Michigan’s pension problem
Moody’s Investors has been on a ratings downgrade rampage for Michigan’s school districts. Here is its explanation from the new sector comment report:
A majority of Michigan school districts have realized declines in enrollment over the past decade. Of the 549 public school districts in the state, 425 lost students from 2004 through 2012, with total statewide school enrollment (excluding charter schools) falling by 13.2 percent.
Demographic shifts like the one occurring in Detroit are devastating to municipal budgets. Typically fewer taxpayers have to carry a greater share of the costs of a municipal infrastructure, which rarely shrinks in proportion with population loss. But Michigan has another substantial problem: Its charter schools. From Moody’s again:
Beyond these statewide population trends, the increasing presence of charter schools in Michigan is also hurting traditional public school enrollment. Both the share of students enrolled in charter schools and the number of charter schools operating in Michigan have grown steadily in recent years.
How many charter school students are in Michigan?
Enrollment in charter schools increased more than 60 percent from 2004 through 2012 as the number of charter schools grew from 199 to 256. This brisk pace of expansion does not appear to be easing, with charter schools increasing in number by another 8 percent to 277 in the 2012-13 school year and again by 8 percent to 298 in the current 2013-14 school year.
At the close of the 2011-12 school year, charter schools enrolled nearly 120,000 students, or about 8 percent of the state’s 1.56 million combined public school and public charter school population.
The process of charter school expansion and student migration began in Detroit, but it is spreading across the state (see chart above):
While the presence and growth of charter schools largely remain concentrated in the Detroit metro area, charter schools are making inroads in other parts of the state as well. This includes not only southeast Michigan, which includes the city of Flint, but also portions of the state’s west and northwest regions.
Accelerating this student migration is a state program called “Schools of Choice,” which allows a student to enroll in another school district and have their education funding follow them:
In addition to charter schools, the state’s Schools of Choice program which enables public school districts to enroll students residing in other school districts, has increased the level of competition for students. While some districts have increased enrollment through this program, these gains have come at the expense of lost enrollment for other surrounding districts.
This has decimated the Detroit school system:
Detroit Public Schools (DPS; B2, negative), for example, saw 8 percent of its resident students enroll in nearby public school districts during the 2011-12 school year, over and above those that transferred to charter schools.
It has also caused massive migration out of weaker school districts:
If funding follows students around, what is the problem with the Michigan scheme? Unfortunately the debt and pension liabilities of a school district remained fixed to the school district. If the student population shrinks, the cash flow to service these fixed liabilities shrinks too.
Moody’s says that, according to state law, school districts can’t raise property taxes, so their options are to either attract students from other districts or cut expenses. Here is the nut of the problem – the pension system:
Declines in enrollment suggest that the accumulated liabilities of the state’s school employee pension system will be funded by a dwindling payroll base. Without new revenues, resources are likely to be increasingly diverted away from school functions to growing retirement costs.
It’s a tough cycle of fleeing students and decreasing revenues. Here is the bleak picture of the state’s teacher pension system (MPSERS):
Since 2007, the reported funding status of the MPSERS pension plan declined from 88.7 percent to 64.7 percent as of September 30, 2011. This represents an increase in the unfunded liability from $5.8 billion to $22.4 billion over the same time period, an increase of 286 percent.
Inclusive of the system’s other post-retirement benefits (OPEB) liabilities, the total plan reported funded status was an even poorer 46.6 percent as of September 30, 2011 and the unfunded liability was $48.3 billion.
Michigan has an unfunded liability of $48 billion for teacher pensions and postretirement benefits (OPEBs). Meanwhile 8 percent of its students have moved to charter schools, where most teachers are not in the state pension plan. The weakest school districts are suffering massive outflows of students. This is a medium-term fiscal disaster.
The two Detroit pension systems – the General Retirement System and the Police and Fire Retirement plan – have, respectively, 82.8 percent and 99.9 percent of the assets needed to pay benefits to current and future retirees. This has been a point of massive contention in the Detroit bankruptcy case. But the state’s teacher pension system is an enormous funding problem, and it appears to get worse every year.
Heads up Michigan. This problem needs immediate attention.