Category Archives: State of Michigan Finances

Retirement Reform Reality: Lansing Steps Up

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.


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Filed under Current Events, GPPS Budget Decisions, State of Michigan Finances, State of Michigan Policy

Retirement Rate Increase: Granholm’s Back Door Cut

Things are starting to look eerily and sadly familiar in Lansing.  In the spirit of March Madness, Governor Granholm is attempting a back door cut that would make legendary North Carolina coach Dean Smith smile, but local school districts frown.  Let the political games began.  It’s Budget Madness.

A few weeks ago Governor Granholm unveiled her rough budget proposal.  As it related to the School Aid Fund, the source of 65% of GPPSS’ revenues, Granholm eagerly proclaimed that she would veto any budget recommendation that reduced per pupil funding.  Some estimates have the required per pupil reduction nearly at $268.  It doesn’t sound like much, but to our district that would reduce our revenue by $2.7 million.

So yeah for Granholm?  Hardly.  The beleaguered lame duck gov was less bold in her proposed increase to the school employee retirement system (MPSERS, discussed in detail here).  In her proposal, the MPSERS rate would increase from 16.9% to 19.4%.  For reference, this is the percentage of salaries paid to employees that the district must contribute on their behalf to their retirement pension and benefit fund.

Since there is NO discussion of an increase in the Foundation Allowance next year, translated into next year’s budget, that increase from 16.9% to 19.4% represents a loss of almost $1.4 million.  So net/net, this is the equivalent of a cut of about $175 per pupil.  Governor Granholm, spare the spin job. A cut’s a cut.

Meanwhile, those dastardly fiends in the Michigan Senate revealed their plan the other day.  They are holding fast to their “cuts only” approach to the budget and call for a per pupil reduction of $118, or about a $1 million loss for GPPSS.  However, in the proposal they call for a retirement rate increase far below that of Gov. Granholm – moving from 16.9% to 17.08% – an increase of a more meager $80,000 to district expenses.

It will be curious how the various stakeholders react to these proposals.  I have a pretty good sense.  Granholm’s plan puts lipstick on the pig because she knows most people don’t know the nuances of the economic implications of her proposal.  But in the background, it aims to preserve a rapidly deteriorating, and perhaps terminally ill, defined benefit program at the continued expense of local school budgets – the mother-lode of unfunded mandates.  This is precisely how individual employee costs increase and why we can afford fewer and fewer every year.

The Senate can claim they are staying true to their word with more cuts, and perhaps further their plan of forcing reform on the retirement system.  But oddly, in a role reversal, the Senate’s plan is actually better economically for local school budgets – not by a huge margin, but certainly better.

To paraphrase Gertrude Stein, “A raise is a raise is a raise.”

These are the subtleties of Michigan K-12 finances.  How many school employees recognize increases in district contributions to their retirement plans for what they are?  All too often, only salary increases are recognized as raises.  Make no mistake about it.  It is a raise, plain and simple.  When an employer spends more money for an employee’s personal benefit, regardless of whether the money goes to salary, health care, or retirement, that constitutes a raise.

Despite their different means, the proposals are fairly similar.  Neither are good news for local school budgets, but neither are as bad as what others are calling for.  As was the case last year, the worst choice Lansing could make would be to sandbag the local districts again by bringing forth these options only to drop the hammer well after budget decisions are made (ala the October 2009 cuts).

This is why prudent school districts budget conservatively.  The district carries all the risk in these scenarios.  Salaries are locked in.  So are health care costs and retirement rates, but our funding remains in doubt.  Not a good combination.  Yet when we spend within or below our budgets, certain parties claim we are “hoarding” funds.  But if the cuts of October 2009 taught us one thing it is this:  The Lansing politicians have no regard for the local school district budget.  It is solely up to us to mitigate that risk.

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School Employee Retirement Costs and the House of the Rising Sun

Most people know by now that Lansing is by far the most significant source of school district funding.  Lansing is also the unilateral source of our second largest expense – employee retirement costs.  Lansing sets the rates and we pay the bill – a financially lethal combination that puts local school boards in an unenviable predicament.

Last Monday, January 11th, the Grosse Pointe Public Schools Board of Education had a marathon budget planning Work Session that could best be described as miserable.  My personal projection is that we will unfortunately have to terminate the employment of over 60 district employees – all of them good people who add value to our mission and who are valued in return.  But we cannot ignore our economic reality.  The cuts are coming – hard and fast.

graphWe collectively stare down the barrel of our most daunting projected budget shortfall in the history of the district, brought about equally by Lansing’s wretched policy making combined with a Depression-level state economy.

I cannot repeat enough that Lansing is the largest source of funding for every public school system in the state of Michigan.  Lansing controls our per pupil revenue.  Lansing has cut our per pupil revenue this year resulting in the loss of $3,000,000 and is making plans now for cuts next year that will result in the loss of another $2,200,000.  Meanwhile salaries and health care costs rise and student population is shrinking.  This is the financial stew that is our sustenance.

