May 10, 2007

Michigan's education time bomb: Costly, loophole-ridden retirement system threatens public schools

Michigan's school retirement system is riddled with loopholes and slipshod policies costing taxpayers hundreds of millions of dollars and driving the state's public education system toward financial crisis.

Schools are laying off teachers, scrapping programs and mothballing extracurricular activities to pay for the spiraling pension and health care bills of retirees -- some of whom qualify for generous benefits by skirting state retirement policies, often with the knowledge and assistance of the state office charged with administering the $3.5 billion program.

The impact could be devastating to public education in Michigan, the only state that makes its schools bear the entire burden of retiree pensions and health care. This year's bill -- an estimated $1,015 per student -- is more than schools spend on books, buses, computer technology and building maintenance combined.

And it's going to get worse.

The retirement assessment -- set by the state but paid by individual school districts -- is now at a record high of 17.74 percent of each district's payroll. That rate is expected to jump to 30 percent by 2020 -- a level that all sides agree would break the backs of Michigan schools.

Phil Stoddard, head of the state office that administers the retirement fund, defends the system.

"I wouldn't say that it's too generous," said Stoddard, executive director of the Office of Retirement Services. But Tom Clay, former director of the state's Executive Budget Office, disagrees. "It's a time bomb," he said. "It's a train wreck. Use whatever term you want. And it hasn't reached (the worst of the) crisis yet."

An analysis by The Detroit News of data obtained through the Freedom of Information Act found:

  • An estimated $2 million per year in taxpayer dollars is spent on retirees who qualify for lifetime health care through a loophole. People who worked in state public schools for at least 10 years earlier in their careers can return to work for 102 hours -- about 13 work days -- at age 60 and receive taxpayer-funded health care for the rest of their lives.

  • Hundreds of "retired" school administrators are collecting pensions and retiree health care while continuing to collect a salary working the same jobs as contract employees, increasing the retirement burden. The practice, which one critic calls "a scam," costs taxpayers about $25 million a year.

  • As much as $1 billion could ultimately be lost through a program that sells early retirement at a discounted price. School employees can buy up to five years of service credit, paying the state so they can retire after 25 years instead of 30. But the purchase price of those years of service factors in the cost of pension benefits but not retiree health care. More than 23,000 school employees have purchased a total of almost 100,000 years of service. At current health care rates, that would cost school districts $1 billion -- as much as the state spends on road construction and repair each year.

  • Some districts are pushing more experienced teachers and administrators to retire early so they can save money by hiring younger employees. But those short-term savings quickly turn into long-term costs. Not only are schools losing some of their most experienced teachers before they have to, but also most of those retirees, some as young as their late 40s, begin drawing lifetime pension and health care benefits immediately.

    Schools may shave $30,000 from their payroll a year by replacing a veteran teacher with a teacher straight out of college, but that retiree will cost the overall state school retirement system about $50,000 a year. "They're saving money now but paying more later," said former state treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University. "There's no advantage to it."

  • Michigan pays for lifetime health care for employees who, in some instances, work as few as five years in public schools. That health insurance is considered to be a premier plan with excellent benefits and low co-pays, according to a health care insurance analyst.

    The schools paid $634 million in medical bills for retirees and their spouses and dependents in 2006.

    Cobbled together by two decades of amendments, protected by a powerful union and ignored by a timid Michigan Legislature, the Michigan Public School Employees Retirement System (MPSERS) is headed for a financial crisis that could devastate schools and ultimately threaten the benefits of thousands of Michigan retirees.

    The crisis has been building for years, but reform efforts have been thwarted by a befuddling circle of unaccountability. Cash-strapped schools pay the bills but don't administer the system; the state Office of Retirement Services administers the program but is powerless to change policies; the Legislature can change policies, but has been in no rush because it doesn't pay the bills.

    Today, the school retirement system is buried under $25 billion in unfunded liabilities for retiree pensions and health care.

    The ballooning cost of public pension plans like Michigan's school retirement system "have the potential to be the savings and loan scandal of the next decade," said Ken Braun, policy analyst of the Mackinac Center for Public Policy.

    Despite dire warnings, there is little appetite in Lansing to reform the system.

    "It represents a failure of political wills by the past two governors and the Legislature," Braun said. "(And) the costs are going up dramatically every hour we don't fix it."

    The Michigan Education Association, the state's teacher union, scoffs at the plan's doomsayers. "People don't understand what they're talking about," said Allan Short, director of government affairs for the MEA. "It's an excellent system that serves as an incentive to keep people in education."

    No one questions the need to provide good benefits to attract qualified employees for Michigan schools. But the benefits -- and the loopholes through which some qualify -- are threatening the very schools those benefits are meant to protect.

    "The program is completely unsustainable," said former state treasurer Roberts. "Something has to be done."

    Main reason for budget cuts

    Ten years ago, schools spent $485 per student to pay for pensions and retiree health care. Today, schools spend $1,015 per student.

    Driving those costs are rapidly rising health care costs and a growing number of retirees.

