May 10, 2007
Special Report: part 1 of 3
Michigan's education time bomb: Costly, loophole-ridden retirement system threatens public schools
Ron French / The Detroit News
Michigan's school retirement system is riddled with loopholes and slipshod policies costing taxpayers hundreds of millions of dollars and driving the state's public education system toward financial crisis.
Schools are laying off teachers, scrapping programs and mothballing extracurricular activities to pay for the spiraling pension and health care bills of retirees -- some of whom qualify for generous benefits by skirting state retirement policies, often with the knowledge and assistance of the state office charged with administering the $3.5 billion program.
The impact could be devastating to public education in Michigan, the only state that makes its schools bear the entire burden of retiree pensions and health care. This year's bill -- an estimated $1,015 per student -- is more than schools spend on books, buses, computer technology and building maintenance combined.
And it's going to get worse.
The retirement assessment -- set by the state but paid by individual school districts -- is now at a record high of 17.74 percent of each district's payroll. That rate is expected to jump to 30 percent by 2020 -- a level that all sides agree would break the backs of Michigan schools.
Phil Stoddard, head of the state office that administers the retirement fund, defends the system.
"I wouldn't say that it's too generous," said Stoddard, executive director of the Office of Retirement Services. But Tom Clay, former director of the state's Executive Budget Office, disagrees. "It's a time bomb," he said. "It's a train wreck. Use whatever term you want. And it hasn't reached (the worst of the) crisis yet."
An analysis by The Detroit News of data obtained through the Freedom of Information Act found:
An estimated $2 million per year in taxpayer dollars is spent on retirees who qualify for lifetime health care through a loophole. People who worked in state public schools for at least 10 years earlier in their careers can return to work for 102 hours -- about 13 work days -- at age 60 and receive taxpayer-funded health care for the rest of their lives.
Hundreds of "retired" school administrators are collecting pensions and retiree health care while continuing to collect a salary working the same jobs as contract employees, increasing the retirement burden. The practice, which one critic calls "a scam," costs taxpayers about $25 million a year.
As much as $1 billion could ultimately be lost through a program that sells early retirement at a discounted price. School employees can buy up to five years of service credit, paying the state so they can retire after 25 years instead of 30. But the purchase price of those years of service factors in the cost of pension benefits but not retiree health care. More than 23,000 school employees have purchased a total of almost 100,000 years of service. At current health care rates, that would cost school districts $1 billion -- as much as the state spends on road construction and repair each year.
Some districts are pushing more experienced teachers and administrators to retire early so they can save money by hiring younger employees. But those short-term savings quickly turn into long-term costs. Not only are schools losing some of their most experienced teachers before they have to, but also most of those retirees, some as young as their late 40s, begin drawing lifetime pension and health care benefits immediately.
Schools may shave $30,000 from their payroll a year by replacing a veteran teacher with a teacher straight out of college, but that retiree will cost the overall state school retirement system about $50,000 a year. "They're saving money now but paying more later," said former state treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University. "There's no advantage to it."
Michigan pays for lifetime health care for employees who, in some instances, work as few as five years in public schools. That health insurance is considered to be a premier plan with excellent benefits and low co-pays, according to a health care insurance analyst.
The schools paid $634 million in medical bills for retirees and their spouses and dependents in 2006.
Cobbled together by two decades of amendments, protected by a powerful union and ignored by a timid Michigan Legislature, the Michigan Public School Employees Retirement System (MPSERS) is headed for a financial crisis that could devastate schools and ultimately threaten the benefits of thousands of Michigan retirees.
The crisis has been building for years, but reform efforts have been thwarted by a befuddling circle of unaccountability. Cash-strapped schools pay the bills but don't administer the system; the state Office of Retirement Services administers the program but is powerless to change policies; the Legislature can change policies, but has been in no rush because it doesn't pay the bills.
Today, the school retirement system is buried under $25 billion in unfunded liabilities for retiree pensions and health care.
The ballooning cost of public pension plans like Michigan's school retirement system "have the potential to be the savings and loan scandal of the next decade," said Ken Braun, policy analyst of the Mackinac Center for Public Policy.
Despite dire warnings, there is little appetite in Lansing to reform the system.
"It represents a failure of political wills by the past two governors and the Legislature," Braun said. "(And) the costs are going up dramatically every hour we don't fix it."
