Wednesday, January 24, 2007

Help Solve School Cost Problems – Part Two, Pension Plan:

A history lesson for Birmingham parents: Costs increases from 2003 to 2007 driven by healthcare and pension obligations run amok (based on a $62.9 million salary budget).

Salary Increase Healthcare Increase Pension Increase

$616,776 (0.99%) $2,690,000 (22.48%) $2,980,000 (36.83%)

  • Do you want to take benefits away?

No, all existing participants will stay in the pension program. The legislation cited above will provide a new alternative for NEW teachers; it is not directed at teachers in the system today.

  • Will the legislation eliminate pensions?

No, it will protect current participants but it will direct new teachers into a 401-k type program.

  • What’s the problem with the current system?

First, the state pension program (MPSERS) is over $23 billion under funded on current pension promises. Second, the cost to cover that short fall is taken out of the school aid fund but is treated as an unfunded mandate. We have no choice because participation in the system is mandated by the state, yet the state will not pay for increased costs.

  • Is that a big problem?

Yes, the pension deficit of $23 billion is nearly as big as the entire deficit of the US Government’s Pension Benefit Guarantee Corporation, which insures the benefits of plans whose sponsors have entered bankruptcy.

  • How much is the MPSERS deficit costing?

We send nearly 18 cents on every salary dollar to the state pension fund to support the system. That contribution has grown each year and is expected to reach 32 cents on every salary dollar by 2020. That cost will not be supported by the state – it will come out of school operating budgets.

  • Is the pension fund failing?

No, it’s guaranteed by the state through its ability to “tax” school districts via mandatory contribution rates. That makes it different from private company pension funds.

  • So is it really a problem?

Yes, because the cost of the benefits continues to rise and the pool of employees entering the system continues to fall. We will have a harder and harder time paying for operations as the burden of pension obligations adds 30% to 40% to our salary costs. It’s the same issue that has impacted the auto industry in Michigan and the impact on schools will be just as devastating. The state will not add additional funds to school budgets to offset the increasing pension burden. The result will be that the pension cost will “crowd out” all other school costs by consuming funding increases leaving nothing left for other expenses.

  • Do other state employees participate in pensions?

Yes and no. Since 1997 all new state employees participate in a 401-k style retirement program.

  • Is making this type of change fair?

Yes, there are as many benefits to participating in a defined contribution plan (401-k) as there are risks in a defined benefit plan (pension). Empirical analysis shows that the returns generated by 401-k plans versus defined benefit plans can exceed, track, or lag those plans depending on the time periods measured. The key is to be an informed participant. Given the dire state of our economy, and the terrible condition of the pension plan, we must take steps to ensure the safety of our teacher’s retirements, and our ability to pay for k-12 education. Not acting would be unfair to everyone.

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