May 10, 2007 at 11:22 am

Laws, court rulings fueled crisis

Michigan is only state that makes schools pay entire pension and health care tab

LANSING -- The budget woes facing Michigan schools today were spawned by a perfect storm of legislative moves and court rulings that began 20 years ago.

The Michigan Public School Employees Retirement System faces $25 billion in unfunded liabilities -- a growing bill that chips away at the state's public education system and threatens the benefits promised to more than 151,000 retirees and their spouses.

Today's retirement system is encumbered by a stew of amendments that, over time, have cost taxpayers hundreds of millions of dollars.

In 1986, spouses and dependents were included under the school retiree health care plan. Schools spent $243 million on the health care of spouses and dependents in 2005 -- about 38 percent of all medical spending.

In 1989, the Michigan Legislature amended the retirement program to allow school employees to purchase up to five years of service credit, in effect, allowing workers to buy early retirement. The purchase price, according to the amendment, would be based on the extra pension the worker would receive. Legislators didn't account for the cost of retiree health care, mainly because health care was a fairly minor expense at the time, said former state treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University. Today, with the health care tab for a retiree and spouse averaging more than $10,000 a year, that 1989 oversight is costing the state hundreds of millions of dollars. Roberts calls it an "unintended consequence."

In 1991, facing a budget shortfall, Gov. John Engler and the Legislature switched retiree health care funding from an actuarial basis, meaning future costs were taken into account, to a pay-as-you-go basis. Switching the system allowed the state to raid millions that had been set aside for future medical costs. Today, the health care fund alone is underfunded by $15 billion.

In 1994, Proposition A lowered Michigan property taxes and helped equalize school funding between districts. In association with that ballot initiative, the Legislature switched the burden of paying for the school retirement system from the state to the schools. Prior to 1994, the state paid school retiree pensions and health care. Afterward, Michigan became the only state in the nation to make schools pay the entire tab for a state-run pension and health care program, according to the National Council on Teacher Retirement. Nine states offer no retiree health care for school employees; in other states, medical bills are paid by various combinations of the state, employers and employees.

Concerned about rising pension costs, the Legislature in 1996 switched state and public school retiree pension plans from defined benefit (in which retirees collect pensions for the rest of their lives) to defined contribution (in which the employee contributes to a 401(k) plan). The move was billed as a way to save millions of dollars.

But the plan was repealed for school employees before it began. The key leverage for keeping the defined contribution plan was an unrelated court case, in which the state was ordered to pay schools $3.2 billion for underfunding special education. Allan Short, director of legislative affairs for the Michigan Education Association, said the MEA cut a deal with the Legislature: Save the defined benefit pension for school employees, and the state could pay some of the $3.2 billion through actuarial changes. Today, that pension plan faces $10 billion in unfunded liabilities.

Since 1994, Michigan gives schools a per-student payment, called the foundation allowance, which is supposed to cover retirement costs and other expenses that the state handed off to the schools in Proposition A. Schools still get state money, but the individual districts must decide how to spend that cash.

Over time, retirement costs have increased faster than the per-student allotment. In the past 10 years, per-student retirement costs have gone up 83 percent while the per-student foundation allowance has increased 35 percent.

Skyrocketing health care costs have hit the system hard. But some of the cost increase is the result of self-inflicted wounds, claims Roberts.

"When there were attempts to increase retirement benefits, nobody stood in opposition," Roberts said. "Nobody said, 'The schools can't afford this.' We basically said, look, we have all this money going to schools, they can decide how to spend it."

But the system doesn't allow the schools to control their retirement spending. Retirement rates are set by the Legislature. Even the MPSERS board of directors has no say over retirement rates or retirement policy of the $3.5 billion program it administers. "They (legislators) don't even ask us," said MPSERS board member Rick Montcalm, who is also superintendent at Utica Community Schools.

The MPSERS board passed a resolution last year asking the Legislature to close a loophole that allows people to qualify for lifetime health care benefits by working for public schools for just five years, from age 55 to 60. In another instance, Phil Stoddard, executive director of the Office of Retirement Services, asked the Legislature to drop health insurance for those who retired early by purchasing credit for years of service.

Neither made it to a vote.

"I've worked in a legislative office and I've taken the phone calls when someone considers touching retirement health care," said Ken Braun, policy analyst of the Mackinac Center for Public Policy. "It's easier for legislators to avoid this because it's a headache."

The state gives schools a per-student payment to cover retirement costs, ... (Laura Little / Special to The Detroit News)