The only real solution is to close public pensions to new employees
Pension costs are forcing tough choices on Michigan’s school districts. Their problems are caused almost entirely by state policies, so the solution must come from the state.
In Michigan, school districts have little to say about the retirement benefits offered to their employees; all the key decisions are set by state policy. The state requires districts to use its retirement system, sets its benefits, and decides what the funding assumptions and policies will be. To pay for pension benefits, the state assesses districts a percentage of their payroll. A district sends 36.31 percent of its payroll to the school pension system, while the employees, as a group, must put 4.69 percent of their paychecks in the system.
State officials made some basic reforms in 2012 as more and more school districts began to grapple with the budget implications of retirement benefits. That year, the state said it would cap school districts’ annual responsibility for pensions. It also announced that it would begin sending an extra payment to the districts to cover a portion of pension benefits. Currently, that’s 10.53 percent of payroll, for a total of $1.082 billion for the 2016-17 fiscal year. This additional funding to districts accounts for $1 out of every $11 the state spends on K-12 education.
If the state weren’t making these payments, it could use that same amount of money to increase the foundation allowance by $727 per pupil. Conversely, if the state didn’t make those payments, districts would have to dip further into their foundation allowance to meet pension commitments.
Public attention often focuses on the size of the foundation allowance. But public school districts would rather see extra money from the state go to cover pension costs than increase the foundation allowance, an unrestricted grant. The reason is that charter schools do not participate in the public school pension system and therefore do not receive the state pension assistance; they would, however, receive their share of an increased foundation allowance, and districts would receive less.
Charter school employees generally work for a charter management company and are not part of the school retirement system that is mandatory for public school employees. Few charters would want to join the public pension plan, since private sector retirement plans tend to cost much less than the burden currently shouldered by school districts — typically 5 percent to 7 percent of payroll compared to 20.96 percent.
While the difference in retirement costs is often pointed to as a structural advantage for charter public schools, districts have advantages of their own. For instance, districts can put additional millages in front of voters to cover construction costs for new or upgraded school buildings, while charters do not have access to that funding source.
The massive scope of the pension problem has led a variety of stakeholders to propose solutions. Some of those are worthwhile, while others create new problems.
One concept regularly floated by some public school proponents is to force charter schools to contribute toward paying down the pension underfunding that plagues the statewide school retirement system. The idea is based on the belief that pension shortfalls were caused in part by decreased payrolls in public school districts brought on by the growth of charter schools. But the issue is not the size of the payroll in the statewide retirement system. Instead, it’s the size of the unfunded liabilities. Spreading the cost of catching up on underfunding to a larger base does not dilute the cost.
Moreover, Michigan’s teacher pension system would be in even worse shape if it had covered employees at public charter schools. It would also be unfair since charters would be cleaning up a mess they had no hand in creating.
Another questionable model for dealing with the pension system’s underfunding also involves spreading burden over a larger base, in this case, by levying an assessment on services purchased by both districts and charter schools. Each year, schools increasingly contract out for support services. Contractors have a competitive advantage over in-house employees since districts don’t have to pay into the state retirement system for contract employees. Some officials think the growth of contracting harms the retirement system, so they propose an assessment. But that is no solution. While an assessment would encourage districts to bring services back in house, doing so would expose both districts and the retirement system to even more unfunded liabilities.
All the discussions of what to do about pension underfunding are overshadowed by a major issue: Lawmakers cannot be counted upon to keep their spending promises. It is difficult to bind lawmakers to giving money in the future, outside of a constitutional requirement. The cap language is just a statute that lawmakers can change at will, and specific funding amounts still have to be agreed upon through the appropriations process. So far, Michigan’s policymakers have been reasonably effective at fully funding to the cap. In fact, they have often given more money than is required, which frees up district spending on other areas.
But school district officials have no guarantee that this pattern will continue. Future legislators could change the statute that places a cap on what districts must send to the pension system. They could do it with no more votes than would be required to pass annual budget appropriations bills.
