Pension Tension: State retirement system a mixed bag for educators, school districts

Sep. 6--TRAVERSE CITY -- Give a school district a dollar, and the state will take back 42 cents.

The pension fund for Michigan's public school educators grows by the year. But the state only has about 60 percent ($50.8 billion) of what it needs in its account to cover retirement package promised.

The remaining 40 percent ($34 billion) falls on public school districts to the tune of 42 percent of their payroll costs. With that chunk lopped off the top -- a chunk getting fatter every year -- school officials are forced to get creative with their budgets while teacher pay and money in the classroom are sacrificed to the state.

Some call it unsustainable. Others recognize the system's drawbacks but admit an immediate fix is unrealistic.

Suttons Bay Public School Superintendent Casey Petz said the pension system, while deeply flawed, was created to compensate educators for working in a profession that pays them less money compared to the private sector. But spending 42 cents on the dollar is an expense that cannot be justified, he added.

Petz said the unfunded liability left to school districts is the problem, not those collecting it.

"Let's attack the problem of fixing our broken pension system, not our educators," Petz said. "They are doing an awesome job and should not suffer because we haven't figured out how to pay for what was promised to them.

"(Teachers) did not create this mess, but they will certainly be subject to the consequences of its failure -- now and in the future."

The get and the give

James Hohman, director of fiscal policy at the Mackinac Center for Public Policy, said the pension system has been underfunded for 42 of the past 43 years, save for one in the 1990s. Hohman said Michigan "accidentally made teachers the state's largest creditors."

"But right now, there's no substitute for just paying down those pension debts," he said.

A wrinkle in that approach is the more than $2 billion spent annually paying interest on the debt. It's like having a maxed out credit card and only paying the minimum every month, Hohman said.

Jeff Crouse, superintendent of the Charlevoix-Emmet Intermediate School District, said the system isn't perfect, but it's working -- and it's improving. The issue is neither dire nor a crisis, Crouse said.

Although some districts pay upward of 42 percent of their payroll dollars into that system, the state reimburses districts down to 20.96 percent.

But school administrators, such as Traverse City Area Public Schools Superintendent John VanWagoner, argue the ping-ponging back and forth of money between the state and the districts creates a unnecessary knot in their finances. TCAPS has had more than $20 million in pension-related costs during the last three fiscal years and is estimated to pay out more than $23 million in the coming fiscal year.

Crouse said money going outside of teaching and learning is just part of education.

"Is it eating up dollars that should be going into the classroom? Potentially," Crouse said. "Is a 21 percent contribution into a system that covers someone's health insurance as well as their pension payment, is that an unreasonable amount?"

VanWagoner says it is.

"Even at 21 or 22 cents of every dollar, that really inhibits us -- it really straps us," he said.

VanWagoner said districts might not get the 21 percent back this fiscal year because of state aid uncertainty caused by the COVID-19 pandemic.

"In a bad budget year, in an emergency like we've been in, we don't even know if that's going to come through," he said.

Out of Pocket

Not just school districts and teachers take a hit in the current system, Hohman said taxpayers also take a blow.

Tom Menzel is one of those taxpayers.

Menzel, the former treasurer for Traverse City, called the pension system a failed model that takes away from "the core charter of educating the child in the classroom."

"Logic says that you cannot complete what public education is called to do," Menzel said. "If you were trying to run a business and had to take that much off the top, you couldn't do it. You wouldn't last."

The selling point for education is preparing children to be "the future leaders of our communities," Menzel said.

"Over the years, it's gotten away from that," he said. "It's not possible to invest the majority of resources in students and teachers."

Menzel pointed to TCAPS and the recent decision to eliminate the Great Start Readiness Program, a free preschool offering to lower-income and at-risk families, as a prime example.

The cut was made in an effort to save $125,000, but the program was recently brought back through a partnership with the Traverse Bay Area Intermediate School District and a $70,000 community donation.

"They (TCAPS) did that -- not because they wanted to -- but because they are so strapped for cash that they couldn't put the money into a preschool that was actually helping children," Menzel said. "That's why there needs to be change."

Turning the ship

A slate of legislative reforms in 2010 and 2011 followed by changes to future expectations of retiree mortality rate and both payroll and healthcare costs has put "significant controls" on the pension system, Crouse said.

Reforms were also made to the retirement system itself to move away from the previous one that created the shortfall.

Teachers and other educators can now choose a standard 401K-style retirement plan paid for by employee contributions or 401K-style account coupled with a standard pension that combines employee and employer contributions. The latter, however, has a much smaller employer contribution -- around 1 percent -- than the previous pension plan.

The reforms are on pace to drive down the required contribution from school districts to 10 percent, but Crouse said that will take 23 years.

"Sixty percent, it isn't awesome by any stretch of the imagination," he said. "But it really is a necessary legacy cost -- one that is a Michigan constitutional right."

The 23-year wait for the system to correct itself will be like waiting for a steaming tanker ship to turn around.

VanWagoner said he'll be long retired by then.

"It's definitely a burden on our system," he said. "But it's a promise we made."

Just as a 401K plays the stock market for the individual, the state invests the $50.8 billion -- combined with $6.9 billion in the retiree health insurance system -- into the market to increase the funded portion of the pension liability.

The annual goal is at least a 7 percent return on investment.

The state hit that mark two of the past three years, but is trending downward -- 13.24 percent in 2017, 11.11 percent in 2018 and 5.14 percent in 2019.

"Whether you find (investing) risky or not, it's the only way to keep paying pensions sustainable," Crouse said. "If you take that piece of compensation away from teachers, the problem is going to be -- where do you find teachers?"

Busted Pipeline

The United States, and particularly Michigan, is in the midst of a worsening teacher shortage.

Federal data released earlier this year shows the number of students enrolling in teacher preparation programs in Michigan decreased more than 71 percent since 2008 -- the second worst drop in the nation.

The Michigan Education Association also reported that 20 percent of teachers are leaving the profession within five years.

Couple the declining teacher pool with the ever-increasing retirement of the Baby Boom generation, and the gap between those paying into the system and those collecting from it will only widen.

Current figures show nearly 219,000 retired educators are collecting a pension and 177,681 active educators are paying into the system.

Last year, about 8,800 educators retired and just north of 6,100 retirees died.

Kingsley Area Schools Superintendent Keith Smith was one of nine chemistry majors in the entire state of Michigan who went into education the year he graduated. Smith said he understood becoming an educator was not going to pay the equivalent of the private sector, but he also knew he would get a good pension and good health insurance.

"While you were never going to get rich teaching, you certainly were going to be taken care of," Smith said. "That, along with a love of children and teaching and learning, really helped foster people into the profession."

But Smith said the "assault on education" and both pensions and health insurance getting "scaled way back" is why people are turning away from being teachers and why it is difficult to attract and keep a young staff.

Pay, ironically, has not gone up, Smith said.

"You can't keep funding us at a rate where we pay these very low starting salaries and then balance that out with the pension," Smith said. "It's time. There's an understanding that the concept of school funding needs to be reexamined."

At least within the next 23 years.

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