Charter Schools Are Not to Blame for Pension Woes

The way to catch up on underfunding is not to rope more people in

Government pension systems around Michigan are a mess, by and large, and there’s no better example than the public school employee pension system. It is need of reform, carrying $26.5 billion in unfunded liabilities. Unfortunately, some lawmakers and local officials do not understand how pension systems work and believe the only way to catch up on underfunding is to rope more people into the system, namely charter school employees.

State representative Jeff Irwin (D-Ann Arbor) exemplified this recently, claiming “As we all know, the shift to charter schools in Michigan is responsible for a big chunk of the added MPSERS costs the rest of our school districts have to pick up,” according to MIRS News.

This is not just a view from the Democratic Party, either. During a debate on reforming the school retirement services a few years ago, Senator Tonya Schuitmaker (R-Lawton) said that it wasn’t “fair” that charters get to avoid the school pension system.

Education officials have echoed similar sentiments. State school board president John Austin claimed in a memo, “Continued expansion of school choice through charter schools, cyber schools, and the EAA shifts school employees away from the MPSERS system, as does privatization of any school services. The result is [unfunded actuarial accrued liability] costs spread over a smaller base, and with school district contributions capped, the state will pick up a larger part of the tab.”

Former candidate for state superintendent and then-Oakland Intermediate School District superintendent, Vickie Markavitch told Bridge, “Public school academies get state money, they want to be called state schools, then they should be in the MPSERS program … Either get rid of MPSERS entirely or require them to get in. If they were paying their share, we wouldn’t be paying $900 (per pupil). You don’t get the average unless you spend the average.”

Although they express their concern in slightly different ways, all of these commenters are equally wrong. And in a big way: If the state were to force charter school employees into the pension system, the underfunding problem would actually get worse. Since the state has consistently underfunded the system, more people in the system just means more opportunity for the already massive liability to grow even larger.

This is because the pension system’s problem has largely been a failure of actuarial assumptions — especially assumptions about investment growth, according to a recent performance audit. Adding charter schools into the system would only magnify the problem.

Nor would it alleviate the burden of paying down the unfunded liabilities. These have to be paid down regardless of how many people are in the system. For example, the state’s legislative retirement system has just one active member, but still has substantial unfunded liabilities, according to its most recent financial statements. The state puts in money to ensure that the plan is solvent. This is no different from what the state can do with the school pension system. Forcing charters to contribute to the school pension system would ensure only that the costs of the unfunded liabilities are paid by those who had nothing to do with creating them.

There is one pension assumption, though, that could improve if charter were roped into the system. The state assumes that public school payroll will increase, even though the long-term trend is down significantly. Payroll has dropped from $10.3 billion to $8.8 billion from 2008 to 2014, a 15 percent decrease. Yet over this period pension planners based their funding requirements on the assumption that payroll would grow 3.5 percent annually (23 percent over the period). Since charter schools tend to be growing and hiring more staff compared to traditional school districts, this payroll assumption would be less of a mismatch if charters were part of the pension system.

But expanding payroll and membership is an expensive way to pay down unfunded liabilities. Consider this: Adding a new employee will cost a school that person’s salary plus the contributions to the retirement system. This would add roughly $50,000 to payroll in order to pay $10,000 in pension liabilities. A better way would be to save the $50,000 and just pay the $10,000 for pension liabilities directly.

Lawmakers have already toyed with this idea. In fiscal year 2015, the state made an extra $108 million contribution to districts to pay down unfunded liabilities. The state can always use its resources to put money in the pension system directly as well.

Those concerned with improving the state’s public school employee pension system should stop trying to make the problem worse by forcing charters — or anyone else — into the system. Instead, lawmakers should close this underfunded pension system to new members and offer new workers defined-contribution retirement benefits instead. There will be no fussing over who pays the costs of underfunded benefits when employers offer benefits that cannot be underfunded.