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Article of Interest - Michigan

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Bridges4Kids LogoStudy: School Pensions Absorb Expected Funding Increases
Gongwer News Service, September 27, 2004
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Expected increases in health care funding for school retirees combined with still low earnings on retirement investments mean retirement account contributions could eat up as much as half of any future increases in school aid, according to a report from the Citizens Research Council.

The report, Financing Michigan Retired Teacher Pension and Health Care Benefits [PDF report found online at http://www.crcmich.org/PUBLICAT/2000s/2004/rpt337.pdf], predicts that in Fiscal Year 2007-08, retirement account contributions will constitute 20 percent of school payrolls, up from 14.87 percent for the fiscal year beginning this week. The report expected foundation grants to increase no more than $300 per student for FY 2006-07 and FY 2007-08, but it expected pension contribution increases would top $100 per student for those years, topping out at $1,200 per student.

The need for increased contributions was a combination of investment losses for the Michigan Public School Employee Retirement System and increases in health care costs.

Most of the investment losses came in 2001 and 2002, but the state values the fund on a five-year average, so schools will see increasing contribution rates to cover those losses through FY 2007-08, the report said. The system posted gains of $497 million in 1999 and $409 million in 2001, but losses of $1.5 billion in 2001 and $1.38 billion in 2002.

The MPSERS fund was actually over-funded by about $259 million in 1997, but by 2003 returned to $6.04 billion under-funded, about the same level it was in 1996.

Increasing health care costs for retirees have also added to the contributions school must make to the retirement fund. The study showed the portion of the contribution dedicated to health care coverage increased about 12.7 percent annually between 1995 and 2003.

Though the report noted that it is rare for states to prefund health care benefits for retirees, it said the benefits, if amortized over 33 years, would be underfunded by $15.7 billion and would require contributions of 15.7 percent of payroll to return to prefunding the benefits.

And increasing number of retirees has also pushed up contributions to the fund, the report said. Between 1995 and 2003, the number of school employees increased 11 percent, but the number of retirees increased 36 percent.

In the long-term, the report expected that pension contributions would level out about 2010 as investment returns come back to historic normal levels. But it anticipated that, without any changes in national health care policy, the health care portion of the contribution would continue to climb, pushing total contributions to about 33 percent of payroll by 2020.

    

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