Tuesday, September 30, 2008

How The Failure in Congress Will Hurt Michigan Schools

The law of unintended consequences. It's when something completely unexpected happens in a way seemingly unrelated to an action. In this case it's the consequence of inaction by Congress that will negatively impact K-16 school budgets in Michigan.

In the name of "saving our taxpayers" money - congress foolishly cost taxpayers nearly $1.2 TRILLION dollars Monday as equity markets melted down (and credit markets remained seized); not the "save" our congress was hoping for I'm guessing. The loss of wealth touches every taxpayer that owns a 401k, a 403b, a Michigan Education Savings Plan (MESP), stock in a public company, or any claim to a PENSION PLAN. That last item is now going to be a very big problem for Michigan schools.

Why?

Because Michigan's pension plans set their valuations as of September 30 every year. And even with today's rally, the loss of equity values between Monday and Tuesday is nearly $700 BILLION. That loss is piled on top of a market that was beaten down from an ongoing slump (recession might be a better word). Year to year performance in the Dow Jones Industrial Average is down over 22% I'm not saying that the pension asset values will fall that far; in fact I expect the pension should outperform the market while adding assets (contributions from teachers and schools should add about $1.5 billion to the fund). BUT, outperforming the market is still substantially negative - and the negative performance could be significant because pension assets were "marked to market" last September, creating an artificial jump in performance for the 2007 reporting period. In fact this years school district contribution rates are based on those artificially inflated September 30, 2007 numbers. Last year's Pension fund statements also revealed the full extent of the unfunded promises made to plan participants; a staggering $31 BILLION of pension payouts and health care promises which cannot be covered by MPSERS assets. As of September 30, 2008 that unfunded liability just got bigger.

The contribution rate paid by schools will have to be adjusted up next February or March; I'll wager the required increase in pension funding will be a significant blow to school budgets. What could make matters worse for schools is if MPSERS held any Lehman Brothers bonds in their portfolio. Lehman did significant work for MPSERS and with Lehman's collapse any Lehman Brothers bonds have a value of $0. Because MPSERS is not required to disclose their financial condition until January '09 school districts won't know the full extent of the damage - by then our budgets are set. I suggest that districts start planning now for what will certainly be bad news from MPSERS in January - and don't count on being "saved" by Congress or Lansing.

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