News Story

Analysis: Gutted School Pension 'Reform' Could Come Back to Bite Schools

A modest school pension reform proposed by Gov. Jennifer Granholm earlier this year was mostly gutted by the Republican Senate, and subjected to more savagery in the Democratic House, but it nevertheless crawled out with a provision requiring employees to contribute an additional 3 percent to the cost of their retirement benefits. The amended statute contains no language requiring that money be used to ease the budget challenges facing school districts, however.

Those retirement benefits consist of two separate components. The first are monthly pension checks sent to retirees, the money for which is "pre-funded" and held in a pension fund that contains most but not all of the reserves required to meet future payments. Under the state Constitution, payment of this part of the benefits is essentially mandatory and guaranteed.

The other component is post-retirement health care benefits, and these are neither guaranteed nor pre-funded. The state disburses them from year to year on a "pay as you go" basis, and it retains the flexibility to trim them as needed.

The money for both comes from an assessment on school districts, the amount of which is calculated from year to year by the state Office of Retirement Services. This year the assessment is 16.94 percent of school payrolls. Before the pension reform bill passed, that was expected to increase to 19.41 percent next year.

It is widely expected that the ORS will use the new 3 percent employee contributions to reduce that assessment increase, but nothing in the revised statute requires them to do so.

In fact, the teachers union succeeded in amending the legislation to require that the new employee contributions be deposited into an "irrevocable" fund to pay those non-mandated retiree health care benefits. ORS could use the money to cover next year's "pay as you go" health care demands, or it could sock it away and still bill the schools the projected 19.41 percent payroll assessment.

That's probably unlikely this year, but lawmakers who blithely assumed it would not happen can only blame themselves if it does, if not now then at some time in the future.


Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.