New School Pension Reforms Will Be Worthless

Michigan lawmakers have been patting themselves on the back for passing a bill requiring school employees to contribute 3 percent more toward their retirement benefits, believing the measure will save taxpayers $300 million to $400 million a year. But whether taxpayers really see these savings is another question.  

The school employee retirement system currently has more demands being made on it than resources to meet them. In addition to providing the pensions owed to former employees, it also has been paying for retiree health insurance benefits to the tune of $706 million a year, even though state has no legal obligation to pay these.

Stay Engaged

Receive our weekly emails!

What's worse, the recently passed legislation was amended so that it does nothing to buttress the under-funded pensions, instead using slightly increased employee contributions to cover the non-mandatory health benefits by depositing the new money into an "irrevocable" fund for this purpose. These reforms alter the burden of paying these benefits, but without reforming the benefits themselves, the system remains a growing expense to taxpayers.

Currently, that expense amounts to 16.94 percent of every dollar of school district payroll. That figure varies from year to year given the changing draws on the pension fund and fluctuations in the value of assets held by the fund. The recently passed legislation may lower that rate a bit, either allowing school districts to use the money for other things, or letting Lansing distribute less tax revenue to them.

In addition, school employee compensation and fringe benefits vary by school district, and are subject to mandated collective bargaining between districts and local union officials. This process is fluid and money is fungible, which means that strong unions can negotiate around the required contributions and effectively restore the status quo.

Union officials will very likely use the increased employee retirement benefit contributions to justify new demands of their own that would minimize or even eliminate the value of those contributions to the overall system. For example, they might demand pay increases that "compensate" teachers for the burden of higher retirement benefit contributions, or press for more expensive health care insurance. School boards are sure to hear, "Teachers are paying more, they should get more!"

Without real reforms to the state Public Employment Relations Act, which mandates school district (and local government) collective bargaining with employee unions, the financial health of any district will be determined primarily by its own labor relations. Districts where the board is strong enough to resist union demands will be able to negotiate concessions on their own. Districts where the union drives negotiations will probably lose whatever advantage is gained from the increased employee contributions within a few years. Rather than attempt to tweak contracts that they do not negotiate themselves, the Legislature should instead look for ways to restore the authority of local school boards to make sound financial decisions.

The sad truth is that as long as collective bargaining determines school wages and benefits, the Legislature's ability to mitigate these costs is tenuous at best. Progress made in Lansing can be undermined in the next round of collective bargaining at the local level. While they made some modest tinkers to the status quo retirement system, legislators left much larger questions about the level and ability to pay school retiree benefits unanswered.


Paul Kersey is director of labor policy and James Hohman is a fiscal policy 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 authors and the Center are properly cited.