Thursday, October 25, 2007

Michigan Needs to Help Schools With Pensions

Although the state has provided a welcome break to schools in the form of a temporary retreat on the pension contribution rate (this year is 16.72% versus last years requirement of 17.74% as the result of "revaluing" the pension investment portfolio - click here to see letter), the problem is, and will continue to overwhelm school budgets - next year the requirement is projected to be over 20%, for Birmingham that's about $2.1 million (or $266/student) ADDITIONAL pension cost.

The following chart illustrates the burden that the unfunded pension and health care liabilities are placing on all school budgets. Note the striking increase in the unfunded burden. These costs are simply given to schools with no corresponding increase in funding.
Proposed and actual changes in state law may help alleviate the problem in the longer term; new legislation includes increased employee contributions to the pension plan and extended vesting periods prior to the ability to collect full benefits. These changes, difficult to make but beneficial to the health of the pension system, still do not address the current crisis relative to the increased burden placed on the state and local school budgets due to simple demographic shifts. Simply put, teachers are retiring faster than new teachers are being hired.

That trend is not going to change. The state is projected (by The Citizens Research Council) to lose more school age children over the next ten years. Lansing has to find a way to contain the burden of the pension fund; one innovative idea is to pre-fund these costs through a bond mechanism. The idea is similar to what is currently happening in the auto industry. Tax payers will still have to foot the bill for this solution, but the cost would be a known quantity, it would not increase every year, it would bring security to pension participants, and schools would be spared the annual agony of guessing the how much the pension contribution would take away from their operating budget. I suspect that some people have explored the idea, but as of yet I have not seen any progress along these lines. Legislators, how about some action?

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