July 15--School districts crushed by surging retirement costs could save as much as $250 million this school year under a contentious bill that would make retirement benefits more expensive for public school employees but give districts millions they could use to decrease class size, restore cut programs or squirrel away more money for emergencies.
On Wednesday, the state Senate is expected to take up the bill -- backed by Gov. Rick Snyder -- that would require current and retired school employees to dig deeper into their pockets to keep their benefits. Some employees would get reduced benefits.
-- Database: How much school districts could save if their retirement costs were lowered
-- How much would retirement bill affect Michigan teachers? A few examples
Supporters say the bill, already approved by the House by a 57-47 vote largely along party lines, would help address a $45-billion unfunded liability in the Michigan Public School Employees Retirement System. Some Republicans believe it doesn't go far enough -- they want to end the pension system altogether for new employees, an extremely costly option the Snyder administration wants to study more.
The bill is hotly opposed by groups representing current and retired school employees.
"There has to be some middle ground," said Kristi Barel, a teacher in Utica Community Schools. "I know times are tough, but it shouldn't just be put on teachers and educators. That's not going to solve the problem."
But state Sen. Roger Kahn, R-Saginaw Township, says the bill will ensure teachers like Barel have the benefits they've earned.
"Their benefits are threatened by the amount of unfunded liability that is present within the system," said Kahn, the lead sponsor of the bill.Democrats in the House and Senate have been opposed to the bills.
"What's in front of us right now is still just another blatant attack on teachers," said Robert McCann, spokesman for Senate Democrats.
Part of a trend across country
Most of the employees covered by the system work in K-12 schools, though it also covers some university, community college and local library employees.
The efforts in Michigan are part of a national trend.
"Everyone is trying to find their own way of reducing the overall costs," said Mike Griffith, senior policy analyst at the Education Commission of the States.
Some say the changes would bring what has been a generous benefit more in line with changes in the private sector, where many employers also have reduced benefits.
The percentage of payroll dollars going to pay for retirement costs has skyrocketed from 12.99% in the 2003-04 school year to 24.46% in 2011-12. That number is expected to rise to 27% this fiscal year, and an estimated 31% and 35% in subsequent years.
"Districts just can't afford it," said Don Wotruba, deputy director of the Michigan Association of School Boards. "We'll have too many districts in deficit, or we're going to be laying off to a point where students are going to be hurt."
The savings won't be a windfall for districts, but they will help. "One of the things that we would do is bank a substantial amount of that savings," said Tom Wiseman, assistant superintendent of business and human resources for the Waterford School District.
School employees have traditionally had a generous retirement package with a pension that could pay a retired employee who made a salary of $50,000 a guaranteed annual pension of $22,500, along with retiree health insurance. About 40% of the state's 187,722 school retirees received pensions above $24,000 during the 2010-11 fiscal year.
Under the bill, current employees would either pay more to maintain their pension benefits, see reduced benefits or have their pensions frozen and move to a 401(k) plan. New employees would have the option of either a hybrid plan that combines a traditional pension with a 401(k) or just a 401(k). Health insurance for new hires would be eliminated, but employers would contribute matching funds to the 401(k).
Pensions for people who've already retired wouldn't be affected. However, retirees would be required to pay 20% for health insurance premiums if they're not receiving Medicare. Medicare recipients would pay 10%. Currently, a typical retiree pays about 10% of health insurance premiums.
The state would set aside money each year to fund future health care costs, rather than the current practice of covering the costs as they come. And the percentage of a district's payroll that would go toward retirement costs would be capped at 24.46% for this fiscal year. That would mean a savings of $2.1 million, for example, in the Waterford School District, $5 million for Utica Community Schools and $3 million in Plymouth-Canton Community Schools, based on data from the Michigan House Fiscal Agency, which assumed a 3.5% increase in payroll.
"That would be significant," said Brodie Killian, executive director of business services for the Plymouth-Canton district.
STATE FACING TOUGH CHOICES
Few dispute the need for reform. State Budget Director John Nixon said the goal of the Snyder administration is to stabilize the system, stop the unfunded liability from growing, ensure that benefits are there for current employees when they retire and provide relief to school districts. Changes in the bill would reduce the unfunded liability by more than $15 billion.
"It's an unstable system and we're trying to bring some stability to it," Nixon said.
But it may mean some difficult times ahead for some employees. Mary Aldecoa, a Fowlerville teacher, said a pay cut and increased health care contributions already have reduced her salary by 10%. The proposed retirement changes would take more of a chunk out of her salary. She said she might lose her home.
"I've barely hung on to it the last year," Aldecoa said.
Vivian Davis, who was a guidance counselor at Albion High School when she retired in 2011, said she and her husband were careful as they planned for their retirement. The increased health care costs, she said, will be difficult to absorb. She estimates she'll have to pay an additional $100 per month.
Davis said she might have to take on additional work, and luxuries -- including an occasional movie with her grandchildren -- might be out.
She is like many others who feel it's unfair for the state to change the rules for those who've already retired.
"You do what you're supposed to do, you take care of business, and you should be able to live comfortably throughout retirement," Davis said.
At hearings this spring, lawmakers heard from many who said the changes would force some current teachers to take on second jobs and would particularly hurt people who had lower-paid support jobs and draw smaller pensions.
"It's just another way to ... shift costs onto the backs of employees and force them to solve a problem they didn't cause," said Doug Pratt, spokesman for the Michigan Education Association, the state's largest union for teachers and other professional employees.
He and others lay some of the blame for the current state of the system on decisions made in the 1990s by elected leaders to stop pre-funding health care and to shift most of the retirement costs onto school districts.