The Michigan Education Association, the state's teacher union, scoffs at the plan's doomsayers. "People don't understand what they're talking about," said Allan Short, director of government affairs for the MEA. "It's an excellent system that serves as an incentive to keep people in education."
No one questions the need to provide good benefits to attract qualified employees for Michigan schools. But the benefits -- and the loopholes through which some qualify -- are threatening the very schools those benefits are meant to protect.
"The program is completely unsustainable," said former state treasurer Roberts. "Something has to be done."
Main reason for budget cuts
Ten years ago, schools spent $485 per student to pay for pensions and retiree health care. Today, schools spend $1,015 per student.
Driving those costs are rapidly rising health care costs and a growing number of retirees.
The state's 553 school districts have no control over their retirement bill. The cost is set by the MPSERS, which last year sent out checks for pensions and health care bills totaling almost $3.5 billion to more than 151,000 retirees and surviving spouses.
Each year, MPSERS actuaries project the total cost of retiree pensions and health care, then bill individual school districts to cover the cost. Districts pay a percentage of their payroll -- the bigger the district, the bigger the bill.
Because between 80 percent and 85 percent of a school's budget is payroll, a small bump in the retirement assessment can lead to financial hardship.
For example, this school year, the retirement rate rose 1.4 percent. That small increase cost rural Fowlerville Community Schools an additional $200,000; suburban Troy School District more than $1.1 million; and the state's largest district, Detroit, a whopping $11.1 million.
While other school expenses such as fuel costs also are rising, retirement costs are the main reason districts across the state are scaling back programs and staff.
"The impact (of retirement costs) is huge," said Tim McAvoy, director of community relations at Troy School District. "We've made $27 million in budget adjustments in the past three years."
For Michigan schools to have paid the same amount in retirement costs this year as last, they would have had to cut $700 million in payroll -- the equivalent of laying off 9,300 teachers statewide.
Michigan schools receive about 70 percent of their funding from the state through a per-student allowance. Increases in that allowance are supposed to cover increased costs of everything from payroll to pencils. But in recent years, the entire increase has been swallowed up by escalating retirement costs.
From 2003 to 2006, the state increased the per-student allowance by $175. During those same years, the MPSERS bill jumped $178 per student.
Utica Community Schools, one of the biggest districts in the state, slashed its staff by 215 people in the past four years, partly to pay for increases in the retirement assessment. "It (retirement costs) has a dramatic impact on our budget," said Utica Superintendent Rick Montcalm, who is searching for ways to cut another $8 million from next year's budget.
Southfield schools, which this year will spend $13.6 million for retirement, cut its child care service and adult education to save money. "It's been difficult," said Southfield Assistant Superintendent Ken Siver.
Retirement costs now eat up 14.3 percent of districts' $7,085 per-student allowance and 13 percent of total school funding.
Citizens Research Council of Michigan, a state budget watchdog group, projects that the MPSERS contribution rate that was 12 percent as recently as 2002 will hit a staggering 30 percent by 2020 -- the equivalent of $6 billion in today's dollars.
"We don't want to wake up someday and find that our system has gone bankrupt," said Don Wortruba, director of legislative affairs for the Michigan Association of School Boards. "If nothing is done, we could reach a point where the classrooms implode or the (retirement) system implodes and people who have been counting on health care won't have it."
Plight mirrors that of Big 3
In many ways, the financial straits of Michigan's public schools mirror the plight of the Big Three. Detroit's automakers and the schools both have offered generous retirement benefits to retirees for decades. As retirees live longer and health care bills rise, retirement costs have skyrocketed. Most organizations that offer retiree health care are dealing with rising bills.
But the schools' predicament is magnified by a stampede of employees retiring at younger ages.
In the past decade, while the number of public school employees rose 7 percent, the number of school employees retiring per year jumped 36 percent.
Today, about 82 percent of all school employees retire before age 65; 64 percent leave by age 60, with 25 percent retired by age 55. The exodus begins around age 46, when employees with 25 years of service who take advantage of an early-out program retire and begin receiving their pension and retiree health care.
As the number of retirees increases, so does the cost to the schools. Schools spent $338 million on health care for retirees younger than 65 in 2005. That's more than the state spends to run its 29 community colleges.
School superintendents such as Sandra Feeley Myrand of Lakeview Public Schools in St. Clair Shores have been warning of a crisis for a decade with little effect. The faults in the system are well-known and, in some cases, agreed upon by Democrats and Republicans. Yet there has been little action in the Legislature to address the problem.
