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 Study:
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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