May 11, 2007 at 1:00 am

Michigan's educational time bomb

Employees buy time, state pays

Workers can purchase early retirement with pension and health benefits at bargain prices.

Some 28,500 Michigan public school employees have figured out what the state has not: Buying their way into early retirement is a bargain.

By paying a percentage of their annual salary, everyone from superintendents to crossing guards can purchase up to five years of service credit, allowing them to retire after 25 years instead of 30.

The price tag, which varies depending on age, salary and years of service, is based only on the cost of that employee's pension -- retiree health care costs aren't factored in.

If that doesn't seem like a big deal, consider this: The average health care cost for those early retirees and their spouses is $10,000 a year.

School retirees have done the math. They've purchased 99,204 years of service credit.

The state Office of Retirement Services, which administers the school pension and retiree health system, hasn't calculated how much the policy has cost taxpayers. But using today's health care costs, those bargain-basement prices paid by retirees could cost Michigan schools as much as $1 billion.

And that price tag doesn't even count the service years purchased by current employees. When those workers retire early, the total cost could balloon to as much as $3 billion.

While the ultimate cost to schools depends on when employees retire, the program is a gaping, high-priced loophole contributing to the financial crisis facing Michigan schools.

"This is financial malpractice," said Ken Braun, policy analyst for the Mackinac Center for Public Policy, a conservative think tank. "The legislature and the governor have a responsibility to fix it."

Michigan's schools are being pushed toward financial crisis by retiree pensions and health care, which have grown at three times the rate of inflation over the past decade.

While most of that growth is the inevitable result of an aging population and rising health care costs, some of the bill is attributable to policies that encourage school employees to retire as much as 20 years earlier than their counterparts in the private sector.

About 64 percent of school employees retire by age 60; 25 percent are gone by 55. Buying five years of service credit allows a teacher who got a job at 22 to retire with full benefits at 47.

The average school retiree left work after 25 years, according to the Office of Retirement Services.

Critics and supporters of the school retirement system agree the service credit purchase plan is the most costly loophole in the system.

Here's how it works:

Since 1989, all school employees have been allowed to buy extra years of service credit, increasing, in the eyes of the retirement system, the number of years they've worked. Those years can be purchased at any time, at any age.

Actuaries in the Office of Retirement Services calculate the price employees pay for those years on a sliding scale. A 22-year-old teacher straight out of college would pay less (10.5 percent of annual salary) than a 50-year-old veteran principal (20.5 percent).

According to the Public School Employees Retirement Act, the price is determined by the "average actuarial present value of the additional benefits" the retiree will receive. Those "additional benefits" have, since the service credit purchase plan was enacted in 1989, been defined as pension benefits.

Doug Roberts, state treasurer for much of the 1990s under Gov. John Engler, said the cost of health care benefits weren't included in the calculation because, at the time, costs were minimal. Today, health care costs account for more than a third of the average retiree benefit package. The average pension of school retirees is about $18,000, while health care for a retiree and spouse costs about $10,000 a year.

What Roberts calls an "unintended consequence" costs schools, even by conservative estimates, tens of millions each year.

Last year, Office of Retirement Services Executive Director Phil Stoddard recommended to the Michigan Legislature that the policy be amended to drop health care coverage to retirees who buy their way into early retirement. Health care coverage would begin at the retiree's normal retirement date -- typically age 60 or when they would have completed 30 years of employment -- rather than when they begin early retirement.

"It (his proposal) went nowhere," Stoddard said.

That doesn't surprise Rick Montcalm, assistant superintendent at Utica Community Schools, who serves on the state retirement board that oversees the program. "Any time you bring up changes in retirement, you hear about it (from school employees)," he said.

The Michigan Education Association, the state's main teachers union, has one of the most powerful lobbies in Lansing.

Even with the state struggling with a deficit, Roberts questions whether the Michigan Legislature will try to close the costly loophole.

"We didn't realize the consequences of some of the things we did," Roberts said. "Now, pressure is coming from the schools, saying we can't afford (retirement costs). But I don't think the state is looking at the same problem."