"What legislators say is they don't know what to do," Feeley Myrand said. "They don't understand how the schools operate. What does that say about what they think of the value of education?"
Republicans and Democrats agree that the system is headed over the cliff. Yet reform measures that are introduced every year die quickly in the state Senate and House. The Mackinac Center's Braun calls the school retirement system the "third rail of Michigan politics," meaning it is political suicide to try to curb teacher benefits. Even loopholes that impact few retirees and cost the state millions have not been closed.
"We've got these big problems we've been trying to fix for years," said Tom White, director of legislative affairs for the Michigan School Business Officials, a group representing public school business managers. "Yet we've not found a legislature that has the political will to make these changes."
Even if the system were reformed now, it would take years to make a notable difference, Roberts said. MPSERS contributions will continue to rise as retirees covered by the current policy move through the system.
"It will take time, but that doesn't mean the state shouldn't address it now," Roberts said. "Otherwise, in 20 years, somebody else is going to be writing about this issue, and it's going to be a lot worse."
May 11
REMUS -- Paulette Strong loved the 102 hours she worked as a school aide last year. She enjoyed being around children. The staff "treated her like a queen."
And the benefits were pretty good, too.
For those 102 hours of work, Strong will get most of her medical bills paid by taxpayers for the rest of her life.
A loophole in Michigan's school retirement policy allows the 60-year-old grandmother from Remus and hundreds of former school employees like her to earn lifetime health care at deeply discounted rates -- a perk worth an estimated $150,000 per retiree -- for returning to work for the equivalent of 13 days.
Strong, a former bus driver who left the school district before qualifying for retiree health care, returned as a school aide earning $6.50 an hour. But because those hours earned her inexpensive lifetime dental, vision and medical care, her effective salary was closer to $1,470 an hour.
"I've heard some jaw-dropping things before, but that's the (worst)," said Ken Braun, policy analyst with the Mackinac Center for Public Policy, a conservative think tank. "That's egregious and it should have been addressed decades ago."
By the time the mid-Michigan grandmother reaches 80, Michigan schools likely will pay bills for her medical, dental and vision care equivalent to the price of two new school buses -- bills that would have been covered by her husband's health insurance if she hadn't returned to work in the schools for a brief stint. She is one of hundreds of school retirees getting health care through the practice, costing taxpayers an estimated $2 million each year.
Few blame Strong for taking advantage of the hole in the system -- she didn't even know it existed until a state public school employee retirement counselor explained it to her. But her case is a glaring example of how educators, unions and, in some cases, state officials, use weaknesses in the law to increase benefits for retirees, which increases the financial burden on public schools.
Retirement costs are strangling Michigan schools, which now pay $1,015 per student per year for retirees' pensions and health care bills. That figure is expected to skyrocket in coming years, threatening the state's already-strapped education system.
The financial crisis is worsened by poorly written policies that have allowed thousands to receive benefits who do not qualify under the spirit of the law, such as the one that allowed Strong to qualify for lifetime health care.
Here's how it works:
Michigan public school employees qualify for a pension in most cases after 10 years of service. Those who qualify for a pension receive lifetime health insurance only if they retire from the public schools. Workers can retire after 30 years of service or when they reach age 60.
But school employees figured out that if they returned to work at age 60, they could "retire" from the schools and qualify for lifetime health care. To qualify in the retirement system as having worked at age 60, employees need to log one-tenth of an annual work schedule, or 102 hours.
Any job in the schools qualifies -- an employee can return as a school aide, bus driver, crossing guard or cafeteria worker -- as long as the hours add up.
Retirees younger than 65 pay $97 a month out of their pensions for dental, vision and medical coverage -- the state pays $586. Retirees 65 and older get free health care, which serves as a supplement to Medicare.
That insurance, comparable to the coverage automakers provide for retirees, offers some of the best health benefits in the state, according to Rick Murdock of Michigan Association of Health Plans.
The state Office of Retirement Services, which manages the school retirement fund as well as retirement funds for other public employee groups, had never calculated how many school retirees had qualified for health care benefits by coming back to work for 102 hours.
At the request of The Detroit News, the ORS searched its database and found 30 retirees who qualified for health care through the loophole in 2006. Their medical bills totaled $268,558 during their first year in the retirement system.
The ORS declined to provide similar numbers for previous years. But if 2006 was representative of past years' classes of retirees, about 450 retirees and beneficiaries are getting health care through the loophole, at a cost of about $2 million a year.