The focus in this post is another ever increasing cost which, after salary, is our second largest expense – employee retiree health and pension costs – referred to as the Michigan Public School Retirement Systems, MPSERS.  Lansing unilaterally controls the rate of this expense.  To put this in perspective, if we receive roughly $10,000 per pupil for school funding, nearly $1,300 of it goes to employee retirement.

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Filed under Current Events, GPPS Budget Decisions, State of Michigan Finances

Fund Equity Is Not a Long-Term Solution to School Funding Challenge

As everyone acknowledges the reality of the financial distress facing public schools, the focus must shift from assigning blame toward crafting solutions.  Understanding fund equity is essential to a meaningful dialog on this topic.  An objective view of data shows that fund equity will help districts cope, but is clearly not a long-term solution to the root cause problems.

Remember the first time you saw the picture below?  Look at it one way and you see an old woman, but with a subtle shift in focus it looks like a young one.

old woman optical_illusion

A view of the state’s K-12 budget and those of the local school district’s can have  a similar effect – most notably in relation to a school district’s fund equity.  You can learn much more about fund equity in this installment of the GPPSS Financial Transparency Series, but in short fund equity can be defined as the aggregate of a district’s revenue less its expenses over the history of its operations.

Sometimes called a  “rainy day fund”, fund equity draws attention in times of budget contraction because it is viewed, rightfully, as an alternative to other imminent and unattractive cuts.  The key question, however, hinges on the nature of the budget shortfall.  Is it temporary or an annually recurring one? A recurring shortfall is referred to as a structural deficit.  The distinction is significant.  I view the budget contractions that Michigan K-12 schools are now experiencing as permanent, what I previously wrote about as the New Normal. Continue reading

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Contemplating the “New Normal” on Michigan’s Darkest Day

Michigan’s communities are engaged in a high stakes game, wrestling with the lethal combination of rising costs and falling revenues.  Despite the urgency of the situation, a long-term view is critical for long-term health.

New reports surface daily chronicling how communities are responding to the financial trauma plaguing Michigan public schools.  Here is a sampling of articles from Dearborn, Saugatuck/Portage, WyomingWayne-Westland/LivoniaBloomfield HillsAllendale, Coopersville, Grand Haven, Hudsonville, West Ottawa, Spring Lake, Charlevoix, Grand Ledge, Hemlock/Saginaw/Chesaning, Escanaba, Fenton/Holly/Linden, Lansing, Utica, Northville, Three Rivers, East Jackson, Adrian, Muskegon, Detroit, Walled Lake, and Birmingham

welcome to MI What’s the point?  The list runs the gamut of the wealthiest districts to those that receive the lowest per pupil revenue.  Some are very large and some are very small.  Some are urban, some suburban, and some rural.  Some were previously receiving section 20J funds and some never received them in the first place. 

The point is that if you’re a school district in the state of Michigan you are certain to be experiencing financial distress.  There are no exceptions.

Welcome to Michigan –  a great state, but great times?  Not so much.

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Filed under GPPS Budget Decisions, State of Michigan Finances

“It’s Hard Getting Poor”

Neither placing blame or ignoring the root causes of the current state budget crisis gets us closer to solutions.  Michigan must come to grips with the reality of our condition and get on with establishing a new level of economic equilibrium.

I decided to get a closer look at what was happening in our state’s capital and attended the Michigan State Board of Education meeting held on October 26th.  The state’s board, unlike local boards, has no authority over K-12 budgets, but they rightly see that the governor’s and legislature’s budget decisions  impact the service for which they are responsible, educating all of the state’s public school students.

mike-flanagan The state Superintendent of Schools, Mike Flanagan, presided over the meeting which was aimed at helping the state board get a better sense of the economic forces behind the state’s recent budget decisions.  Two economists presented loads of data, but this statistic made the greatest impression on me:

In the year 2000 Michigan had the 16th highest per capita income in the United States.  By 2006 we had fallen to 33rd.  By the end of 2010, we are expected to be in the bottom 10.

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Granholm, Detroit News Want to Make a Hard Job Even More Difficult

The $165 per pupil cut is now state law. Granholm drops unexpected hammer on GP Schools with elimination of 20J funds.  Detroit News takes poorly researched position on Sinking Fund ballot question.

Amidst all the drama surrounding the various state budget bills, the House and Senate approved a School Aid Act bill  that cut funding by $165 per pupil.  The Grosse Pointe Public School System has roughly 8,400 students so this cut amounts to a loss of roughly $1,400,000 in annual revenue.  (See previous post for details on Michigan budgets and school funding.)

granholm Last night Governor Granholm signed this bill into law.  Many districts were clamoring for Granholm to take action so the state aid payments to public schools would not be delayed any longer.  Well, the good news is she signed it.  The bad news, for Grosse Pointe Schools and about 40 other districts like us, is that Granholm exercised her right of a line item veto on Section 20J fundsContinue reading

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Filed under Current Events, Dispelling Rumors, GPPS Finances, State of Michigan Finances