Some people argue that the money going to these benefits does not make its way into the classroom, but that does not reflect the reality of how school funding works. Teachers’ retirement costs are part of employee compensation, and if there’s anything that should be considered as spending “in the classroom,” it’s the compensation of the teachers in those rooms. It is true that 87 percent of pension costs are going to benefits that employees have already earned, rather than compensating teachers for the work they do today. But that simply means we’re still spending for yesterday’s classrooms today because we didn’t spend what we should have at the time.
The pension underfunding problem is the largest long-term issue facing Michigan. State policymakers made overly optimistic assumptions about what pensions cost and have not set aside enough money to pay what they promised. Until this problem gets fixed, any additional money being generated by sales taxes, income taxes and property taxes for schools may wind up in the pension system.
The underfunding albatross has been getting larger every year. The state’s payments to districts do help them out and limit their exposure to the pension burden. But they do not absolve lawmakers of their responsibility to properly fund a pension system that meets the commitments the state has made to current and former employees. Nor do they fix the system’s funding problem. To stop the underfunding, lawmakers ought to develop a defined contribution system that will put teachers’ future retirements in their own hands rather than at the mercies of the annual appropriations process.
Adding to the dialogue
Recent debates about whether persistently underperforming Detroit schools should be exempted from state closure laws prompted the Excellent Schools Detroit coalition to share some observations behind their gloomy outlook. People of good will want much better opportunities and outcomes for Detroit students, even as the path to that destination appears steep and foreboding.
Most of Excellent Schools’ broad points about the state of education in the Motor City and its future prospects (restated below in bold lettering) hold a great deal of truth and offer good starting points for conversation. The following additional key facts and insights need to be included in the policy discussion.
1. For Detroit families, the education system remains in crisis. The staggering share of poorly performing schools in the city is undeniable. The question is what truly promising “comprehensive” solution ought to be pursued, when the recently rechristened school district has seemed impervious to making needed changes. Given the dire situation, no quality educational option should be left off the table.
2. The new Detroit Community School District Board (DCSD, formerly DPS) will have to move aggressively. Streamlining an oversized bureaucracy and rooting out the stench of corruption should be at the forefront of a new board’s agenda, as it seeks to regain public trust and redirect dollars to serve students directly in classrooms. Rethinking the role of the board and the central office to foster more local control ought to be a top priority.
3. Is the charter sector really ready to lead? The best available research shows Detroit charters on average add three months of learning each year in key subjects, but the bar does need to be raised higher. Excellent Schools is correct that too many Detroit area charters remain among the bottom 5 percent of the state’s Top-to-Bottom Rankings, though the number is far lower than the number of district schools.
But Michigan would be better off with a system that grades all schools — charter and district — not simply on raw achievement scores that tend to reflect the facts of student poverty. Excellent Schools Detroit’s local scorecard, which gives equal weight to academic proficiency and students’ progress compared to their peers, gives most schools serving the city’s students below-average marks. The result is most pronounced among DPS schools.
Excellent Schools specifically mentions two charter operators with “track records of low performance.” But directly taking into account student poverty rates, as our Context and Performance Report Cards do, tells a somewhat different story. The schools specifically cited earned twice as many A’s and B’s as D’s and F’s on the most recent editions of our report card. In other words, taking poverty into account provides for a fairer measurement of teachers and schools.
4A. The legal battle around closing schools is the predictable result of divisive, shortsighted legislating. The new Detroit reform legislation includes tougher provisions for automatically closing charter schools. It also closes the loophole on “authorizer shopping” by poor-performing charters seeking to escape sanction. But even before these changes, 21 struggling charters have been closed since 2010. No district school in Michigan has been shut down for chronic underperformance.
The new Detroit district published a legal brief arguing the law exempts its schools from closure for three years, but the attorney general since has issued a binding opinion that no such exemption exists. Wherever one wishes to assign blame for the public disagreement, everyone should agree on the need to create a level playing field for implementing high-stakes academic sanctions.
4B. Some schools should close, BUT closing schools alone won’t solve the problems. Yes, the evidence shows New York’s approach to school closures had measurably small benefits on the performance of local high schools. But there is no valid reason to put faith in this strategy alone. Any potential reforms for Detroit should be evaluated on the evidence of their costs and benefits. One reform that has not been enacted is to remake the city schools’ governance after Washington, D.C.