Allan Short, director of government affairs at the Michigan Education Association, the powerful state teachers union, shrugs off the impact of the loophole, saying the medical bills of the retirees qualifying through the loophole "wouldn't make a dent" in the retirement fund. "Very few people use it," Short said. "Who's going to want to go back to work for (13) days?"
The number of people isn't the issue for former state treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University. "Isn't it just wrong?" Roberts asked. "It's a little like saying, only a few people are ripping you off, so it's OK."
Over time, the bills add up. ORS data indicates that in today's dollars, school retirees will cost taxpayers almost $150,000 between the ages of 60 and 80. If 450 people are getting free health care through the loophole, they'll likely cost the schools $40 million over their lifetimes in today's dollars. That's enough to build four elementary schools.
Strong was introduced to the rule in 2005 when she called the Office of Retirement Services for help filling out paperwork to get her pension. She'd worked as a special education bus driver for 22 years before leaving the Maple Valley Schools in 1997.
Strong inquired about the cost of purchasing vision and dental insurance through the system.
"The counselor told me that if I could work 102 hours, I could qualify for dental, vision and health insurance," Strong said. "I was shocked. I said, 'For nothing?' And he said, 'That's right.' "
The counselor went on to say that Strong's husband could be covered under the plan, too, for $23 a month for a plan excluding prescription drugs.
Strong thought it sounded like a great deal, but doubted her chances of finding a school district willing to hire her for 102 hours. "I'd been gone for 10 years," she said. "I used to be a bus driver. Who would hire me?
But she quickly discovered that local school districts were familiar with the loophole and were happy to help. Beal City Public Schools hired her as a school aide.
"They said, 'Don't worry, we'll find a way to get your 102 hours,' " Strong said.
Strong didn't even ask how much she was going to get paid. She wasn't there for the money. "I'd pass a teacher in the hall and they'd say, 'How many hours do you have? You're going to get it!' " Strong recalled.
Strong and her husband delayed their departure to Arizona, where they spend each winter, until she completed her 102 hours on Dec. 19, 2005.
"The counselor told me to get it (the benefit) this year (2005)," Strong said, "because it may not be available next year."
The state's retirement counselor, in effect, cost taxpayers an estimated $150,000 by explaining how to secure lifetime health coverage.
The Office of Retirement Services defended the counselor's actions. "Integrity is one of our core values in state government," said Edward Woods III, director of communications for the Michigan Department of Management and Budget, which oversees the retirement office. "If a customer asks a question, we will reply honestly and truthfully.
"However, if someone feels there is a need to change the policy, we encourage them to contact their state legislators," Woods said.
Even the MEA concedes the rule used by its members is indefensible.
"I'll admit it's an unfair provision," Short said. "It could be dropped."
Yet the Michigan Legislature has not taken action. Sen. Wayne Kuipers, R-Holland, chairman of the Senate Education Committee, believes few legislators knew about the issue and that the $2 million a year it costs schools isn't enough to draw attention.
"It's not a lot of money, but it's the principle at this point," Kuipers said. "It's not right, it's not what was intended, and we should take a look at it."
Retirement 'rithmetic
30 retirees qualified for lifetime health care by going back to work for 13 days in 2006. Factor in the number of retirees who likely qualified for health care the same way in prior years, and the cost* reaches: $40M, enough to build 4 elementary schools
*Detroit News estimate
By the numbers
$1,015
The amount spent per-pupil on retirement costs.
64
The percentage of school employees who retire by age 60.
5
The number of years some school employees work to earn lifetime health care.
$25B
The unfunded future liabilities of the school retiree pension and health care funds.
9,300
The number of teachers who would have to be laid off to keep retirement costs at last year's level.
May 10
Laws, court rulings fueled crisis
LANSING -- The budget woes facing Michigan schools today were spawned by a perfect storm of legislative moves and court rulings that began 20 years ago.
The Michigan Public School Employees Retirement System faces $25 billion in unfunded liabilities -- a growing bill that chips away at the state's public education system and threatens the benefits promised to more than 151,000 retirees and their spouses.
Today's retirement system is encumbered by a stew of amendments that, over time, have cost taxpayers hundreds of millions of dollars.
In 1986, spouses and dependents were included under the school retiree health care plan. Schools spent $243 million on the health care of spouses and dependents in 2005 -- about 38 percent of all medical spending.
