News Story

Commentary: Pension Reform Bigger School Fiscal Issue Than Education Budget

School officials are pulling out their knives and aiming them at Gov. Snyder’s education budget, which does not transfer as much tax money to schools as they’d like. These officials focus on the wrong thing, however. If they really wanted to “put more money in the classroom,” they’d be up-in-arms about the state-managed and unsustainable school employee pension system. Increasing the amount of money Lansing doles out to schools by a few percentage points is a pittance compared to the financial benefits districts would experience if this pension system were properly reformed.

Take Rockford Public Schools, for instance. Its annual financial report indicates that the projected increase in pension rates will have a larger impact on district finances than the proposed change in state revenue. Based on salaries for 2011, the upcoming increase in pension contributions will cost the district $1.1 million, and pensions already cost roughly one out of every eight dollars the district spends.

In contrast, the executive budget calls for maintaining the district’s foundation allowance at $6,846 per pupil, but the district is eligible for more state money if it meets certain “best practices.” In contrast, the increased pension fund expense is roughly equivalent to a $150 decrease in the district’s foundation allowance.

So on one hand the state is providing modest increases in state support. On the other hand, it’s increasing mandatory contributions for retiree pensions and benefits. Others have noted this problem. School officials, though, focus nearly all their energy on complaining about lack of state funding while rarely ever advocating for a meaningful fix to the pension system. And when they do comment on the costly pension system, their preferred reforms do not fix the problems.

To a small extent, these school officials are right that the state budget has more direct consequences — there are immediate fiscal ramifications that are dependent on the budget. There are few options for the state to get the pension fund under control.

The long-term consequences of pension reform, however, are stark. Had the state converted to a defined-contribution retirement system and reigned in retiree health care expenses a generation ago, the retirement benefits would cost 5 percent to 7 percent of payroll instead of the current 24.46 percent of payroll. (The costs are also projected to increase to 31.21 percent.) The state employee retirement system’s conversion to a defined-contribution plan has already saved the state up to $4.3 billion in additional unfunded liabilities.

Schools officials should support reforms that would limit their exposure to the expensive retirement system.

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.