Democratic, Republican Legislators Debate School Employee Retirement Issue

The rising cost of paying into the Michigan Public School Employees Retirement System was the biggest factor in Tuesday night’s bleak budget projection by Saline Area Schools finance director Janice Warner.

Today the district pays 24.46 percent of its payroll to the state, which then pays for the pensions and benefits to retired school employees. In 2004, that number was just 12.99 percent of payroll. It is expected to rise to 27.27 percent next year, 31.21 percent in 2013-14. That’s close to an extra $2 million a year in costs for a district already grappling with a structural deficit.

Superintendent Scot Graden said it’s an issue that the community needs to understand.

“Our costs have doubled as it relates to the pension, in the last five years. As I go into the community and talk with people, they don’t quite understand how this invisible part of the payroll has exploded and the burden it has placed on the district,” Graden said.

Graden said the spiraling costs are not sustainable and that worries him as both an administrator and public schools employee.

“Without fundamental reform, retirement benefits are in jeopardy, from the employee side and from the employer side,” Graden said.

At Tuesday’s meeting, the Saline Area School Board got a taste of how Republican and Democratic legislators differ in their approach to the issue. State Rep. Mark Ouimet, R-Scio Twp., State Rep. Rick Olson, R-York Twp., and State Rep. Jeff Irwin, D-Ann Arbor, all spoke before school board.

Olson, who managed the business office in Adrian’s public schools district before being elected to office, said the MSPERS program’s unfunded liabilities are over $45 billion. Of that the pension plan holds $17.6 billion in unfunded liabilities and the retirement health benefits unfunded liabilities are over $27 billion, Olson said. Olson said there are too many stranded costs, which are caused when an employee leaves the system with unfunded, yet vested benefits. The causes of the stranded costs are many, Olson said. A chief culprit behind the growth of these stranded costs are the number of early retirements.

“We promised benefits we didn’t have funding for. It works as long as you have people coming into the system and paying in. It’s sort of like a Ponzi scheme. As soon as the new money stops coming in, the whole thing falls apart,” Olson said.

A decade ago, there were 2.5 school employees for every person collecting retirement benefits. Today that ratio is 1.23 employees for every retiree.

“Right now, we’re in a boat full of water and bailing like crazy,” Olson said. “But we haven’t plugged the hole in the bottom of the boat.”

Olson said plugging the hole won’t make everyone happy.

“There are only three ways to solve this kind of problem. You need to reduce benefits. Employees can contribute more. Or you need to find a bunch of money from somewhere,” Olson said. “I think the final solution will involve all three.”

He advocated reducing benefits, asking for more employee contributions, and reforming the system so employees are paying into it as they go, as opposed to having future employees pay for their retirement.

Irwin approached the problem from a different position. He said that during the years of Gov. Jim Blanchard and John Engler, the state diverted MPSERS investment earnings away from the pension plan. He said he’d like to see a full accounting for that and that the state ought to make good on those dollars.

The MPSERS rate is based, in part, on financial “smoothing” process that spreads out the impact of investment losses or gains over five years. Irwin said that the rate is, in part, is out of whack because of historically bad markets.

“If you look at the last five years, the market performance has been historically abysmal. You can't find a period in the last 100 years as bad as these five years. If we're using that to come up with the $45 billion number, is that really a good predictor of the future?” said Irwin, who suggested that increasing the smoothing period to eight years might provide more credible data and reasonable retirement rates.

Irwin also said the legislature’s efforts to loosen the reigns on charter schools and cyber schools make the problem worse.

“We've got thousands and thousands of kids who are now no longer in the public school system. That's drawing out more payers but we keep all the payees,” he said.

He also said that state’s urging of privatization of school services, such as busing, food services, transportation and custodial work, has made the problem worse.

“What we've done is cut the legs out from the pension system with the aggressive privatization of public schools,” Irwin said. “Until we can get the folks in Lansing to put down the gavel, take a deep breath, and stop making the problem worse, it's a lot harder to make the problem better.”

He also criticized the Republicans for “raiding” the school aid fund for over $1 billion a year to pay for tax cuts for businesses.

Ouimet said it did no good too point fingers and blame for what was done in the past.

“The bottom line is here’s where we are. And we’ve got to deal with what we’ve got.”

He said he didn’t think it was financially realistic, as Irwin suggested, to smooth out the MPSERS investment over a longer period of time.

“We have to make sure we stay realistic and remain fiscal responsible so we do not lapse back into the problems created over the last decade or so,” Ouimet said. “The good news is that we have challenging years rolling off soon. The question will become, does the market improve to carry the roll off?”

Irwin’s speech drew applause from the audience, which was generally made up of teachers. Ouimet’s applause came from the school board table.

During questions, Olson said reforming pension is difficult because it’s constitutionally guaranteed. But the retirement health benefits are not, Olson said.

Olson said he expected to see a solution by the end of the month.