires in 1997. It estimated that as of 2011 this reform had saved taxpayers between $2.3 billion to $4.3 billion. There are approximately three times as many school employees as state employees, so the impact of failing to adopt this reform for schools would be that much greater.

The school pension system has accumulated a $26.5 billion unfunded liability. The state is trying to catch up on years of persistent underfunding, but can’t keep up with the increased amounts its own actuaries say are necessary to feed “the monster that ate school funding increases.”

Specifically, from 2010 to 2014, the state fell $1.8 billion short of the annual required payments the accountants project are necessary to start catching up on past underfunding. For example, in 2014 the calculations showed that a $2.1 billion payment was required if the unfunded liability is to be amortized over a reasonable number of years. Yet the actual amount contributed was $1.6 billion. Hohman says that this missing $500 million will likely increase the unfunded liability down the road.