“The cost of underfunding pensions to school budgets is massive,” Michigan’s Mackinac Center for Public Policy reported in January 2016. “$6 billion to $7.8 billion would have been saved if employees had been offered defined-contribution benefits over the past decade—enough to pay for every public school teacher salary for a year. Using pension officials’ own assumptions and projections, the state now owes current and future school retirees $26.5 billion more than it has saved.”
State Rep. Tom Leonard (R-DeWitt) told reporters shortly after he was elected speaker of the Michigan House of Representatives in November 2016 one of his priorities would be to fix the state’s “broken” teacher retirement system, by giving new school hires 401(k)-style contribution plans that would match teacher contributions at 7 percent.
State law prevents schools from paying more than 27 percent of their payroll costs into the pension fund; the state legislature makes up the difference. That difference, Leonard says, is now $500 to $600 per year for each Michigan public school student.
Leonard says the pension problem is only going to get worse.
“Right now, we have a situation where the Michigan Public School Employee Retirement System has a $22 billion liability, but what’s even more troubling is that [the] broken retirement system is costing our local schools about 36 percent of their payrolls,” Leonard told School Reform News.
“Just recently, I met with a group who gave me facts that were even more troubling,” said DeWitt. “Right now, that 36 percent of payroll would be assuming an 8 percent return on investment in the pension fund, which is very generous, at best. If you ratchet that down to 6 or 5.5 percent, where it likely should be, in the next few years we could be looking at over 50 percent of local school districts’ payrolls going to pension funds.”
Teachers Unions ‘Lie’
Leonard says teachers unions are trying to paint him as a villain, saying he’ll steal pension money from retired teachers, but Michigan and several other states protect pensions in their state constitutions.
“Michigan is unique in that all state pensions are constitutionally protected, so even if we wanted to go there, we could not take away a retired schoolteacher’s pension,” Leonard said. “That is simply a lie coming from the teachers union. This [plan] would apply to only new teachers moving forward, and it would allow us to get more money in the classrooms. When you look at the fact that we’re spending 36 percent of the payroll on pensions, if we could get that down to 7 percent, we could get a lot more money in the classrooms to help our children.”
Alternative System Ready
James Hohman, assistant director of fiscal policy at the Mackinac Center, says Michigan already offers a defined-benefit plan for all its state workers, other than the state police and teachers. Hohman says teachers’ pensions should move in that direction, too.
“Michigan offers a defined-contribution retirement system to its state employees that ought to serve as a model for its school-pension system,” Hohman said. “The state plan has always cost 7 percent of payroll, whereas the school pension system now costs 31 percent of payroll. And the benefits in the school plan are no longer that generous: Half of employees will leave before they vest in any pension.
“The ballooning underfunding problem has demanded more of today’s dollars to go to pay for yesterday’s deferment,” Hohman said. “The underfunding is growing faster than the taxes used to pay for schools. It has driven layoffs and teacher concessions around the state.”
Current System ‘Unfair’
Hohman says the current plan isn’t fair to anyone.
“The state is not supposed to be in this situation,” Hohman said. “It is supposed to set aside the cash necessary to pay for pensions as they are earned. But the state underfunding has made school employees the state’s largest creditors. The ever-increasing costs to pay down that debt means that there are high costs for benefits that are not very generous. It is a system that is unfair to school managers, teachers, and taxpayers alike.”
‘It’s Going to Be a Battle’
Republicans maintain majorities in the Michigan House and Senate, along with the governorship.
Leonard says he has the Senate majority leader on his side and is optimistic they can begin to tackle the problem during the current legislative session.
“It’s going to be a lot of work,” Leonard said. “It’s going to be a heavy lift. But what I do know is that it’s a big priority for myself as well as for the Senate majority leader, so we certainly have two legs of the stool right now that want to get this done. It’s just a matter of he and I being able to muster up the votes. The teacher lobby sometimes does have a huge impact on some of our members, as well as local superintendents, so it’s going to be a battle, but I think we’re going to get there.”
Elizabeth BeShears ([email protected]) writes from Trussville, Alabama.