A news service for the people of Michigan from the Mackinac Center for Public Policy

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Public School Pension System Totally Broken

Taxpayers on the hook for billions in unfunded liabilities

For every $10,000 a school district pays an employee in the upcoming 2013-14 budget year, the state government and school district will send the retirement system $2,935 to cover health care retirement and pension costs, said James Hohman, a fiscal policy analyst for the Mackinac Center for Public Policy.

Yet, only $122 of that $2,935 actually goes to fund the benefits of that employee. The rest goes to pay an increasingly multi-billion dollar unfunded pension and retiree health care liability for all others in the system, Hohman said.

Last year, Michigan legislators enacted reform measures to help reduce the costs of the Michigan Public Schools Employees Retirement System (MPSERS). However, that MPSERS’ unfunded liability still increased to $24.3 billion in 2013 from $22.4 billion in 2012, just for pension liabilities. That unfunded pension liability was $835 million in 2007.

The cost to state of Michigan employers — such as school districts, community colleges and libraries — to pay for MPSERS pension is capped at 24.79 percent of its employee payroll. In 2012, those employers paid $1.45 billion just to cover pension liabilities. However, that wasn’t enough because the unfunded liability has become so big that the state must pay an additional 4.5 percent over the 24.79 percent to cover the costs above that cap.

"One concern we have is the fact that even though there is additional money coming into the school aid fund as our state is slowly recovering, those funds are being eaten up by this off the top required payment," said Dave Martell, executive director of the Michigan School Business Officials.

Martell said after the MPSERS costs are covered, there is a concern there won’t be enough money left to provide the districts with more foundation allowance funding to cover even inflationary cost increases.

Hohman said the state of Michigan has to admit it has a problem with MPSERS unfunded liabilities and close the retirement system. He said the state should switch from the MPSERS defined benefit program that pays an annual pension, to a more manageable defined contribution plan that makes an annual payment into a retiree savings account.

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