5. With or without closures, time to rethink special education. Following this undeniable point, Excellent Schools has recommended creating a task force “to consider citywide coordination and consolidation of special education and bilingual services.” The intermediate school district is a good place to start looking for reform opportunities. Wayne RESA oversees and funds a unique mandatory center-based program for more severely disabled students. The county’s conventional districts end up serving an unusually higher share of special-needs kids than charters do, when compared with the rest of the state.
6. Going beyond performance, Detroit increasingly has an equity problem. Excellent Schools accurately points out dramatic regional gaps in school quality. Schools in and around downtown tend to significantly outperform those in outlying neighborhoods. Easy solutions are not forthcoming. However, one short-term step to help reduce inequity for impoverished families would be to give families transportation vouchers they could use to get to better schools.
7. Which brings us to the last observation, poverty matters. While poverty ought not provide an excuse to abandon hope for the current generation of Detroit kids, it is quite reasonable to acknowledge the effects poverty tends to have on incoming students. Excellent Schools notes the Mackinac Center’s longstanding critique of Michigan’s school accountability rankings. Since many schools may be closed at the end of the current school year, that critique takes on more urgency.
As we seek to identify the worst schools, we should not discard achievement standards that fail to take student poverty into account. These raw measures must be balanced with measures of academic growth or comparisons based on student poverty. Detroit students, who already have few options for quality schools, cannot afford to see the wrong schools shut down.
Tax reform proposals and state pension underfunding
This morning the Washington D.C.-based Tax Foundation released its 2017 State Business Tax Climate Index. The index ranks the structure of a state’s tax system, not the actual financial burden it imposes.
Michigan’s position is unchanged from last year at No. 12. This is up from 2010 when the state was ranked 17th, according to Joseph Henchman, an economist with the foundation. Michigan’s ranking improved after it eliminated the hated Michigan Business Tax and related surcharge in favor of a more transparent Corporate Income Tax.
The index is constructed from six subindexes including such items as the state’s property, sales and corporate income taxes. The outlier is Michigan’s Unemployment Insurance Tax, which came in at 47th worst among 50 states.
Henchman, a vice president with the foundation, argued that Michigan’s ranking for the unemployment-insurance tax was a function of “a relatively high minimum tax rate, a high maximum rate, charging benefits to the most recent employer only and charging employers even if the former employee’s benefit awards are reversed or the employee refuses suitable work.”
The West Michigan Policy Forum met Monday and more than 400 of its members — comprised of business leaders — voted on its top policy priorities.
The top vote-getter was pension reform. Moving government employees to a defined contribution program (similar to a 401k program in the private sector) from a defined benefit one could save billions of dollars going forward. Today’s system is underfunded and unaffordable.
In second place: Eliminate the state’s personal income tax. This bold idea — if adopted — would place the Great Lake State in some rarefied air among states. Only seven sister states function without a personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
The Mackinac Center has long called for rolling back the state’s personal income tax burden. In 2007 the Legislature imposed a “temporary” personal income tax hike, increasing rates from 3.9 percent to 4.35 percent. A change in 2011 reduced the rate, but only to 4.25 percent, and made the new rate permanent.
Ten tax-related bills were introduced in the House and Senate over the last week. The complete list is available at MichiganVotes.org.
Lansing State Journal publishes op-ed on local pension debt
Michigan’s counties are drowning in pension debt and it’s time for their leaders to act to prevent future cuts to services or major tax hikes to residents.
Josh Paladino, a Mackinac Center summer research intern, wrote about the ballooning unfunded pension liabilities municipalities are facing in a recent op-ed published by the Lansing State Journal.
When governments refuse or are unable to address unfunded pension liabilities, retirees are left vulnerable and uncertain about their futures while taxpayers are ultimately left holding the bill. In 2015, Michigan residents paid $405 million to county pension plans across the state.
Using Ingham County’s $125 million pension funding gap as an example, Paladino made the case for shifting new hires to defined contribution plans, rather than defined benefit, as a number of counties in Michigan have already successfully done.