In 1989, the Michigan Legislature amended the retirement program to allow school employees to purchase up to five years of service credit, in effect, allowing workers to buy early retirement. The purchase price, according to the amendment, would be based on the extra pension the worker would receive. Legislators didn't account for the cost of retiree health care, mainly because health care was a fairly minor expense at the time, said former state treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University. Today, with the health care tab for a retiree and spouse averaging more than $10,000 a year, that 1989 oversight is costing the state hundreds of millions of dollars. Roberts calls it an "unintended consequence."
In 1991, facing a budget shortfall, Gov. John Engler and the Legislature switched retiree health care funding from an actuarial basis, meaning future costs were taken into account, to a pay-as-you-go basis. Switching the system allowed the state to raid millions that had been set aside for future medical costs. Today, the health care fund alone is underfunded by $15 billion.
In 1994, Proposition A lowered Michigan property taxes and helped equalize school funding between districts. In association with that ballot initiative, the Legislature switched the burden of paying for the school retirement system from the state to the schools. Prior to 1994, the state paid school retiree pensions and health care. Afterward, Michigan became the only state in the nation to make schools pay the entire tab for a state-run pension and health care program, according to the National Council on Teacher Retirement. Nine states offer no retiree health care for school employees; in other states, medical bills are paid by various combinations of the state, employers and employees.
Concerned about rising pension costs, the Legislature in 1996 switched state and public school retiree pension plans from defined benefit (in which retirees collect pensions for the rest of their lives) to defined contribution (in which the employee contributes to a 401(k) plan). The move was billed as a way to save millions of dollars.
But the plan was repealed for school employees before it began. The key leverage for keeping the defined contribution plan was an unrelated court case, in which the state was ordered to pay schools $3.2 billion for underfunding special education. Allan Short, director of legislative affairs for the Michigan Education Association, said the MEA cut a deal with the Legislature: Save the defined benefit pension for school employees, and the state could pay some of the $3.2 billion through actuarial changes. Today, that pension plan faces $10 billion in unfunded liabilities.
Since 1994, Michigan gives schools a per-student payment, called the foundation allowance, which is supposed to cover retirement costs and other expenses that the state handed off to the schools in Proposition A. Schools still get state money, but the individual districts must decide how to spend that cash.
Over time, retirement costs have increased faster than the per-student allotment. In the past 10 years, per-student retirement costs have gone up 83 percent while the per-student foundation allowance has increased 35 percent.
Skyrocketing health care costs have hit the system hard. But some of the cost increase is the result of self-inflicted wounds, claims Roberts.
"When there were attempts to increase retirement benefits, nobody stood in opposition," Roberts said. "Nobody said, 'The schools can't afford this.' We basically said, look, we have all this money going to schools, they can decide how to spend it."
But the system doesn't allow the schools to control their retirement spending. Retirement rates are set by the Legislature. Even the MPSERS board of directors has no say over retirement rates or retirement policy of the $3.5 billion program it administers. "They (legislators) don't even ask us," said MPSERS board member Rick Montcalm, who is also superintendent at Utica Community Schools.
The MPSERS board passed a resolution last year asking the Legislature to close a loophole that allows people to qualify for lifetime health care benefits by working for public schools for just five years, from age 55 to 60. In another instance, Phil Stoddard, executive director of the Office of Retirement Services, asked the Legislature to drop health insurance for those who retired early by purchasing credit for years of service.
Neither made it to a vote.
"I've worked in a legislative office and I've taken the phone calls when someone considers touching retirement health care," said Ken Braun, policy analyst of the Mackinac Center for Public Policy. "It's easier for legislators to avoid this because it's a headache."
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May 11
Michigan's educational time bomb
Employees buy time, state pays
Workers can purchase early retirement with pension and health benefits at bargain prices.
Ron French / The Detroit News
Some 28,500 Michigan public school employees have figured out what the state has not: Buying their way into early retirement is a bargain.
By paying a percentage of their annual salary, everyone from superintendents to crossing guards can purchase up to five years of service credit, allowing them to retire after 25 years instead of 30.
The price tag, which varies depending on age, salary and years of service, is based only on the cost of that employee's pension -- retiree health care costs aren't factored in.
If that doesn't seem like a big deal, consider this: The average health care cost for those early retirees and their spouses is $10,000 a year.
School retirees have done the math. They've purchased 99,204 years of service credit.
