School Pension Boost Proposal Exposes Political System’s Dysfunctions

In an apparent bid to boost membership under the guise of "helping" school districts to save money, the Michigan Education Association union has proposed a 33 percent pension boost for school employees who retire before June 30, 2010. This self-serving measure does not save money, and should be summarily dismissed.

Legislation to enact it, however, has been introduced in both the House and Senate (Senate Bill 255, sponsored by Sen. Wayne Kuipers, R-Holland; and House Bill 4285, sponsored by Rep. Fred Miller, D-Mt. Clemens). Both would burden taxpayers with $3 billion in new unfunded school employee pension liabilities — a 52 percent increase according to the House Fiscal Agency. Taxpayers would be on the hook for an extra $232 million every year for the next 29 years, assuming the liability was amortized in the usual manner.

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On top of that, school employees receive very generous health benefits from the moment they retire — which many do in their mid-50s. HFA estimates this proposal would add approximately $152 million in additional health costs over the next five years.

So where are the "savings?" The MEA contends that replacing some 29,000 older school employees whose annual salaries average $52,500 with younger employees getting around $30,000 a year would save money — at least temporarily. HFA ran the numbers and concluded that is not how it would work.

Given the fact that Michigan schools increase employee compensation on the basis of years on the job rather than whether a person is any good, guaranteed pay-hikes for the replacements would erode initial payroll savings of $259 million to just $65 million after five years, and eventually to zero. Even at the temporary high point, as a money-saver the proposal fails: The increased annual liability amortization and health care costs exceed the payroll savings.

Another long-term cost not included in the HFA analysis is the massive future liability represented by tens of thousands of new MEA members added to the obsolete "defined benefit" pension system still in place for school employees. An honest proposal would place these new hires in a 401k-type defined contribution pension system, with defined contribution Health Savings Accounts providing any post-retirement health benefits.

In fact, given the federal "stimulus" money sloshing into the state budget, now would be the perfect time for the desperately needed transition to that fiscally responsible, taxpayer-friendly system, regardless of the MEA proposal.

Here's the bottom line on this self-serving proposal from the union: Using an accelerated amortization schedule recommended by the state Office of Retirement Services (it writes down the increased liability over the period of temporary payroll savings) the pension-bump would cost taxpayers some $2.9 billion over the next five years. That doesn't include the billions of additional liabilities represented by locking-in a whole new generation of future defined-benefits pension recipients.

Beyond the math errors, there are so many flaws with this proposal that it's hard to know where to begin. In a way, it does a service by exposing the real priorities of the state's largest school employee union: "Where's mine?"

The fact that the measure has garnered serious legislative attention also reveals the extent to which the state's bipartisan political establishment is in the tank for government employees, with the well-being of taxpayers and school children taking a back seat in many cases.

It also puts a spotlight on the folly of pegging teacher pay hikes to time on the job, regardless of whether their students ever learn anything. A rational system would pay more to instructors whose students show increased achievement; teachers who fail to measure up would get less, and those who don't improve would be encouraged to find other careers. Under the current system, not only do poor teachers keep getting pay hikes, they're also darned near impossible to get rid of.

This transparently self-serving proposal to further increase the benefits of an already privileged class of public employees at taxpayers' expense says a lot about the skewed priorities that have brought Michigan so low. The fact that it's being treated seriously and respectfully by the political class and by some in the media sheds light on their dysfunctions, too. Taxpayers should be shocked at being so poorly served.


Jack McHugh is senior legislative analyst 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.

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