Brendan P. Walsh

The City of Detroit’s finances took the unenviable spotlight this week when Mayor Dave Bing gave what will be known as his “Detroit needs to be run by Detroiters” speech.  Bing’s speech appears to be a pre-emptive strike in what may turn out to be a state takeover of Detroit’s finances or perhaps even the largest municipal declaration of bankruptcy anyone has ever seen.

Not good no matter how you slice it. As usual, though, Detroit’s woes present a cautionary tale. 

As the pundits and wonks drill into Detroit’s predicament, we see a common theme.  The non-partisan Citizen’s Research Council did their normally outstanding job issuing a report on “Legacy Costs and Indebtedness of the City of Detroit.”  It’s not the most exciting read, but Nolan Finley boiled it down in his column this morning with the summary statement, “if Detroit were a private company, it would already be in bankruptcy court trying to restructure a general fund-backed debt of $7.7 billion, or $10,800 per resident.”

Allow me this layer of wonkishness as we compare this plight with Michigan’s own challenges and how it affects local school budgets.

A couple of the major planks of this legacy cost platform are retiree pensions and other post-employment benefits (OPEB), which is mainly health care.

These funds depend on contributions made by both employees and employers, while employed, to either pre-fund or “pay as we go,” meaning the contributions collected currently pay for the benefits of the current retirees.  The implication is there is not investment interest benefit in the “pay as you go” model.  Pensions are mostly pre-funded, but still underfunded in terms of their total obligation.  OPEB are almost 100% pay as you go.

Detroit’s aggregate pension plans are funded to the tune of 87.1%, or underfunded by about $5.6B.  Can you see the Lansing policymakers shaking their heads?  Now would be a good time to remind them that just the state managed pension plan for public school retirees (MPSERS) is actually in worse shape, funded proportionally lower than Detroit’s at 78.9% which translates to $12B underfunded amount.

Depressed yet?  But wait – there’s more!  OPEB is way worse.  Again, these are in a pay as you go condition.  Detroit’s OPEB is underfunded by $5.0B while Michigan’s public school employee retiree OPEB is underfunded by a whopping $27.6B.

Finley calls out the statistic that Detroit’s legacy obligations equate to $10,800 per resident.  If we take the MPSERS combined unfunded liability ($39.6B) applied against the state’s 9.88M citizens, the MPSERS obligation alone is $4,006 per citizen.  This doesn’t comprehend Michigan’s many other long-term obligations.

Why doesn’t the State of Michigan garner the same scrutiny on these legacy costs as Detroit is now receiving?  Lansing was shrewd on this one.  After all, where does this rising legacy cost manifest itself?  Not in Lansing, but across the 550 or so local school districts who absorb rising retirement obligations determined by Lansing. 

It’s pretty amazing. While Lansing increases the amount local school districts must pay to fund MPSERS with their right hand, their left hand is cutting per pupil funding.

This was the major theme of my presentation on the Financial State of the District last week.  Here are some statistical extracts just related to our MPSERS and retirement costs:

• In 2008, we expended about $1,800 per pupil on MPSERS and retirement.  This year it will have increased to $2,400 per pupil – a $600 per pupil cost increase while, in the same span of time, revenue per pupil has been cut $400.  This alone is a negative $1,000 per pupil swing.  Now multiply by 8,300 students and behold an annual $8.3M problem brought about by MPSERS and state aid per pupil alone.  Reminder: Locally we control neither one.
• In 2008, MPSERS and retirement consumed 14% of our per pupil aid.  This year that has grown to 19% and next year it will be 21%.  Think about that.  $1 out of every $5 we receive to operate our schools goes to retirement costs.
• In 2008, our average MPSERS and retirement cost per employee was about $16,400.  This year it has grown to $21,900 and next year it is projected to be $23,700.  That is a $7,300 per employee compensation increase that, unfortunately, our employees don’t see in their check every other week – but that is a real number that is wreaking havoc on our budget. 

And this is really what I am pleading with all GPPSS stakeholders to understand.  I can guarantee you this: Local school districts that do not recognize this trend and take corrective action are simply doomed.  Lansing will play the role of the Teflon Don, wag their finger and mutter “tsk, tsk, tsk.”

Detroit gets routinely framed as the poster child of poor fiscal management, and indeed their leadership has contributed to these problems.  But know that legacy pension and OPEB costs are a rampant problem that affects all of us in the Grosse Pointe Public School System very directly.

We didn’t create this problem, but the irony is that if we don’t grab and hold tightly this hot potato, we’ll get burned even worse.