“School administrators in metro Detroit districts are considering whether to retire and then return to their jobs as independent contractors . . . . Retiring allows them to begin drawing a state pension, while being rehired privately for the same job allows them to continue to collect a salary . . . .
Drawing both a pension and a paycheck was once considered "double dipping," but is allowed under Michigan's new pension reform law . . . . School districts save money when they re-hire the retiree privately, because the district typically does not offer benefits and is no longer required to contribute to the state retirement system on behalf of that employee . . . . “ Michigan Education Digest, June 8, 2010
This process has been called “retire-rehire” and has been a tactic some school districts have used to save money, by, in effect, dumping the benefit costs onto the retirement system. When an administrator retires and then is rehired on a contract, the district avoids not only the about $16,000 per year health insurance cost and the 2010-11 MPSERS rate of 19.41% (minus the 3% the employees will need to pay under the new law), but the district also avoids the 7.65% combined Social Security tax, the unemployment tax and workers compensation insurance costs.
This all adds up, with most superintendents and many other administrators earning over $100,000 per year. For example, as cited in the Michigan Education Digest report, the “retiring” Clawson Public Schools Superintendent will continue to receive her $140,000 annual salary, but the district will no longer pay $65,000 in benefits.
Many will ask, “Well, if the school districts are saving so much money, what’s wrong with that? It sounds like good management to me.”
The problem is that the benefit costs are not avoided, but merely shifted. That is, the stressed MPSERS system now absorbs the cost, and this cost is then paid by higher contribution rates paid on wages by all school districts for their employees. This practice has been under attack as “abuse” by the MPSERS system for years, and while not completely legal, many districts continued to do it. The “retired” employee is hired on a contract through a third-party employer, rather than directly. That, in itself, should be a red flag that something is not right with the tactic.
The tactic appears to have been less effective with hiring back teachers than with administrators. The excuse is that “good school administrators are hard to find”, but often this is just a smoke screen for protecting the good ole boy system within the current and former school administrator ranks. Many teachers are ready to step into principal roles when given a chance. And, with all of the laid off management skill in Michigan today, there is ample transferable talent available to run our schools at the superintendent level.
While the school district retirement system reform law recently enacted was a step in the right direction, it could be improved by eliminating the double dipping it still allows.
Showing posts with label MPSERS. Show all posts
Showing posts with label MPSERS. Show all posts
Thursday, June 10, 2010
Wednesday, May 12, 2010
Reform of MPSERS Retirement System Necessary – But Only Wisely
Governor Granholm proposed changes to the Michigan Public School Employee Retirement System (MPSERS) in her budget proposal. With the contribution rate public schools and community colleges needing to pay going up to 19.41% for the coming school year, it is obvious that the system is unsustainable. Changes must be made to keep the program actuarially sound, and yet affordable by the education system.
Governor Granholm’s proposal was aimed to create cost savings to help balance the budget, but also contained a sweetener to entice long tenured employees to retire (and allow lower cost new employees to be hired) by raising the multiplier of 1.5% to 1.6%, for a 6.6% increase. The multiplier is multiplied by the number of service years credited to the employee. For example, with 30 years of service, and if the highest 3-year average salary were $60,000, at a multiplier of 1.5, the retirement payments would be 1.5% x 30 x $60,000 = $27,000 per year, while at 1.6% they would be $28,800.
The Senate chose not to include the sweetener in Senate Bill 1227, while adopting the bulk of the Governor’s proposal. Significant savings would result. On the other hand, the Democrat controlled House of Representatives amended the bill to send back to the Senate the bill increasing the sweetener from 1.5% to 1.7% or a 13.3% increase, plus a plethora of additional sweeteners.
The worst change made in the House is changing the lifetime health coverage to a constitutionally protected fringe benefit, which it is not now classified. The Michigan Capitol Confidential estimated the added burden to the State would be a new $25.9 Billion liability for the taxpayers.
When the State is having trouble adopting a balanced budget, does it make sense to be adding to the State’s costs and liabilities? Well, to the Michigan Education Association bankrolled and controlled House Democrats, apparently it does.
I say “NO, IT DOES NOT!”
With the bill thrown into a free conference committee, the Senate Republicans would be better off coming out with no bill than a poor one, just to get something agreed upon. With the state the state is in, we cannot afford to saddle the taxpayers with even more costs and liabilities.
Governor Granholm’s proposal was aimed to create cost savings to help balance the budget, but also contained a sweetener to entice long tenured employees to retire (and allow lower cost new employees to be hired) by raising the multiplier of 1.5% to 1.6%, for a 6.6% increase. The multiplier is multiplied by the number of service years credited to the employee. For example, with 30 years of service, and if the highest 3-year average salary were $60,000, at a multiplier of 1.5, the retirement payments would be 1.5% x 30 x $60,000 = $27,000 per year, while at 1.6% they would be $28,800.
The Senate chose not to include the sweetener in Senate Bill 1227, while adopting the bulk of the Governor’s proposal. Significant savings would result. On the other hand, the Democrat controlled House of Representatives amended the bill to send back to the Senate the bill increasing the sweetener from 1.5% to 1.7% or a 13.3% increase, plus a plethora of additional sweeteners.
