Pension System Costs the Monster That Ate School Funding Increases

Retirement costs have almost doubled in recent years

In 2007, payments for school employee retirement systems amounted to 13 percent of state spending on public schools. By 2014, the last year for which figures are available, those payments were the equivalent of 22.6 percent of state school aid, part of an effort to start catching up on decades of underfunding the pension plan.

The increase represents $1.1 billion annually that is not available for teacher salaries, textbooks, school buses and other education expenses. Contributions to the retirement system cost school districts $1.5 billion in 2007 and $2.6 billion in 2014, a 73 percent increase.

Over that seven-year period, the amount of state dollars allocated to K-12 schools remained about the same.

In 2007, then-Gov. Jennifer Granholm signed an education budget that allocated $11.6 billion in state dollars and represented the high-water mark for state support for public schools. Four years later Granholm signed her last school aid budget. It appropriated $10.8 billion in state dollars for the 2010-11 school year, a decline of $794 million. This turned out to be the low point for state spending on schools. In that year retirement system expenses had increased to $1.9 billion.

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Granholm’s state school aid cuts were masked by an unprecedented increase in federal funding for schools. In Granholm's final three budgets, the state received $6.4 billion in federal funds, mostly attributable to the 2009 Obama stimulus program. In the five school budgets signed by Gov. Rick Snyder, the state never received more than $1.8 billion in federal K-12 education dollars, or 15 percent less than the average amount of federal funds received during the last three Granholm budgets.

All of Snyder’s budgets have dedicated more state dollars to K-12 schools than Granholm’s final 2010-11 budget. However, payments to the retirement system have risen even faster.

For example, Snyder’s 2013-14 budget appropriated $11.5 billion in state school support, which was about $90 million less than the 2007 high-water mark (0.7 percent less). But while school districts made $1.5 billion in retirement payments in 2007, that number had increased to $2.6 billion in 2014.

“MPSERS obligations remain a financial difficulty for every school district in the state of Michigan,” said Ann Arbor Public Schools Superintendent Jeanice Swift in an email. “In Ann Arbor, our foundation allowance today ($9,100 per student) is lower than it was in 2002-03 ($9,234 per student). These dollars are not adjusted for inflation.”

James Hohman, the assistant director of fiscal policy for the Mackinac Center for Public Policy, says school district leaders need to help solve the problem of ever-rising pension system costs instead of just asking for more money.

“Schools are getting more from state taxpayers, but have been saddled with higher retirement costs due to persistent and ongoing pension underfunding,” Hohman said. “School officials ought to become part of the solution to that problem instead of just complaining about state funding.”

Hohman has written articles and studies recommending a solution, which is to close the pension system to new employees and instead offer employer contributions to 401(k)-type accounts.

MPSERS, the retirement system for public school employees, has accumulated $26.5 billion in unfunded pension liabilities. This figure does not include the cost of promised post-retirement health insurance benefits.

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See also:

Fixing Michigan's Budget-Killing School Employees' Pension Up in the Air

Close MPSERS to Stretch Dollars Further

Closing School Retirement System the Right Choice