Ten counties have shifted from defined benefit plans to defined contribution plans for new employees and together have 94 percent of the money needed to cover their pension debt. …
Oakland County tackled its pension debt in 1994 by shifting new hires to a defined benefit plan and now has a system that’s 98 percent funded.
Deputy County Executive Robert Daddow said closing defined benefit plans and enrolling new hires in a defined contribution plan will cut down on the required payments long term, while still providing solid benefits to retirees.
Collectively, Michigan’s 83 counties have a $2.5 billion unfunded liability and owe pensions to over 63,000 members in the system.
Read Paladino’s in-depth report on Michigan’s pension crisis in Michigan Capitol Confidential here.
New Mackinac study featured in state media
Michigan’s 21st Century Jobs Fund program is fatally flawed and lawmakers ought to put it out of its misery, one Mackinac Center analyst argued in a recent op-ed published in The Detroit News.
Gov. Jennifer Granholm promised the program would blow the state away, but 10 years later, taxpayers have little to show for the hundreds of millions of dollars reallocated through the jobs fund. Aside from the fund’s lack of transparency, questionable reporting practices and possible constitutional issues, Mackinac Center’s Assistant Director of Fiscal Policy argues the entire premise of the corporate welfare program is flawed.
The state does not have great expertise in picking winners and losers and is even less likely to do so when the pool of options is limited. …
The legislation that created the program says that it is about diversifying the economy and creating jobs. Those are measurable goals but tough to measure when the data is hidden.
But creating jobs and diversifying the economy is unlikely to happen because the program is not set up to succeed. Its scope is not large enough to make a dent in the job creation picture. The state economy creates tens of thousands of jobs every month and loses a similar number.
Hohman authored a new study evaluating the fund, which The Peninsula covered.
The originators of this program wanted a self-sustaining economic development fund that would create 72,000 jobs,” James Hohman, assistant director of fiscal policy at the Mackinac Center and the study’s author, said. “A decade later, hundreds of millions are gone and only 6,500 jobs are claimed as a result of this spending. Even then, state auditors have warned about the quality of data in the reports on this program and the administrators of it have not complied with transparency requirements.”
Hohman said any economic impact by the 21st Century Jobs Fund has been negligible and argued the money invested into it would be better spent elsewhere.
Read the full op-ed in The Detroit News here.
Read Hohman’s latest study, An Evaluation of Michigan’s 21st Century Jobs Fund, here.
Patrick Wright joins WNEM TV5 to discuss new rule
Nearly half the states, including Michigan, are suing the U.S. Department of Labor in an effort to block the Obama Administration’s new overtime rule that would significantly increase the number of people eligible for overtime pay.
State Attorney General Bill Schuette, who signed onto the suit, said the new rule that’s set to take effect Dec. 1 will hamper job creation and increase unemployment. Patrick Wright, Mackinac Center vice president for legal affairs and director of the Mackinac Center Legal Foundation, told WNEM TV5 that the rule may be designed to increase wages, but will do the opposite.
A lot of companies, they’re not miraculously going to come up with more money. They’re going to find ways to make ends meet and that’s probably going to harm the very people that this regulation is supposed to help.
Currently, salaried workers who make $23,660 per year or less are eligible for overtime pay, but the new rule would raise the cutoff to $47,500.
Watch the full news report at WNEM TV5 here.
LaFaive comments in MLive article
If Michigan lawmakers want to stifle the state’s craft brewers, they’ve found just the way.
Rep. Tom Hooker, R-Byron Center, introduced House Bill 5873 this month to increase Michigan’s beer tax from $6.30 to $21.70 per barrel, a nearly 250 percent hike. Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center, weighed in on the debate in a recent Mlive article.
It will harm businesses including the many craft brewers in Michigan that have opened in recent years. Michigan is one of the leaders in craft breweries, and here we are hamstringing organizations that might actually be destinations of travel.
He added that the tax could decrease consumption or drive people to consume other types of alcoholic beverages.
Read the full article from Mlive here.
Out with old in with new licensure mandate; increase legislature transparency; more
House Bill 4282, Exempt small-project home repair contractors from licensure mandates: Passed 66 to 40 in the House
To exempt individuals who do residential repair and rehab jobs worth less than $4,000 from licensure mandates imposed on contractors.