    The state's 553 school districts have no control over their retirement bill. The cost is set by the MPSERS, which last year sent out checks for pensions and health care bills totaling almost $3.5 billion to more than 151,000 retirees and surviving spouses.

    Each year, MPSERS actuaries project the total cost of retiree pensions and health care, then bill individual school districts to cover the cost. Districts pay a percentage of their payroll -- the bigger the district, the bigger the bill.

    Because between 80 percent and 85 percent of a school's budget is payroll, a small bump in the retirement assessment can lead to financial hardship.

    For example, this school year, the retirement rate rose 1.4 percent. That small increase cost rural Fowlerville Community Schools an additional $200,000; suburban Troy School District more than $1.1 million; and the state's largest district, Detroit, a whopping $11.1 million.

    While other school expenses such as fuel costs also are rising, retirement costs are the main reason districts across the state are scaling back programs and staff.

    "The impact (of retirement costs) is huge," said Tim McAvoy, director of community relations at Troy School District. "We've made $27 million in budget adjustments in the past three years."

    For Michigan schools to have paid the same amount in retirement costs this year as last, they would have had to cut $700 million in payroll -- the equivalent of laying off 9,300 teachers statewide.

    Michigan schools receive about 70 percent of their funding from the state through a per-student allowance. Increases in that allowance are supposed to cover increased costs of everything from payroll to pencils. But in recent years, the entire increase has been swallowed up by escalating retirement costs.

    From 2003 to 2006, the state increased the per-student allowance by $175. During those same years, the MPSERS bill jumped $178 per student.

    Utica Community Schools, one of the biggest districts in the state, slashed its staff by 215 people in the past four years, partly to pay for increases in the retirement assessment. "It (retirement costs) has a dramatic impact on our budget," said Utica Superintendent Rick Montcalm, who is searching for ways to cut another $8 million from next year's budget.

    Southfield schools, which this year will spend $13.6 million for retirement, cut its child care service and adult education to save money. "It's been difficult," said Southfield Assistant Superintendent Ken Siver.

    Retirement costs now eat up 14.3 percent of districts' $7,085 per-student allowance and 13 percent of total school funding.

    Citizens Research Council of Michigan, a state budget watchdog group, projects that the MPSERS contribution rate that was 12 percent as recently as 2002 will hit a staggering 30 percent by 2020 -- the equivalent of $6 billion in today's dollars.

    "We don't want to wake up someday and find that our system has gone bankrupt," said Don Wortruba, director of legislative affairs for the Michigan Association of School Boards. "If nothing is done, we could reach a point where the classrooms implode or the (retirement) system implodes and people who have been counting on health care won't have it."

    Plight mirrors that of Big 3

    In many ways, the financial straits of Michigan's public schools mirror the plight of the Big Three. Detroit's automakers and the schools both have offered generous retirement benefits to retirees for decades. As retirees live longer and health care bills rise, retirement costs have skyrocketed. Most organizations that offer retiree health care are dealing with rising bills.

    But the schools' predicament is magnified by a stampede of employees retiring at younger ages.

    In the past decade, while the number of public school employees rose 7 percent, the number of school employees retiring per year jumped 36 percent.

    Today, about 82 percent of all school employees retire before age 65; 64 percent leave by age 60, with 25 percent retired by age 55. The exodus begins around age 46, when employees with 25 years of service who take advantage of an early-out program retire and begin receiving their pension and retiree health care.

    As the number of retirees increases, so does the cost to the schools. Schools spent $338 million on health care for retirees younger than 65 in 2005. That's more than the state spends to run its 29 community colleges.

    School superintendents such as Sandra Feeley Myrand of Lakeview Public Schools in St. Clair Shores have been warning of a crisis for a decade with little effect. The faults in the system are well-known and, in some cases, agreed upon by Democrats and Republicans. Yet there has been little action in the Legislature to address the problem.

    "What legislators say is they don't know what to do," Feeley Myrand said. "They don't understand how the schools operate. What does that say about what they think of the value of education?"

    Republicans and Democrats agree that the system is headed over the cliff. Yet reform measures that are introduced every year die quickly in the state Senate and House. The Mackinac Center's Braun calls the school retirement system the "third rail of Michigan politics," meaning it is political suicide to try to curb teacher benefits. Even loopholes that impact few retirees and cost the state millions have not been closed.

    "We've got these big problems we've been trying to fix for years," said Tom White, director of legislative affairs for the Michigan School Business Officials, a group representing public school business managers. "Yet we've not found a legislature that has the political will to make these changes."

    Even if the system were reformed now, it would take years to make a notable difference, Roberts said. MPSERS contributions will continue to rise as retirees covered by the current policy move through the system.

    "It will take time, but that doesn't mean the state shouldn't address it now," Roberts said. "Otherwise, in 20 years, somebody else is going to be writing about this issue, and it's going to be a lot worse."

    You can reach Ron French at (313) 222-2175 or rfrench@detnews.com">rfrench@detnews.com.