A well publicized report from the Pew Center on the States suggests that something must be done to address a gap between the amount of money set aside and the level of pensions promised by the Michigan Public School Employee Retirement System. The study also provides information on school retiree health benefits, implicitly accepting the premise that these are an enforceable obligation just like the pension payments. That's probably not true, meaning that the obligatory funding gap would only include pensions ($11.5 billion), not the combined total of pensions and health benefits ($51.5 billion) that Pew estimates.
Either way, the reality is that Michigan can no longer afford to keep deepening its school pension liabilities. Thus, Gov. Jennifer Granholm has proposed offering a pension "sweetener" to encourage the most senior school employees to retire, and enroll their replacements in a cost-saving "hybrid" system combining elements of both the traditional "defined benefit" pension system that's causing the problems described above with a modern 401(K) type "defined contribution" system.
Two points need to be raised. First, this proposed "hybrid" is a half-measure. The antiquated defined benefit system that guarantees retirees a fixed monthly payment for life should be closed immediately, and all new school employees entered into a pure defined contribution system. (All state employees, other than teachers, hired since 1997 have been enrolled in a defined contribution system.)
Second, the governor's proposal would boost the monthly cash pension payments by 6.7 percent for eligible school employees who head for the exits after this school year ends, but why should taxpayers have to "bribe" them to retire?
Under the current system, the longer school employees stay on the job, the larger their guaranteed monthly pension payments become. In addition, the current teacher tenure law prohibits reducing any teacher's pay individually, regardless of their performance. It also discourages schools from removing ineffective teachers by creating an expensive and time-consuming dismissal procedure draped in red tape. This makes it easier to keep paying a tenured but ineffective teacher rather than hiring a new one.
Thus, teacher compensation is based on two things and two things only — longevity and academic credentials in the form of college credits and degrees. This creates no external incentives for teachers to improve their performance, since pay automatically climbs the more years they stay on the job.
Compounding these poorly aligned incentives, a "first-hired-last-fired" seniority system automatically protects teachers based strictly on their years of experience from staffing reductions that naturally arise due to declining enrollment. It creates a contractual obligation for school districts to keep their most expensive employees.
For teachers of retirement age, the trifecta of the single salary schedule, seniority and tenure create one of the most secure jobs in any profession. Top these jobs off with extravagant health insurance benefits and protection from a politically powerful employee union, and it really is little wonder why Michigan has to offer extra cash incentives to encourage teachers to retire.
This "carrot" may not yield the turnover Gov. Granholm seeks, however, so her plan also includes a "stick." The state would no longer provide post-retirement dental and vision insurance to eligible employees who don't take the hint and decide to stick around — an implicit acknowledgement of the reality described above that retiree health benefits are not enforceable obligations. These employees also would have to contribute 3 percent more of their current salary to the MPSERS pension system.
(Note: The recently passed legislation to make Michigan eligible for federal "Race to the Top" money added a requirement that schools adopt an annual teacher "evaluation" system to be used in promotion, retention and tenure-granting decisions, but did not explicitly require a new compensation system, and it made no changes to the existing teacher tenure law.)
Michael Van Beek is director of education policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.