House Bill 5469, Extend open records law to legislature: Passed 100 to 6 in the House
To extend the Freedom of Information Act to legislators, whose offices are currently exempt, subject to a broad range of exceptions and exemptions. The House also passed House Bill 5477, which extends the disclosure requirements to certain kinds of documents held by the governor's office.
House Bill 5475, Exceptions to applying open records law to legislature: Passed 100 to 6 in the House
To define the records that would be exempt from Freedom of Information Act requests to the state legislature under House Bill 5469. These include standard provisions on records dealing with security matters, active contract bidding, information of a personal nature or business proprietary records, records that violate attorney-client privilege or involve ongoing litigation, etc. The bill would also exempt records of exchanges between a lawmaker and a constituent. Notably, records held by the Republican and Democratic caucus staffs would also be exempt, including their communications and public relations operations.
House Bill 4822, Ban social promotions for third graders who can’t read: Passed 60 to 47 in the House
To prohibit “social promotions” of third graders who have not reached minimum reading benchmarks starting in the 2019-2020 school year, subject to many conditions and exceptions, and with requirements that additional interventions and tutoring be tried before a student is actually held back. This final version of the bill allows a school district superintendent make an exception but not teachers or principals, and only if the student is proficient in other subjects.
House Bill 5826, Ban government suing person who submits open records law request: Passed 102 to 5 in the House
To prohibit public bodies from suing a person or entity making document requests authorized by the state Freedom of Information Act.
House Bill 5651, Let new port authorities give private company partnership status
To permit a government port authority to grant partnership status to a private business or developer, which would permit them to operate and collect revenue from the facility. New port authorities would not get half their expenses paid by the state like existing ones, but would be able to keep any annual profits rather than turning them over to the local and state government.
House Bill 4580, Require "claw back" provisions in some selective tax break deals: Passed 35 to 0 in the Senate on September 21, 2016
To require that starting in 2017 local governments and a state "Next Michigan Development Corporation" must include "claw back" provisions in new tax break deals they selectively grant to particular corporations or developers, allowing foregone taxes to be demanded if the beneficiary does not abide by the terms of the tax break agreement. This applies to property taxes levied on business tools and equipment ("personal property tax").
Senate Bill 570, Exempt certain sportsmen club property from property tax: Passed 24 to 10 in the Senate
To exempt property owned by sportsmen or gun clubs from property tax if they let governments use their facilities, provide gun safety classes to the public, and have other pro-social practices specified in the bill.
Senate Bill 1022, Create process for disclosing police firing to other agencies: Passed 35 to 0 in the Senate
To establish a process and give a liability exemption that lets one police agency disclose information to another about a formerly-employed officer who may have been fired. A “separating” officer would be allowed to review the record and add a written explanation to it. Police job applicants would have to sign a waiver allowing these records to be shared with a prospective employer.
Senate Bill 1015, Impose licensure on applied behavioral analysis: Passed 34 to 1 in the Senate
To impose licensure on practitioners of “applied behavioral analysis," with $90 annual license fees and other fees, regulations, scope of practice restrictions, education and experience requirements, and more.
SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit http://www.MichiganVotes.org.
Skorup weighs in with USA Today and the Detroit Free Press
Tesla is taking its fight to sell vehicles directly to consumers in Michigan to the courtroom.
According to an article published by USA Today and the Detroit Free Press, the electric automaker is suing Michigan Secretary of State Ruth Johnson, Michigan Attorney General Bill Schuette and Gov. Rick Snyder over a 2014 state law requiring manufacturers to sell vehicles through dealerships. Tesla, much like Apple, wants to sell directly to consumers.
A bill introduced this year by Rep. Aaron Miller, R-Sturgis, would allow Tesla to sell vehicles in Michigan by allowing direct-to-consumer sales.
Jarrett Skorup, a policy analyst with the free-market think tank Mackinac Center for Public Policy that supports changing the law, said that people should be able to freely sell goods, and supports Tesla’s position that it should be able to sell vehicles in Michigan without interference from dealerships.