COMPLEX SET OF FACTORS IN PLAY
There are numerous other problems. The number of current employees paying into the system has dwindled as statewide enrollment declines have forced layoffs, more districts privatize services and more charter schools open. Few charter operators or private companies running services such as busing opt to be part of the retirement system.
Meanwhile, the state's aging population, coupled with incentives that have enticed school employees to retire, is driving up the cost of retiree health care. The system also has lost "huge amounts of money" because of recent stock market losses, Nixon said.
The impact on districts has been severe. In Northville Public Schools, the district spent $9.3 million on retirement in the last school year, a figure that amounted to $1,273 per student, said Mike Zopf, assistant superintendent for finance and operations. That was a huge chunk of the district's per-pupil grant of $8,019. The state has provided some extra funds to school districts to offset the increased costs, but those haven't come near to addressing the problem.
And while retirement costs have risen steadily, per-pupil grants from the state have stagnated, which makes the retirement costs even more burdensome.
"We're really in a pinch," Wiseman, from the Waterford district, said.
The savings expected in the current fiscal year would be welcome, but school administrators are more guarded about a provision in the bill that would change the way the state determines how much school districts pay for retirement. It's now calculated based on a percentage of payroll costs; the bill would have it be calculated based on a percentage of a school district's current operating expenditures.
David Martell, executive director of the Michigan School Business Officials, said proponents see it as an attempt to spread the retirement costs more evenly. Right now, when school districts reduce staff, they end up paying less into the retirement system -- shifting more costs to other districts. If the state uses a district's operating expenditures, the costs are more evenly spread.
Whether or not that's a fair way of spreading the costs is open to debate, Martell said.
"It's a controversial piece of the bill. There are some districts that would just as soon not see that happen. But others think it's a good idea," Martell said.
One concern, raised by some school administrators and union groups, is the impact the retirement changes would have on recruiting and maintaining employees.
Martell said the most sought-after teachers -- those teaching key subjects such as math and science -- are the ones who are getting paid below market for their type of degree.
"You could start losing your cream of the top to other industries," Martell said.
The bill has gone through several rewrites. The current version of the bill passed in the House on June 14.
"We don't think the current version is the perfect solution," said Wotruba, of the Michigan Association of School Boards, which supports the bill. "But it's better than the alternative of doing nothing."
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More Details: Bill's highlights
Current employees would have three options:
-- Pay 4% or 7% of their salary -- depending on what year they were hired -- to maintain the benefits they have, up from the 4% to 5% employees pay now.
-- Pay existing contribution amounts, but accept a reduced pension (the pension multiplier decreases to 1.25% from 1.5%.)
-- Freeze the existing pension and move to a 401(k) with an employer contribution of 4%.
New hires would have a hybrid plan that would consist of a smaller pension and a plan similar to a 401(k). It would include an employer contribution of 3% if the employee contributes 6%. Employees could also choose a 401(k) only.
Retiree health care changes
Retirees would pay 20% toward their health care premium; 10% if they're on Medicare. Currently, a typical retiree pays about 10%.
Current employees would continue to pay 3% of their salary toward future retiree health care costs. However, they could opt out and have what they've paid to date credited to a 401(k), with an employer match of up to 2%.
New employees would have no health insurance upon retirement. They would receive up to 2% in matching contributions from their employer into a 401(k), money that could be used to purchase retiree health care.
If the Senate passes the bill, it would go to Gov. Rick Snyder, whose signature would make it law. The bill also could go to a conference committee if differences between the House and Senate versions need to be worked out. Its lead sponsor is Sen. Roger Kahn, R-Saginaw Township.
More Details: Studying costs
The bill before the Michigan Senate calls for the state to spend up to $100,000 in the next six months to study the cost of closing the state's school employee retirement system to new workers.
Some Republicans in the Legislature want to end those pensions now and move new employees to a 401(k) plan.
"We want to ensure (the system) is going to be around for years to come," said Sen. Patrick Colbeck, R-Canton, who wants to end pensions to new employees.
State Budget Director John Nixon said, "We're not opposed to it." But it's a huge step that in the short term could cost the state $1.7 billion in transition costs over the next eight years and another $8 billion over the next 25 to 30 years. Nixon says he believes some of those costs could be mitigated, but the state needs more time to come up with solutions.
Those increased costs would come in part because moving new employees to a 401(k) would leave fewer people to pay into the system. Also, federal accounting rules would require that if the state closes the system, it must speed up the pace of paying out benefits for those in the system.
"If you close down the pension plan, you have obligations that are constitutionally guaranteed," said Sen. Roger Kahn, R-Saginaw Township, the lead sponsor of the current bill. "The state will have to pay for those people."
More Details: Estimating pension benefits
The annual benefit for school employees -- which includes everyone from custodians to teachers to district administrators -- is based on a formula:
-- For employees hired before Jan. 1, 1990, the formula uses the average of the five highest consecutive years of earnings. For those hired after Jan. 1, 1990 , it's the average of the three highest consecutive years.
-- The average is then multiplied by 1.5% and the number of years the employee has worked for a Michigan public school. For example: A teacher with 30 years of service and an average salary of $61,500 would get a pension of $27,675 annually based on this calculation: $61,500 x 0.015 x 30 = $27,675.
The average annual pension for retired school employees was $20,321 during the 2010-11 fiscal year. Here is a breakdown of retiree pensions among 187,000 school system retirees:
Pension amount Number of retirees Percentage
More than $24,000 74,702 39.8%
$21,601 to $24,000 7,761 4.1%
$19,201 to $21,600 7,478 4%
$14,401 to $19,200 15,846 8.4%
$9,601 to $14,400 19,250 10.3%
$4,801 to $9,600 28,272 15.1%
Less than $4,800 34,413 18.3%
Source: Office of Retirement Services
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