No easy solution for underfunded teacher pensions

By BROOKE KANSIER
Capital News Service

LANSING – The Michigan Public School Employee Retirement System (MPSERS) is setting new records – and not in a good way.

The pension system is underfunded by $26.5 billion – the biggest hole ever, according to the Midland-based Mackinac Center for Public Policy.

MPSERS serves K-12 public school districts, community colleges, intermediate districts and a handful of libraries and public universities. As of last year, it had 227,756 active members and 204,512 retirees.

The fund’s liabilities have been increasing for decades, said Jarrett Skorup, a policy analyst with the Mackinac Center.

The downward spiral began in the early 1990s, when former Gov. John Engler took office. He issued an executive order that slashed the state contribution to MPSERS by $54 million in response to state budget problems. In 1992, Michigan once again took aim at MPSERS, cutting another $116 million in its contributions.

It’s gone downhill from there, with rising health care costs and a K-12 budget overhaul in 1994 shifting MPSERS costs further onto school districts and off the shoulders of the state.

Along with a pension, MSPERS provides retirees with health, dental and vision coverage. Rising healthcare costs are one of the biggest reasons for MSPERS’ skyrocketing deficit, Skorup said. Unsuccessful investments by the state in the 2000s and the subsequent recession also hurt.

“They guessed too high on those returns,” Skorup said. “That caused the liability problem to go up.”

Pension plans like MPSERS have certain protections under Michigan’s constitution. It requires the state to pick up the tab for liabilities when those funds are promised rather than pushing them into the future. So every year, the state – and municipalities – are supposed to contribute enough to cover the pension of every new employee entering the system.

The problem is they don’t – and haven’t for a long time, said Eric Hoogstra, a clinical affiliate with the Finance Department at Grand Valley State University.

“Governments aren’t kicking in enough to these plans to fund the promises they’ve made,” Hoogstra said. “It’s just snowballing now.”
Mackinac Center’s Skorup said years of underfunding have created long-lasting liabilities that are sucking the life out of the public education budget – at the expense of school districts and teachers.

While teachers and other school employees have paid into the system since 1986, their once small contribution has risen rapidly in recent years, Skorup said.

And so has the contribution from districts. Close to 10 percent in 2008, the rate hit 27 percent in the 2012-13 school year and rose to 31 percent the year after.

Skorup said today’s rate is closer to 35 percent.

Another factor is the growing disparity between the number of people paying in, and the number getting a payout, said Michigan Education Association (MEA) President Steve Cook.

With the growth of online and privatized school options, fewer children attend public schools and fewer public school teachers are needed. And with retirees living longer, more money has to be set aside to cover the larger number of people retired under the plan than in the past.

“MPSERS is slowly but surely doing worse and worse every year because there are fewer and fewer people paying into the fund,” said Cook, whose union is the largest in the state representing teachers and other school employees.

But Skorup says removing people from the system will help in the long run.

“Our pension system’s underfunded by $26 billion. Having more employees in that system is not going to help with these liabilities,” he said.

And these aren’t liabilities the state can ignore.

Because MPSERS is a defined benefit plan, employees are guaranteed a certain payout when they enter the system. The state can’t renegotiate that payout, and the state constitution forces it to honor those commitments.

It’s not an easy problem to solve.

The state has tried to increase contributions to make a dent, from $155 million in 2012 to $796 million this year, according to the Senate Fiscal Agency. But with a total shortfall in the double-digit billions, it’s not much of a dent.

Enough, Skorup said.

If the state doesn’t make drastic changes, “then we become the city of Detroit,” where pension problems contributed to bankruptcy, he said.

He suggests shifting to a defined-contribution plan, which is similar to a 401K – employees are allotted money annually to invest toward retirement as they choose, instead of the state controlling fund investments.

With money paid out yearly, there is less slack for unpaid liabilities to occur and compound as under the current system, Hoogstra said. He added that Michigan would have to pay off its current liabilities – but that shortfall would stop growing.

However, some fear the daunting price tag such a transition could bring.

“You would have to be putting in extra money before you would see any savings in the long run,” said MEA public affairs director Doug Pratt. “You’re talking hundreds of millions of dollars over the course of 30 years.”

Skorup counters that the Legislature could spread out that cost to minimize the immediate impact – and that with the state of the system today, it’s do or die.

“We have this big hole, and what I’m arguing is we should stop digging that hole,” he said. “The hole’s still going to exist, but we can start filling it in.”