The worst change made in the House is changing the lifetime health coverage to a constitutionally protected fringe benefit, which it is not now classified. The Michigan Capitol Confidential estimated the added burden to the State would be a new $25.9 Billion liability for the taxpayers.
When the State is having trouble adopting a balanced budget, does it make sense to be adding to the State’s costs and liabilities? Well, to the Michigan Education Association bankrolled and controlled House Democrats, apparently it does.
I say “NO, IT DOES NOT!”
With the bill thrown into a free conference committee, the Senate Republicans would be better off coming out with no bill than a poor one, just to get something agreed upon. With the state the state is in, we cannot afford to saddle the taxpayers with even more costs and liabilities.
Sources:
Tuesday, October 20, 2009
Controlling Public School Employee Benefit Costs
The Detroit News is highlighting ideas from various groups to promote discussion on reform, restructuring government and the economy.
Idea 20 : Cap school employee health benefits and/or enroll them in health savings accounts.
Idea 14: Consolidate health care coverage for all public employees in Michigan in a single insurance pool.
Idea 19: Transition newly hired Michigan teachers to a defined contribution retirement system or 401(k).
All three of these ideas attempt to control costs of benefits, yet in ways that do not infringe on the results of years of collective bargaining between the teachers’ unions and the local school districts.
The typical employee share of the health insurance cost is 5 to 10 percent, compared with an average of 25% in the private sector. With statewide school health insurance expenses of $1.93 billion in 2008, increasing the percentage to that of the private sector would save more than $290 million a year. Moving all school employees to high-deductible Health Savings Account plans would save even more -- as much as $450 million in the first year and $26 billion through 2021, according to a Mackinac Center for Public Policy analysis.
An alternative approach to controlling rising health care costs would be to create a health insurance pool for all public employees which is believed would cut administrative costs and provide a larger number of customers to negotiate lower rates. This was a Republican idea which was going nowhere until House Speaker Andy Dillon (D) came out publicly this summer in favor of such an approach. See the Hays Group 2005 Report on the Feasibility and Cost-Effectiveness of a Consolidated State-wide Health Benefits System for Michigan Public School Employees.
Dillon’s white paper estimated that pooling health insurance would save up to $900 million a year, versus an estimate by the American Federation of Teachers and International Union of Operating Engineers in 2005 of only $156 million to $223 million a year for teachers (or a 7 percent savings). Applying the 7 percent savings across all government and school employees amounts to more than $500 million a year. Whichever estimate is correct, and it is impossible to say ahead of time which will be more correct, as the savings will depend on the details of the proposals enacted, the savings appear worthwhile to achieve.
A second expensive benefit is the teachers’ retirement plan.
The Michigan Public School Employees' Retirement System (MPSERS) provides pension and other post-employment benefits to more than 160,000 retirees and beneficiaries. There are 715 participating employers, including K-12 districts, public school academies, district libraries, tax supported community colleges, and seven universities. Under the current “defined benefit” plan, each of which is required to contribute the full actuarial funding contribution amount to fund pension benefits for its employees. (1.5% times the years of service times the highest three year average compensation, plus qualified retirees get health insurance coverage.) As the investment yield rises and falls, and estimates of retirees’ health care costs fluctuate, the actuaries calculate the contribution necessary to fully fund the plan, with a current rate of almost 17% of each employee’s wages (and projected to rise even higher).
The recommendation is to switch to a “defined contribution” plan, where the employer would contribute a set amount each year, and the ultimate benefit the employee would receive would depend on how well the investment of the contributions do. In short, the risk of market variation is shifted to the employee. The contribution rate might also be somewhat less than current and forecasted contribution rates.
The Citizens Research Council of Michigan in July, 2009 said in Michigan State and Local Government Retirement Systems, page 51:
“Transitioning newly hired Michigan teachers to a defined contribution retirement system would provide a much-needed structural reform to the state budget and prevent long-term legacy costs that are unsustainable for the Michigan education system and state budget. . . .
However, the transition from closing a defined benefit plan to new entrants, and placing all new hires in a defined contribution plan, normally requires ongoing contributions to both plans that may entail an increase in overall pension contributions for a number of years, so careful actuarial and budget analysis is critical to informed decision-making.”
The problem with high and rising MPSERS contribution rates is nothing new, with the Citizens Research Council forecasting significant funding difficulties in its 2004 report Financing Michigan Retired Teacher Pension and Health Care Benefits, A step in the right direction since then has been switching to a more actuarially sound “graded premium” plan for the retirees' health benefits. Under this change, retirees are required to contribute to the health insurance cost on a sliding scale based on the number of years of service, as compared with needing to contribute only 10% once vested after 10 years of service regardless of whether the years of service accrued were 10 or 35.
Nonetheless, the burden of the current plan is far above what private industry carries; in other words, the benefits are far richer than private sector employees enjoy.
