News Story

Cost Of School Pension Underfunding In 2021: 42% Of Teacher Payroll Expense

Politicians overpromised, managers filled gap with rosy scenarios, taxpayers on the hook

The growth of Michigan’s school employee pension fund has fallen short of projections made by its managers almost a decade ago. The price is now being paid by school districts that must spend millions more than anticipated in an attempt to shore up unfunded pension promises.

That’s according to a new analysis from the Mackinac Center for Public Policy, which says that the state’s Office of Retirement Services forecast in 2012 that school districts would have to contribute about 31% of their payroll costs to fund retirement for most of the next decade. But in 2021, it said, the actual rate is up to 42.7%.

The primary reason for the gap, according to James Hohman, the Mackinac Center’s director of fiscal policy, is that forecasters made overly optimistic estimates pension fund growth. They also, he said, overestimated the growth of the school workforce and and school payrolls. The latter, he said, was especially costly.

Hohman said that while the 2012 forecast expected public school payrolls statewide to reach $12.5 billion by 2019, slow growth in enrollment — and the extra teachers needed — meant school payrolls were only about $8 billion that year. And because the system’s managers had bet on the higher figure, they were allowed to make smaller contributions to the pension fund.

All this means that school districts, and their taxpayers, now bear a heavy burden in having to bolster the Michigan Public School Employees’ Retirement System (MPSERS). That is because decades of underfunding have left the pension fund more than $40 billion short of the amount needed to pay promised retirement benefits.

It also means schools are forced to direct more revenue toward retirement costs and away from the classroom.

In Detroit, for instance, the school district was required to pay about 27% of its annual state foundation grant ($2,202 per pupil) just to cover retirement system costs in 2018, according to an analysis by the Reason Foundation.

“The basic problem is that (politicians) have made promises (to school retirees) that they hope somebody can figure out how to deliver on later,” Hohman said.

Although the 2012 projections were significantly off the mark, Hohman and state House Appropriations Committee Chairman Thomas Albert said reforms enacted in 2012 and 2017 may eventually rein in unfunded liabilities.

The 2012 ORS forecast predicted that by 2039, unfunded liabilities would be largely eliminated, and employer/taxpayer contributions to the pension system would fall to 5.5% of payroll.

That may not happen on schedule, Albert said. But both the anticipated rate of return on investment and expected payroll growth are now more realistic because of legislative action, Albert said.

“It may get worse before it gets better,” he said. “But I think it is coming under control.”

The Office of Retirement Services did not respond to a request for comment.

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.