The state Office of Retirement Services, which administers the school pension and retiree health system, hasn't calculated how much the policy has cost taxpayers. But using today's health care costs, those bargain-basement prices paid by retirees could cost Michigan schools as much as $1 billion.
And that price tag doesn't even count the service years purchased by current employees. When those workers retire early, the total cost could balloon to as much as $3 billion.
While the ultimate cost to schools depends on when employees retire, the program is a gaping, high-priced loophole contributing to the financial crisis facing Michigan schools.
"This is financial malpractice," said Ken Braun, policy analyst for the Mackinac Center for Public Policy, a conservative think tank. "The legislature and the governor have a responsibility to fix it."
Michigan's schools are being pushed toward financial crisis by retiree pensions and health care, which have grown at three times the rate of inflation over the past decade.
While most of that growth is the inevitable result of an aging population and rising health care costs, some of the bill is attributable to policies that encourage school employees to retire as much as 20 years earlier than their counterparts in the private sector.
About 64 percent of school employees retire by age 60; 25 percent are gone by 55. Buying five years of service credit allows a teacher who got a job at 22 to retire with full benefits at 47.
The average school retiree left work after 25 years, according to the Office of Retirement Services.
Critics and supporters of the school retirement system agree the service credit purchase plan is the most costly loophole in the system.
Here's how it works:
Since 1989, all school employees have been allowed to buy extra years of service credit, increasing, in the eyes of the retirement system, the number of years they've worked. Those years can be purchased at any time, at any age.
Actuaries in the Office of Retirement Services calculate the price employees pay for those years on a sliding scale. A 22-year-old teacher straight out of college would pay less (10.5 percent of annual salary) than a 50-year-old veteran principal (20.5 percent).
According to the Public School Employees Retirement Act, the price is determined by the "average actuarial present value of the additional benefits" the retiree will receive. Those "additional benefits" have, since the service credit purchase plan was enacted in 1989, been defined as pension benefits.
Doug Roberts, state treasurer for much of the 1990s under Gov. John Engler, said the cost of health care benefits weren't included in the calculation because, at the time, costs were minimal. Today, health care costs account for more than a third of the average retiree benefit package. The average pension of school retirees is about $18,000, while health care for a retiree and spouse costs about $10,000 a year.
What Roberts calls an "unintended consequence" costs schools, even by conservative estimates, tens of millions each year.
Last year, Office of Retirement Services Executive Director Phil Stoddard recommended to the Michigan Legislature that the policy be amended to drop health care coverage to retirees who buy their way into early retirement. Health care coverage would begin at the retiree's normal retirement date -- typically age 60 or when they would have completed 30 years of employment -- rather than when they begin early retirement.
"It (his proposal) went nowhere," Stoddard said.
That doesn't surprise Rick Montcalm, assistant superintendent at Utica Community Schools, who serves on the state retirement board that oversees the program. "Any time you bring up changes in retirement, you hear about it (from school employees)," he said.
The Michigan Education Association, the state's main teachers union, has one of the most powerful lobbies in Lansing.
Even with the state struggling with a deficit, Roberts questions whether the Michigan Legislature will try to close the costly loophole.
"We didn't realize the consequences of some of the things we did," Roberts said. "Now, pressure is coming from the schools, saying we can't afford (retirement costs). But I don't think the state is looking at the same problem."
May 12
Michigan's education time bomb: Part 3 of 3
Politics stall school retiree reform
Retiree, teacher lobbies keep legislators from tackling public school retirement system.
Ron French / The Detroit News
LANSING -- There is widespread agreement that Michigan's troubled school retirement system needs reform.
There is also widespread pessimism that anything will be done soon.
The retirement system, which provides pension and health care benefits for about 150,000 school retirees, is riddled with loopholes and sloppy policies costing schools tens of millions of dollars each year. Schools now pay $1,015 per student for retirement costs. Those costs are projected to skyrocket in the next decade, raising the specter of hollowed-out schools or cuts in promised benefits to thousands of state retirees.
Bills attempting to lessen benefits or close loopholes have died quick deaths in the Michigan Legislature, which has been reluctant to offend the teachers and retirees.
While reform remains elusive, Republicans and Democrats are beginning to talk about the issue.
This weekend, Gov. Jennifer Granholm and legislators will begin discussing how to restructure the Michigan Public School Employee Retirement System.
