In 2004, CRC warned of the increasing challenges facing K-12 school funding arising from required annual increases in school retirement contribution rates. Annual employer (school district) contributions pay for future pension benefits for current school employees, health benefits for current retirees, and a portion of the unfunded liability associated with pension benefits. The required employer contribution rate of the Michigan Public Schools Employee Retirement System (MPSERS) was 14.87 percent of payroll in Fiscal Year 2005 (FY2005). Today, in FY2012, the contribution rate has increased to 24.46 percent of payroll and is projected to rise to 27.37 percent of payroll in FY2013, unless changes are made. CRC’s 2004 report, Financing Michigan Retired Teacher Pension and Health Care Benefits, included a menu of policy options to address the growing costs of MPSERS. Recently introduced legislation in the Michigan Senate incorporates a number of the options previously indentified by CRC.
In the current era of restrained public resources, school districts and other entities (community colleges, libraries, and universities) are finding it more difficult to meet the ever-increasing annual MPSERS contributions. This is a cost that that these organizations have no control over because the system is administered by the State of Michigan and only state policymakers can make changes to it. Schools and others have no recourse but to pay the retirement bill each year.
Schools districts finance the MPSERS cost each year from their per-pupil foundation grant. In recent years, there have been few increases in the grant, while the MPSERS contribution rate has increased each year. In fact, the minimum foundation grant was reduced by $470 over the last two fiscal years, from $7,316 per pupil in FY2010 to $6,846 per pupil in FY2012. As a result, greater shares of a district’s foundation grant each year must go towards satisfying the MPSERS obligation, effectively eroding the purchasing power of the grant.
The Michigan Senate recently introduced legislation (Senate Bill 1040) that takes aim at the escalating costs of MPSERS for schools. This legislation incorporates a number of the policy options proffered by the CRC almost eight years ago to help control the spiraling costs, including:
- Lowering the multiplier from 1.5 percent of final average compensation times the number of years of service to 1.25 percent for future years of service, unless the employee agrees to an increased employee contribution (5 percent or 8 percent depending on date of hire);
- Shifting more of the responsibility for financing retiree health insurance premiums from the employer to the employee;
- Shifting to a graded retiree health care premium for all employees (this was done previously for school employees hired since July 1, 2008), similar to what had been done with state employees in the late 1990s;
- Eliminating the retiree health benefit for new employees and replacing the benefit with an employer-matching 401k account.
A number of the provisions contained in Senate Bill 1040, if enacted, represent real compensation reductions for school employees and additional out-of-pocket expenses for former school employees. Teachers are the most important ingredient in the education equation. In addition to affecting the financial situation of current teachers, the contemplated legislation could certainly influence the type and quality of teachers that schools are able to recruit in the future.
Michigan state government is not unique in the challenges it faces with funding employee legacy costs (pension and other post-employment benefits). Many states and local governments are grappling with the same problem of escalating costs while facing stagnant or declining resources. Michigan policymakers took significant steps to deal with the costs of the other major state retirement system (State Employees Retirement System) in 2011 under Public Act 264 and Public Act 265. Policymakers are focusing on the challenges associated with financing benefits under MPSERS, something CRC alerted them to nearly a decade ago, except the scale of the problem is relatively larger today.