Thursday, February 3, 2011

MPSERS - School Pension In Trouble (Part 1 of a Series)

Economic and demographic reality is colliding with the pension and healthcare promises made decades ago in Michigan’s Public School Employees Retirement System (MPSERS). As I’ve discussed, and now Governor Snyder has pointed out, the reality of a $36.9 billion unfunded pension liability (another way of saying the pension is short $36.9 billion) creates a crushing burden on all Michigan taxpayers; this includes the very people that participate in the pension fund. The chart above reveals a simple truth as to why the pension fund is struggling. It shows both the declining active (employed) membership in MPSERS, and the growing number of retired members. The two lines are going to converge and cross if trends continue. The chart below projects a continued fall off in Michigan's student population through 2020, it is a trend that started years ago. Source data here and here.

That measure (total students) is highly correlated to public school employment. Together the charts show how employment has responded to the decline in total students, and how that trend is likely to continue. The implication is simple: the future holds fewer students, fewer public school employees, accelerating payouts from pension funds, and higher percentages of school operating budgets directed to support the pension fund. In fact, the projected contribution rate for next year is expected to increase from 20.66% to nearly 28% That means for each dollar an employee earns, districts will have to divert an additional 28 cents on top of that dollar to support the pension fund. That additional contribution gets larger in future years (source data here). The state does not increase school funding to match this mandate -- it is the ultimate in unfunded mandates. The pension payments are made out of operating funds available for the classroom, for teacher salaries, for equipment and supplies, and for program support.

MPSERS has attempted to address the issue, but the current measures represent bandaids. Some initiatives designed to save the system have been met with legal challenges which, if successful, will have the ironic effect of further crippling the pension system.

Conversations about honest assessments and major reforms are happening, the key to crafting lasting solutions is clarity regarding the nature and scope of the problems -- topics to be explored in future posts.