Rising School Retirement Contribution Rate Erodes Value of Foundation Grant

Among other things, Governor Snyder’s fiscal year 2013 (FY2013) budget proposal confirms the increases in the required retirement contribution rate that local school districts will face in the coming years.  To help districts plan, the FY2012 budget included a projected rate of 27.4 percent of payroll for FY2013.  The FY2013 budget confirms the earlier projected figure and provides an estimate for FY2014 (31.2 percent of payroll).  The rate increases for FY2013 and FY2014 will further erode the value of the per-pupil foundation allowance, which is frozen at the FY2012 level for the next two years under the Governor’s budget recommendation.  While the new budget provides additional per-pupil revenues to help offset the rising retirement costs that districts will face, these are insufficient to fully cover the incremental retirement obligations.  CRC highlighted this in a recent summary presentation of the Governor’s budget recommendation.

All traditional public school districts, community colleges, a few charter schools, and a handful other entities participate in the Michigan Public School Employees Retirement System (MPSERS), a state-administered defined benefit pension plan.  In addition to traditional pension benefits, the system provides members with other post employment benefits (OPEB), mainly health insurance, during retirement.  (Schools and others are responsible for providing health insurance to members during their working years.)  MPSERS benefits (pension and OPEB) are largely financed by assessments charged, as a percentage of active payrolls, to schools and others.  Pension benefits are prefunded (meaning resources are set aside today to pay benefits in the future), while OPEB are currently financed on a pay-as-you-go basis (meaning there is no prefunding and the system pays for the retiree benefits as they occur from current dollars).

The required contribution rate to finance MPSERS benefits rose in FY2012 to 24.5 percent of payroll from 20.7 percent of payroll in FY2011.  The Governor’s budget sets the FY2013 rate at 27.4 percent, an increase of 2.9 percentage points.  Also, the new budget provides notice that the rate will increase again in FY2014 to 31.2 percent.  Compared to the current year assessment, the FY2013 rate increase equates to a per-pupil cost of $166 and the FY2014 rate bump equals a $215 per-pupil increase.  These increases are not a complete surprise to local districts as the retirement rate has been rising steadily for some time and the recent early retirement program for school employees contributes to the increases.

While the specific reasons for the rate increases can be complex and a function of a number of different things, generally three factors account for what is taking place currently.  As previously mentioned, an early retirement program offered in 2010 to school employees increases the rate as costs of the program are being amortized over a five-year period.  Also, the performance of the retirement system’s investment portfolio has not consistently met assumed rates of returns.  Also, reductions in school employment levels in recent years causes the unfunded obligations of the system to be spread across a declining payroll base, adding to the retirement rate.   

The retirement contributions to MPSERS are largely financed by the per-pupil foundation grant.  The FY2013 budget does not include an increase in the foundation grant for districts (which varies by district).  The minimum grant is frozen at the FY2012 level of $6,846, $300 below the FY2011 amount.  The Governor does not recommend changing the grant in FY2014.

The Governor’s budget recommendation includes increases in per-pupil funding (outside of the foundation) that districts can use to cover the MPSERS rate increase, but the amounts are insufficient to fully finance the incremental costs arising from the retirement contribution rate increase.  Districts will be eligible to receive, in addition to their foundation grant, up to $178 per pupil in student performance/”best practices” incentive-based funding in FY2013, up from $100 per pupil in FY2012.  It is likely that that not all districts will receive the full amount.  Also, districts will receive funding, estimated at $115 per-pupil, specifically to help them offset the MPSERS rate increase in FY2013.  Districts received a similar allocation in FY2012 in the amount of $100 per pupil.  In total, and compared to the current year budget, districts will receive an additional $93 per pupil (outside of the foundation grant).  However, the MPSERS rate increase requires districts, on average, to spend an additional $166.  Therefore, on net, districts will realize a reduction in per-pupil funding of 1 percent, as reflected in the table below.

 Per-Pupil Funding Changes Compared to FY2012

 

FY2012

FY2013

FY2014

Foundation (minimum)

 $   6,846

 $   6,846

 $   6,846

Best Practice/Performance Funding

 $      100

 $      178

 $       65

Retirement Contribution Incr. Cost Offset

 $      100

 $      115

 $      115

  Subtotal

 $   7,046

 $   7,139

 $   7,026

  % Change from FY2012

 

1.3%

-0.3%

 

 

Retirement Contribution Incr. (compared to ’12)

 $        -  

 $     (166)

 $     (215)

  Net Change

 $   7,046

 $   6,973 (-1.0%)

 $   6,811 (-3.3%) 

The financial costs associated with the retirement rate increases for FY2013 and FY2014 represent further erosion of the foundation grant for districts.  The chart below examines the inflation-adjusted foundation grant (FY2012$) with and without changes in the retirement rate since FY1995 (when districts first became responsible for financing the contributions to MPSERS).  Holding the retirement rate constant, the real value of the grant in FY2004 was $8,100 and factoring in the rate changes between FY1995 and FY2004, the value of the grant was $8,170.  Since that time and projecting things to FY2014 shows that the value of grant, after MPSERS rate adjustments, would fall to $5,821 (or $5,932 with the additional non-foundation per-pupil resources provided in FY2012 to FY2014).  In contrast, the real value of the grant, holding the MPSERS rate constant, would be $6,593 in FY2014.

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