Monday, February 01, 2010

A Very Broken Pension Get Granholm's Attention

Governor Granholm made the following recommendations that target the escalating cost of the MPSERS retirement system:

  • Employee contributions to the plan will increase by 3 percent for all employees except those in the MIP Plus program, whose contribution was increased in 2008. MIP Plus members’ contribution will increase by 0.9 percent.
  • Elimination of subsidized retiree vision and dental coverage for school employees retiring with an effective date after October 1, 2010. Retirees will be able to purchase this coverage for a monthly fee through the plan.
  • The retirement multiplier will be increased from 1.5 percent to 1.6 percent for employees who retire with an effective date between July 1 and September 1, 2010, which will be paid by the applicable school districts.
  • A new, more cost-effective retirement plan for new employees hired on or after October 1, 2010 will be created. New employees will participate in both a base defined benefit plan and a defined contribution plan.
  • Phased-in retirement will be allowed for up to three years for retiring employees, age 60 or older. They will be able to collect their DB plan retirement with a workload of no more than 20 hours per week for a previously full-time employee. This option is available to the employee at the discretion of the school districts.
  • A limited number of state employees will be hired to replace those who choose to retire under this plan. The replacement of public school employees will be at the discretion of the local district.

None of this is happy news to MPSERS participants. These recommendations highlight a 3 year net loss of $17.9 billion in MPSERS and an unfunded liability which has grown to nearly $46 billion (using ‘09 assets, not '08 as presented in financial statements) . What surprises me is that the actuaries work letter is focused on September 30, 2008. Why not 2009? Between ‘08 and ‘09 the system lost $5.3 billion (on top of the $12.6 billion loss the prior year), why no mention of this their letter. I suppose it’s because of the “5 year smoothing” which sought to mitigate the impact of the revaluation undertaken in 2006. Unfortunately that was the high point and it’s been down hill from there. I cannot imagine how the actuaries could have expressed confidence in the system given the billions in investment losses, the shrinking base of new employees, the expanding base of retirees, and the increasingly unsustainable tax imposed on school districts across the state. But then that’s always been the bailout position — that the system could withstand anything because it had an unlimited ability to extract funds out of the school aid fund. But a shrinking school aid fund, coupled with $17.9 billion in investment losses will challenge those assumptions. Next year the MPSERS contribution rate is expected to exceed 18% per payroll dollar, that is a tax which is taken out of local school operating budgets, that rate should be higher because "smoothing" hides an funded ratio that is closer to 63% (not the 83.6% reported). That added pressure is on top of the $165 per student cut, the additional $122 per student 20j cut in Birmingham, and the projected $268 per student cut in 2010/2011 which is actually a $555 per student cut ($165+$122+$268) for that year.

The Governors proposal reflects a new reality which has imposed itself on Michigan’s education system. Without the systemic changes reflected in the Governors proposal the long term pain would only compound, and more promises would be broken. What no one has quantified is whether the changes will be enough to stabilize a very troubled system.

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