The way state Rep. Rick Olson sees it, there are only three places to find a solution to financial problems in the Michigan Public School Employees Retirement System.
“Increased contribution by employees, reductions in benefits -- or find a magical money tree somewhere,” the Saline Republican said.
With no magic to call on, a group of Republican legislators came up with Senate Bill 1040, which tackles the $45 billion unfunded MPSERS liability in three major ways:
* Teachers, staff and administrators hired since 1990 would pay 8 percent of their annual salary into the retirement fund; they currently pay a range of 3 percent to 6.4 percent, depending on income.
* Current employees hired before 1990 would have the choice of paying 5 percent, up from zero contribution for pensions, or switching to a 401(k)-type program or freezing their pension at current levels.
* Current retirees would switch from a 90/10 health-care plan (i.e., paying 10 percent of its premium costs) to an 80/20 split.
All employees currently pay 3 percent for retiree health care, under a law passed in 2010, although the law is under judicial review and the money, while still being collected, is held in escrow. As of September 2011, it totaled $296.4 million, according to the MPSERS comprehensive annual financial report.
Changes also would come in retirement eligibility, requiring members to have a combined age/years of service number of 85. Members currently can retire after 30 years of service, but five of those years can be purchased. And to receive retiree health care, members would have to be at least age 60, after a phase-in period.
The bill hasn’t been warmly received by all quarters. A Senate hearing drew sharp testimony from teachers and retirees.
Gary Olson, a former head of the Senate Fiscal Agency who is preparing a paper on the financial impact of the bill, warned the panel that some changes may violate the state constitution, which guarantees pensions.
“I'm not convinced all the members of the Legislature understand the current system,” he said later. “A vast majority (of MPSERS members) are already contributing a significant amount of their salary. That’s not known by everybody.”
Olson said legislators should have the Attorney General's Office weigh in on the bill's constitutionality.
Other critics point to the decision made by Gov. John Engler in 1991 to end the state’s contribution to the MPSERS health-care fund, which had been prefunded. Switching to a pay-as-you-go basis helped set the stage for the current shortfall, as health-care costs have exploded in recent decades.
“What hasn't happened is, the state hasn't been pre-paying into that system, the health-care side, which is the majority of that $45 billion,” said Doug Pratt, director of public affairs for the Michigan Education Association, the state’s largest teachers union.
Pratt added that the state has made the situation worse by encouraging such initiatives as charter schools, privatization and outsourcing, which reduce the number of school employees in the system.
“Let's say you have a school custodian, works 20 years, accrued benefits and was paying into them. With the push to outsource those jobs, that person's job is no longer paying in, but that accrued liability is still there. No one is paying for that,” said Pratt, who suggested requiring charter operators and others taking such contracts to pay into the MPSERS system.
The largest share of the funding burden falls upon local school districts, which pay a percentage of their payroll, an amount set in Lansing. This year, it’s 24.46 percent; next year it will rise to 27 percent and clear 31 percent the year after that. As payroll is more than 80 percent of most school districts’ spending, the dizzying rise in contributions is reducing resources for other programs.
“It’s a huge amount that will have to be paid for in laid-off staff,” said Peter Spadafore, a member of the Lansing School District board. Senate Bill 1040, while painful, is “a good start” toward addressing the problem, he said.
“Our goal is not to strip away benefits, it’s to come up with a system that is affordable and sustainable,” Spadafore said.
Rep. Olson told a group of Michigan school administrators last month that the work group wanted the districts’ contribution to be no higher than 22.5 percent of payroll, and perhaps even lower, the Kalamazoo Gazette reported. Olson, himself a former school business manager in Adrian, said the group’s goal was threefold – to reduce unfunded liability, reduce districts’ contribution rate and be fair to employees.
“But without doing something about stranded costs” -- the people drawing out of the system who are supported by fewer and fewer paying in -- we’re like a boat with a lot of water in it,” he said. “We’re bailing like crazy, but first we need to plug the hole.”
Staff Writer Nancy Nall Derringer has been a writer, editor and teacher in Metro Detroit for seven years, and was a co-founder and editor of GrossePointeToday.com, an early experiment in hyperlocal journalism. Before that, she worked for 20 years in Fort Wayne, Indiana, where she won numerous state and national awards for her work as a columnist for The News-Sentinel.