Overspending, Pensions Push Michigan’s No. 2 School District To Fiscal Edge

The second largest school district in Michigan is “on the path to financial disaster” and could become a candidate for a state takeover. That’s according to the report of an intermediary, dubbed a fact-finder, who was appointed to help the district and its union resolve a contract impasse.

Although the report authored by a longtime law professor and attorney does not mention it, Utica is also a textbook example of how decades of state mismanagement of the school employee retirement system has gutted school budgets across Michigan.

As evidence of Utica’s overspending, the fact-finding report says that the district has repeatedly had to dip into its reserve funds to balance budgets over the past 10 years, meaning it often spent more than it took in. As a result, the district’s general fund balance has dropped from $45.0 million in 2006-07 to $20.7 million in 2016-17, a drop of $24.3 million.

Like every other Michigan school district, Utica is getting crushed by the burden of having to catch up on $29.1 billion worth of underfunding in the state-run school employee pension system. The Michigan Public School Employees Retirement System, or MPSERS, is underfunded by over $26 billion.

In 2009, this district was paying $16.8 million into to the system. By 2017, the annual pension payment had grown to $43.9 million, a $27.1 million increase.

The Michigan Legislature recently passed a law that effectively closed the pension system that racked up the underfunding debt, but it will take years before districts get much relief. Notably, the reform was passed in the face of resistance from many public school administrators, teachers unions and the managers of the status quo state system.

With just under 28,000 students, Utica is Michigan’s largest school district after Detroit. Its teachers are among the highest paid in the state, with an average salary of $80,334 in 2015-16, according to the Michigan Department of Education.

The Utica schools fact-finder report contains 2016 correspondence from state oversight officials noting that the district has spent more than its revenue could support in six of the past 10 years. Superintendent Christine Johns’ response did not cite growing pension expense as a factor for the overspending, and instead pointed to alleged funding cuts, constitutional limitations on property tax increases, inflation, and other factors.

Specifically, she blamed “over a decade long environment of a permanent reduction of per pupil funding, redirection of revenue, the Headlee Amendment, the implementation of the 2X formula, inflationary costs, restricted categorical funding, and declining enrollment.”

But Utica has received more money from the state of Michigan over the past eight years, not less. The state gave Utica $7,919 per pupil in 2016-17, up from $6,523 in 2008-09. Even after inflation that represents a real increase of $512 per pupil in 2017 dollars.

The “permanent reduction” Johns cited probably refers to one source of state school funding, the “foundation allowance” each district receives, which is determined by a complicated formula that blends local and state school tax revenues. This can account for up to 80 percent of all state dollars a district receives, and for Utica it decreased from $7,807 per pupil in 2008-09 to $7,684 per pupil in 2016-17.

But districts get more than the foundation allowance from the state. Each one also gets extra money help address those skyrocketing pension expenses. In 2016-17, the state paid Utica schools $21.5 million to help cover these costs — which district had to send right back as part of its annual pension fund contribution.

“They should be blaming MPSERS for any financial trouble they are having,” said Ben DeGrow, director of education policy at the Mackinac Center for Public Policy.

Utica Community Schools didn’t respond to an email seeking comment.