The discussion will take place during emergency budget meetings on the $700 million general fund deficit, according to a senator familiar with those meetings.
The fact that the retirement fund is on the agenda even though it isn't part of the general fund is a sign that lawmakers and Granholm are becoming more serious about reforming the system, which is now $25 billion in the red.
"It has to be on the agenda -- it's one of the largest budget items we have," said Sen. Wayne Kuipers, R-Holland, chairman of the Senate Education Committee. "Until now, it's been an inside-the-beltway type of (issue). It's my hope that we can generate momentum (for reform)."
Most of the tweaks made to the system in the past two decades have added benefits or made it easier for employees to qualify through loopholes.
'Lack of political will' cited
Outmuscled and outmaneuvered by the state school employee unions, legislators have remained hesitant about addressing the impending retirement crisis.
"We've got these big problems, we've been trying to fix them for years, yet we've not found a legislature willing to make the changes," said Tom White, director of legislative affairs for the Michigan School Business Officials, a group representing public school business managers. "There is a lack of political will."
Granholm press secretary Liz Boyd said the governor favors reform of the school retirement system, but declined to offer any specific reforms she would support.
"Everything is on the table," Boyd said.
Political leaders who spoke to The Detroit News believe change is inevitable, but rate the chances of meaningful reform this year at no better than 50-50.
Policies being discussed range from a complete overhaul of the system to borrowing billions of dollars to stabilize the fund.
Public schools and the State Police are the only two public employee groups that still have defined benefit pensions, meaning that upon retirement, they receive a pension check based on their service for the rest of their lives. Other public employee groups were switched in 1997 to a defined contribution plan, in which employees contribute to a 401(k). "That's what most businesses have today," Kuipers said. "It's more portable (for employees) and gives districts more flexibility."
General Motors Corp. stopped offering retiree health care for white-collar workers hired after 1993 in an effort to save money. A similar measure would do nothing to lessen the health care costs of current school retirees (now averaging $150,000 over their lifetime) but would save taxpayers millions in coming decades.
Rep. Brian Palmer, R-Romeo, has proposed a graduated health care benefit, with school employees earning a 3 percent credit on retiree health care for each year they work. That system would retain the same level of benefits for veteran teachers, but would reduce the benefits for those who work in the schools less than 30 years but who currently get about 90 percent of their medical bills paid by the schools.
State employees already have graduated retiree health care benefits. "It's that way in the rest of the world," Palmer said. "The current system is impossible to (financially) support."
The state could close loopholes allowing more retirees to qualify for benefits. For example, ex-school employees now can return to work for the equivalent of 13 days at age 60 and receive lifetime health care benefits. Others qualify for lifetime health care by working as few as five years, as long as their last year of work is at age 60. And as many as 500 "retired" administrators are still working, drawing their paychecks and their pensions at the same time.
Hope for change withers
Some policies that could be easily amended have remained in place for decades.
"Every increase (in state funding for schools) is being eaten up by retirement costs," said Speaker of the House Andy Dillon, D-Redford Township. "It needs to be addressed."
The governor's Emergency Financial Advisory Panel warned in February that the school retirement system was breaking the back of the state's public education system.
"We value greatly the men and women who dedicate their lives to public service," the report said. "The scale of long-term benefit costs, however, tests the public purse just as it does the competitiveness of the Big Three and other large companies with many retirees and many others heading into retirement."
Despite failures at reform, Kuipers said he is hopeful. "If we don't do it now, we won't do it ever," he said. "When the state's economics are tough like they are now, it forces you to look at reform."
White, the lobbyist for Michigan School Business Officials, is less optimistic. "If a Republican governor (Engler) and a Republican Legislature didn't reform it (in the 1990s), I don't think it's going to happen now."
Democrats, who now control the governor's office and the House of Representatives, are typically more supportive of unions.
Granholm hasn't proposed any changes in the school retirement system in the more than four years she's been in office.
Republicans have been no better, says Don Wortruba, director of legislative affairs for the Michigan School Board Association. "The Senate Republicans say they're committed to it. But they say they're committed to it every year. It's all about passing the buck."
Former state Treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University, thinks many today still don't grasp the depth of the problem.
"We as a society have made a promise to provide retirement benefits to public employees," Roberts said. "We should do anything to protect the people in the system now. But we need a long-term solution. It needs to be solved, but it won't be solved quickly."
You can reach Ron French at (313) 222-2175 or rfrench@detnews.com.