In 2000, Michigan’s state-run pension system for public school employees was short $246 million of what it needed to cover future retirees’ benefit checks.

The funding gap exploded more than a hundredfold since then, reaching $26.7 billion in 2016. The burden of catching up on this underfunded obligation is creating an ongoing budget crisis for public school districts across the state.

For example, the Ann Arbor school district was required to contribute $13.4 million to the system in 2007; by 2016 it had to pay $23.5 million, a 75 percent increase in just nine years. Had pension costs stayed at 2007 levels, the district would have had enough money left over to give all 1,180 teachers an $8,475 bonus in 2016.

School districts across the state have experienced increases of comparable magnitudes.

James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, did an analysis of the Michigan Public School Employees Retirement System from 2007 to 2015. The unfunded liability grew from $5.8 billion to $26.7 billion over that time.

Employer contributions to the pension fund get invested in stocks and bonds that are expected to grow enough over the decades to cover future retiree pension checks. Poor market returns over part of the last decade are a major contributor to the problem, accounting for nearly half ($12.7 billion) of the $26.7 billion, according to Hohman's analysis.

For example, the value of the pension fund’s investments declined by 16 percent in 2008 and another 7 percent in 2009.

Another $5.6 billion of the gap is due to state officials persistently failing to deposit the amount their own accountants say is needed each year to amortize, or catch up on, past underfunding within a reasonable number of decades. The state has now failed to meet these “actuarially required contributions” for seven years in a row, and for 20 of the past 29 years. The annually “required” payments, which in most years were not fully made, rose from $572.6 million in 2000 to $2.3 billion in 2016.

Another $3.5 billion of the unfunded liability is due to changes in benefits and actuarial assumptions, such how long retirees will live, estimates of future school payrolls and more.

“The state has made repeated decisions in funding policy and investment assumptions that have made school employees the state’s largest creditors. This is unfair to teachers and taxpayers alike,” Hohman said.

Kurt Weiss, spokesman for the Office of Retirement Services, didn’t return emails seeking comment.

Editor's note: Ann Arbor School Board President Christine Stead responded to a request for comment on the impact of the rising costs of the state's public school employee pension system. Ann Arbor Public Schools’ contributions to the Michigan Public Schools Employees Retirement System was $13.4 million in 2007 and was $23.5 million in 2016.

Thank you for the opportunity to share the perspective of a school board trustee on the impact of rising MPSERS costs on a school budget.

The Ann Arbor Public Schools' foundation allowance in 2007-08 was $9,667 per student. In the current year (2016-17), AAPS' foundation allowance is $9,230. That is a decrease of about 5 percent. Assuming your data on AAPS' MPSERS contribution is correct, there was a 75 percent increase in our contribution to MPSERS over this same period of time.

With a declining trend in this period against a severely increasing cost, the impact has significantly affected our ability to invest in the areas that we primarily fund with our foundation allowance: our teachers and staff. Our ability to adequately fund the classroom environment matters to our families, students and the community we serve. It is exactly this trend that has most people concerned about education saying that we have less money now than we did a decade ago. When our foundation allowance is declining while our costs are increasing at this pace, districts have to look for other means to keep our classroom environments good for our children.

We have long advocated for the 300 new charter schools in Michigan to contribute to MPSERS, since they are public schools funded with taxpayer dollars. Our laws in this state allow for them to get around this requirement by contracting out teachers as a service contract. This creates an undue burden on the 530 traditional public school districts in Michigan. Requiring charter schools to contribute to MPSERS based on their teaching staff FTE count is an obvious step that our legislators could take to help reduce the pace of increased costs of MPSERS on districts.

We recognize that there have been changes to MPSERS that impact newly-hired teachers. We also recognize that policies like our state's charter schools policies have created an environment such that Michigan has the highest percent of for-profit charter schools in the US. Our lax charter school policies only exacerbate the burden of MPSERS on traditional public schools.

We are doing everything we can in Ann Arbor to keep our class sizes small and provide the high quality education programs and environment that our community expects. We look forward to working with legislators interested in making Michigan a top 10 state in education again. Funding and cost burdens are of utmost importance as part of that strategy.

Thank you for the opportunity to share our experience.

Sincerely

Christine Stead

President, Board of Education

Ann Arbor Public Schools