Tesla argues in the lawsuit that Michigan’s law violates the Fourteenth Amendment’s due process and equal protection clauses.
Michiganders wishing to purchase a Tesla may only do so by going to another state. Illinois, Indiana and Ohio all have galleries where consumers may buy a vehicle directly from the company.
Read the full article in USA Today here.
The Nov. 8 North Dakota ballot initiative to raise cigarette excise taxes by 400 percent will — if adopted — increase cigarette smuggling and cause other unintended consequences.
We have studied cigarette evasion and avoidance (what we call “smuggling”) around the United States for a decade and have developed a statistical tool for measuring the degree to which cigarettes are smuggled across state and international borders.
Our model of smuggling — which uses data through 2014 — tells us that for every 100 cigarettes consumed in North Dakota, another 11.6 are smuggled out to other states, mostly neighboring ones such as Minnesota. There is no illicit inbound traffic.
We can run “what if” scenarios with our statistical model to estimate future smuggling rates based on proposed excise tax increases. We find that, after raising excise taxes to $2.20 per pack, North Dakota will stop being a cigarette “exporting” state. Instead, cigarettes smuggled into the state will become 16.6 percent of the total market. That is, of all the cigarettes consumed in North Dakota, more than 16 percent will have been smuggled in through one of two means: casual or commercial trafficking.
Casual smuggling typically involves people buying less expensive cigarettes for personal consumption. They do this through online purchases or going to a different taxing jurisdiction, such as an Indian reservation or another state. Commercial operations, by contrast, involve long haul, large shipments from distant states such as Virginia or North Carolina.
With the current excise tax at 44 cents per pack, almost 100 percent of the North Dakota-related smuggling is casual. People in neighboring states drive across the border to buy smokes and return home. But under the higher tax scenario, most smuggling will be inbound, and commercial.
Our model compares legal tax-paid sales with reported smoking rates by state. The difference between the two must be explained, and we — and other scholars — attribute it to smuggling. The model also controls for important factors that may influence measurements, such as border county populations and the presence of Indian reservations.
The reservation variable is important because there are four tribes in North Dakota which may be a convenient source of lower-priced smokes. A 2014 National Bureau of Economic Research paper titled, “Reservation Prices: An Economic analysis of Cigarette Purchases on Indian Reservations” looked at this problem. It conducted a survey of 6,539 smokers that roughly 19 percent of them “always” buy their smokes on one of New York’s reservations.
Some states — such as Washington — try to minimize reservations as a source of cheaper smokes by negotiating tax compacts with their tribes. Such compacts typically require tribes to collect state-level excise taxes on sales to nontribal members. North Dakota has one such compact. We’re not yet sold on their efficacy. Taking away the incentive for consumers to shop on reservations just creates an incentive for individual tribal members to become a source of cheap cigarettes themselves.
The state of Washington’s tax compacts have still not prevented it from having high smuggling rates. We estimate its 2012 smuggling rate at 48 percent of the total market. Only three other states had higher rates that year. Would the absence of tax compacts have changed that fact? We’re not the only scholars to estimate smuggling rates. In 2015, a team of researchers hired by the United States Congress (and using data through 2012) published their own analysis and estimated Washington’s smuggling rate at 45.5 percent.
To give the reader an idea of how profitable the trade in illicit cigarettes is, consider one example. In 2013 a California man pleaded guilty for his work in trying to smuggle millions of cigarettes shipped from China to the Port of Newark in New Jersey. They were then shipped to California for distribution. If smuggling is profitable at those distances, imagine what profits await organized crime syndicates that send loads of cigarettes from Nebraska or Missouri to North Dakota.
The massive profits that await smugglers have inspired every other sort of mischief. In the highest profile (but not only) case of its kind, North Carolina men ran vanloads of cigarettes to Michigan and used part of their profits to support the Hezbollah, a known terrorist organization. At other times, cigarettes have been brazenly stolen by thieves who cut through the roofs or break through the walls of legal, cigarette wholesalers and retailers. Other thieves hijack trucks for their cargo of cigarettes. The list goes on.
Supporters of this initiative may mean well, but the costs associated with the tax increase may outweigh the benefits.