Noteworthy In 2017: School Pensions Reformed, No Annual Contribution Shortfall

For the first time in eight years, the state of Michigan put more money into its public schools employees’ pension fund than accounting rules require. Contributing less than that in most years is how a pension funding shortfall has grown large.

The state contributed $2.4 billion to the Michigan Public Schools Employees Retirement System in 2017. That contribution to MPSERS was $64.7 million more than the amount, known as the annual required contribution, that accounting standards recommend.

The state has underfunded its pension obligations for years, which is one reason it has a staggering unfunded liability of $29.1 billion. That amount is the difference between how much the system’s own actuaries say it should have to meet its pension promises and the amount it actually has.

The contribution shortfalls have been substantial in many years. In 2013 and 2014, for example, the state paid a combined total of $1.8 billion less into the system than what was required by the accounting standards.

Figures on the 2017 pension contribution level were included in a recently released annual report for the school employees retirement system.

“As part of our normal process, additional payments were made this year to make up for prior years when the ARC [annual required contribution] wasn’t met due to payroll that didn’t meet expectations,” said Caleb Buhs, director of communications for the Department of Technology, Management and Budget.

The increasing costs of the employee pension system have been described as a budget-killer for local school districts.

For example, Utica Community Schools’ contribution to MPSERS increased by $23.6 million over a six-year period, jumping from $19.9 million in 2011 to $43.5 million in 2017. If the pension costs had stayed at its 2011 level, the district could have given each of the 1,450-plus teachers in the district a $16,000 bonus this year.

“Lawmakers and managers have regularly missed its payments into the pension system and have accidentally made school employees the state’s largest creditors,” said James Hohman, director of fiscal policy at the Mackinac Center for Public Policy. “So it’s a relief to see them working to pay down these obligations.”

In 2017 Michigan’s legislators voted to close this defined benefit school pension to new employees, 20 years after their predecessors closed a defined benefit system for state employees. New school employees now can enroll in a defined benefit system, in which they themselves must absorb a portion of any future underfunding. Alternately, they may enroll in a defined contribution 401(k) account with substantial employer contributions or a self-funded annuity. Closing the previous system does not mean its liabilities disappear, but it does contain them and lead to eventually paying them off.