It is Fine to Get Detroit Out of the School Pension System

Other districts already pay for Detroit's liabilities

Detroit Public Schools has been in financial trouble for a long time, and ensuring that DPS can pay its bills is likely to require further state funding. As plans for fixing DPS are debated, school officials throughout Michigan have begun to worry that their state funding will be reduced when a bailout for DPS is finalized.

What these officials don’t realize is that their districts are already paying to catch up on Detroit’s pension liabilities. Every school district is a cost-sharing member of the Michigan Public School Employee Retirement System, which is drastically underfunded. MPSERS costs are not calculated by determining each district’s individual share of retirement costs and accumulated liabilities, but for all districts as a whole. The total costs are then converted to a single percentage of payroll and assessed on districts statewide.

Unfortunately, the assessments have been insufficient to cover the benefits earned by employees. Currently, MPSERS requires $26.5 billion more than it has in the pension fund to cover these benefits.

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The result of this underfunding is that Detroit has already off-loaded the bulk of its pension cost onto other districts. DPS employees earned more retirement benefits when the district was three times larger than it is today. According to MPSERS’ annual report, close to 25,000 DPS employees paid into MPSERS in 2004, compared to just 9,118 in 2013. 

Now, as a smaller district, DPS is paying less to catch up on those underfunded benefits. In other words, DPS added to the state’s pension liabilities when it was large and is not paying as much for them now that it is smaller.

Indeed, DPS is behind even on the smaller amounts it is assessed now. The district owes more than $80 million to MPSERS, because DPS has failed to make mandated payments in the past.

None of this would be a problem if retirement benefits were paid as they were earned, (as required by the state constitution). But you can’t turn back the clock and do it over again.

Of total current MPSERS contributions, 83 percent go to pay for underfunding of the pension system and to catch up on retiree health care obligations. It is unknown just how much of that the $26.5 billion MPSERS shortfall is caused by Detroit. The retirement system is not set up to answer that question. But it is likely that Detroit’s past employees played a significant role.

MPSERS contributions are tremendously burdensome for school districts and school employees. In 2014, school districts paid $2.4 billion in retirement contributions. That’s roughly 17 percent of the entire school aid budget.

These are mandated costs and providing relief from them can help Detroit pay its other bills. Doing so may increase contribution rates in the rest of the system by another point or so. But those rates are already increasing. The state added another billion in unfunded liabilities this year alone. Rather than worry about Detroit, the best thing school officials can do for their districts’ future is to advocate for responsible and comprehensive MPSERS reform.

The state school pension system is broken. It is not an invalid choice to release a district in an emergency like Detroit’s from MPSERS and the it increasing burdens. More than half decade of state management of DPS is an argument for absolving it from the state-mandated retirement system.

In addition to saving Detroit from having to pay 33 percent of its payroll to MPSERS like other districts, removing DPS from the pension system would mean its new employees we be offered benefits that are paid as they are earned instead of deferring obligations to the future. In other words, retirement benefits will no longer become long-term liabilities.

Detroit may lose out on special payments the state is making to assist schools with their pension contributions, but those payments do not cover the full contribution cost anyway.

There much for legislators to consider in finding a solution for Detroit — getting rid of geographically assigned schools and possibly converting the district to a charter district, to cite two possibilities — and their impact on short-term retirement contribution rates should sidetrack such discussions.

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