Retirement lawsuit bites into school budgets

When legislative reform of the Michigan Public School Employee Retirement System promised to cap school districts’ contributions at a flat 24.46 percent of payroll, many administrators reached for something else to uncap, in celebration.

However, months later, with challenges to the reforms working their way through the courts, the bottle being opened might be holding antacid.

With the future of Public Act 300 unsettled, school districts – the primary funders of the retirement system – have been informed the new contribution will be 25.36 percent of payroll for employees hired before July 1, 2010, and somewhat lower for those hired after, who are in a different, hybrid plan. The new assessment started Oct. 1, and will continue into the foreseeable future while the law remains under judicial review.

“The money is likely to be pulled out of fund equity, or in mid-year cuts for districts that don’t have it,” said Brendan Walsh, treasurer of the Grosse Pointe Public School System, which stood to save $1.9 million under PA 300. Statewide, the savings would have totaled nearly $250 million, or roughly $175 per pupil. Had the law not been passed, the school districts’ required contribution to the retirement system would have jumped to 27.37 percent. The 24.46 cap represents their contribution last year.

The revisions to the retirement plan were immediately challenged after Gov. Rick Snyder signed the bill, with the Michigan Education Association and the American Federation of Teachers claiming the window MPSERS members were given to make decisions about their pensions and retirement plans was unreasonably short. The groups also claimed changes to their constitutionally protected pensions were improper and illegal. An Ingham County judge issued a temporary restraining order in September, and Snyder sought intervention by the state Supreme Court. The high court declined, however, ruling a week ago that the suit should go through the full appeals process.

PA 300 made changes in the retirement system in an effort to control its unfunded liability; retirees would contribute more to their health care, younger members would contribute more, and those in between would have to choose between contributing more or freezing their pensions at current levels. The window for making that choice was to close Oct. 26, which the MEA said was not enough time. 

The temporary restraining order remains in effect, which requires local school districts to contribute at the higher rate for the time being.

And while the higher rate shouldn’t be crippling for most districts, it does frustrate the budgeting process, which is generally concluded in June.

In Livingston County, the savings would have been $4.5 million, which makes the delay frustrating, said Livingston Educational Service Agency Superintendent David Campbell.

“I didn’t go lay off a school psychologist” in response to the new assessment, Campbell said “That’s why you have a fund balance. But it’s frustrating trying to maintain a school budget when the (MPSERS contribution) rate keeps changing.”

If the 25.36 percent rate continues through the school year, Campbell estimates the district will be out about $200,000.

“Had schools known in June this would be happening, we should have planned for it. That’s why you’re always reminded as a school district to budget conservatively,” said Walsh. “When you budget conservatively, this is how you build up a fund equity.”

In an emailed statement, AFT President David Hecker said he hoped a study of the feasibility of  switching to a defined contribution-only plan – part of PA 300 – would show such a plan is inadequate to meet retirees' needs. He wrote, "The current hybrid pension plan — a 'combo plate' of defined benefit and defined contribution, which is what newly hired school employees received, 'meets the replacement ratio adequacy test,' whereas the DC plan 'falls short of the replacement ratio adequacy test.' In other words, if we switch newly hired school employees to a defined contribution plan, their pensions will not enable them to live their senior years in dignity. ...We do not want the people educating our children to fear outliving their pensions."

Steve Cook, MEA president, said the union was looking forward to the Nov. 28 hearing in Inghan County court, adding, "If we feel there’s been a violation of the constitution, we won’t rest on that. The nexus of this, going all the way back, is the astounding failure of the state to even deal with this. It goes back to the Engler administration decision not to prefund (retiree health care), to go on a pay-as-you-go basis. If (the MEA) operated our pension plan the way the state does, we’d be in jail."

Staff Writer Nancy Nall Derringer has been a writer, editor and teacher in Metro Detroit for seven years, and was a co-founder and editor of GrossePointeToday.com, an early experiment in hyperlocal journalism. Before that, she worked for 20 years in Fort Wayne, Indiana, where she won numerous state and national awards for her work as a columnist for The News-Sentinel.