The Michigan Education Association, the state's largest teachers and school employee union, already runs its own health insurance pool through the Michigan Education Special Services Association, which covers more than half of public school and community college employees. The MEA opposes any increase in the teachers’ share of the cost, the pooling of the health care plans, and transition to a contributory retirements system.
As much as we all like individual teachers, we must push for every efficiency in government that we can, in light of the scarce dollars we have to spend. Increasing the school funding by raising taxes in the face of an economic downturn to continue unsustainable benefit programs for teachers is not only politically unpalatable, but also counterproductive in encouraging job growth in Michigan.
Comments?
Idea 20 : Cap school employee health benefits and/or enroll them in health savings accounts.
Idea 14: Consolidate health care coverage for all public employees in Michigan in a single insurance pool.
Idea 19: Transition newly hired Michigan teachers to a defined contribution retirement system or 401(k).
All three of these ideas attempt to control costs of benefits, yet in ways that do not infringe on the results of years of collective bargaining between the teachers’ unions and the local school districts.
The typical employee share of the health insurance cost is 5 to 10 percent, compared with an average of 25% in the private sector. With statewide school health insurance expenses of $1.93 billion in 2008, increasing the percentage to that of the private sector would save more than $290 million a year. Moving all school employees to high-deductible Health Savings Account plans would save even more -- as much as $450 million in the first year and $26 billion through 2021, according to a Mackinac Center for Public Policy analysis.
An alternative approach to controlling rising health care costs would be to create a health insurance pool for all public employees which is believed would cut administrative costs and provide a larger number of customers to negotiate lower rates. This was a Republican idea which was going nowhere until House Speaker Andy Dillon (D) came out publicly this summer in favor of such an approach. See the Hays Group 2005 Report on the Feasibility and Cost-Effectiveness of a Consolidated State-wide Health Benefits System for Michigan Public School Employees.
Dillon’s white paper estimated that pooling health insurance would save up to $900 million a year, versus an estimate by the American Federation of Teachers and International Union of Operating Engineers in 2005 of only $156 million to $223 million a year for teachers (or a 7 percent savings). Applying the 7 percent savings across all government and school employees amounts to more than $500 million a year. Whichever estimate is correct, and it is impossible to say ahead of time which will be more correct, as the savings will depend on the details of the proposals enacted, the savings appear worthwhile to achieve.
A second expensive benefit is the teachers’ retirement plan.
The Michigan Public School Employees' Retirement System (MPSERS) provides pension and other post-employment benefits to more than 160,000 retirees and beneficiaries. There are 715 participating employers, including K-12 districts, public school academies, district libraries, tax supported community colleges, and seven universities. Under the current “defined benefit” plan, each of which is required to contribute the full actuarial funding contribution amount to fund pension benefits for its employees. (1.5% times the years of service times the highest three year average compensation, plus qualified retirees get health insurance coverage.) As the investment yield rises and falls, and estimates of retirees’ health care costs fluctuate, the actuaries calculate the contribution necessary to fully fund the plan, with a current rate of almost 17% of each employee’s wages (and projected to rise even higher).
The recommendation is to switch to a “defined contribution” plan, where the employer would contribute a set amount each year, and the ultimate benefit the employee would receive would depend on how well the investment of the contributions do. In short, the risk of market variation is shifted to the employee. The contribution rate might also be somewhat less than current and forecasted contribution rates.
The Citizens Research Council of Michigan in July, 2009 said in Michigan State and Local Government Retirement Systems, page 51:
“Transitioning newly hired Michigan teachers to a defined contribution retirement system would provide a much-needed structural reform to the state budget and prevent long-term legacy costs that are unsustainable for the Michigan education system and state budget. . . .
However, the transition from closing a defined benefit plan to new entrants, and placing all new hires in a defined contribution plan, normally requires ongoing contributions to both plans that may entail an increase in overall pension contributions for a number of years, so careful actuarial and budget analysis is critical to informed decision-making.”
The problem with high and rising MPSERS contribution rates is nothing new, with the Citizens Research Council forecasting significant funding difficulties in its 2004 report Financing Michigan Retired Teacher Pension and Health Care Benefits, A step in the right direction since then has been switching to a more actuarially sound “graded premium” plan for the retirees' health benefits. Under this change, retirees are required to contribute to the health insurance cost on a sliding scale based on the number of years of service, as compared with needing to contribute only 10% once vested after 10 years of service regardless of whether the years of service accrued were 10 or 35.
Nonetheless, the burden of the current plan is far above what private industry carries; in other words, the benefits are far richer than private sector employees enjoy.
The Michigan Education Association, the state's largest teachers and school employee union, already runs its own health insurance pool through the Michigan Education Special Services Association, which covers more than half of public school and community college employees. The MEA opposes any increase in the teachers’ share of the cost, the pooling of the health care plans, and transition to a contributory retirements system.
As much as we all like individual teachers, we must push for every efficiency in government that we can, in light of the scarce dollars we have to spend. Increasing the school funding by raising taxes in the face of an economic downturn to continue unsustainable benefit programs for teachers is not only politically unpalatable, but also counterproductive in encouraging job growth in Michigan.
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