Late last night, while most sane people slept, Lansing lawmakers took the step that really had to be taken to right the direction of the Michigan K-12 funding system.
Some have estimated this action, passed by the Democratic House and Republican Senate, could reduce costs by several hundred million dollars immediately and by as much as $3.1 billion over the next decade. The non-partisan House and Senate Fiscal Agencies generally supported such estimates.
As I have written before, while these bills comes under the guise of a “retirement incentive” it is more aptly about retirement reform. This was really the issue. And that reform was not, and likely will not be, well-received by current school employees.
In short, the bill increases the retirement multiplier for those eligible to take advantage of it meaning the pension received will be greater than what would have been expected normally. That’s the carrot. There are some sticks – and some missing carrots.
Current employees who choose not to retire (or are not eligible) will be required to increase their personal contribution to the retirement system by 3% of their salary. Recall that the retirement system, MPSERS, is predicated on a combination of employee and employer contributions that are a straight percentage of salary. This year K-12 districts have been paying about 17% of employee salaries into MPSERS. Next year it had been expected to go to 19.41%. These are huge numbers when you recall salaries are our greatest expense.
So this bill will come at a price for employees who do not retire and this is where the spinning will begin. The MEA has argued that the lawmakers are trying to fix the economic problems “off the backs of employees”. This was essentially MEA President Iris Salters’ quote. Others will argue that the incremental cost borne by teachers and other employees is for their own personal benefit given that this is their retirement fund. Very few if any non-government employees receive a pension remotely resembling that of government employees.
The missing carrots, or what is noticeably absent from the bills, are any guarantees for public school employees regarding reirement health benefits. This was the hangup over the late stages of this bill’s evolution. The Michigan constitution guarantees the state employees’ pension benefits, but not their health benefits. A recent House version of this bill took that action, which thereby increased the cost of retirement.
As I have written before, when you break down why the MPSERS costs have increased as significantly as they have, rising retiree health care costs represent the greatest source of cost escalation. So by taking this action, Lansing seems to be acknowledging this issue. It is in this context that these bills are more aptly termed retirement reforms as opposed to an incentive.
And that’s the other very big news here. The bill requires that new hires will be placed into a hybrid retirement system that is not exclusively a defined benefit plan, but more dependent on employee contributions – similar to 401k’s.
The net effect of all this on near and long-term school funding will remain to be seen. There are lots of possibilities:
- Our per pupil Foundation Allowance may still be reduced, but it is very unlikely that it would be anywhere near the $268 cut that has been often discussed.
- The MPSERS rate may not got to 19.41%, but if it goes short of that I would predict a moderate Foundation Allowance cut. Again, though, the net effect would not be NEARLY as harsh as the $268 cut AND the 19.41% MPSERS rate would have been.
- This will undoubtedly spur many retirements not only of teachers but many other employees, including secretaries, custodians and others. In the GPPSS this could mean that some of the people whose jobs were eliminated may be able to be hired back.
In the even bigger picture, this reform may well prove to be a catalyst for other Michigan budget reforms. I don’t think Lansing lawmakers could even look cross-eyed at alternative revenue options without first addressing the MPSERS problem. This was arguably the biggest puzzle piece. One has to wonder for the House Democrats to have supported this whether there was some back room quid pro quo negotiated. This action will go a long way toward addressing the School Aid Fund’s $400 million projected shortfall. The state’s General Fund deficit is still $1.3 billion. It will be interesting to see what’s next.
This action shows that Lansing lawmakers are finally getting serious about spending reform, which is welcome news for those who realize change had to come.