Brendan P. Walsh

In February of last year, I wrote Rick the Nerd and the Blustery Day, which offered this summary commentary of Michigan governor Rick Snyder’s initial K-12 budget proposal and its $920 million proposed school funding reduction:

Snyder should get credit for showing real political courage – holding at bay ideologues on both the right (who must swallow personal tax increases) and left (who swallow cuts to their core constituency).  I’m not sure which are the Heffalumps and which are the Woozles, but neither can declare victory.  Businesses are the undeniable winners for now.  The true test of Snyder’s plan is whether what’s good for business is good for Michigan.

The hero’s welcome for Rick should be postponed until his plan, and those businesses benefactors, actually creates jobs.  And even then the end result is stable to increasing  income and consumption tax revenues.  Should the party actually take place, it won’t be of the tea variety.  Snyder’s plan is most certainly not that.

The winds of change continue to blow today, and Snyder’s overall strategy is coming into sharper focus. Let’s take a look at the 2012-13 School Aid Budget (House Fiscal Agency summary here), but importantly in conjunction with the public school employee retirement system reform proposed in Senate Bill 1040 (House Fiscal Agency summary here). While the two aren’t officially tied together, they might as well be.

Rick Snyder made a big bet when he blew up the much maligned Michigan Business Tax. Doing so cratered the School Aid Fund by $750 million a year. This move alone was the primary reason why Michigan school districts absorbed a $470 per pupil funding cut. Snyder bet that by creating a business friendly tax environment, jobs would be created, which would then replenish that loss.

Whether directly attributable or not, the Nerd’s bet is paying off. According to revised estimates, the state’s school aid fund revenue in 2012-13 will be $11.2 billion, moderately below the 2010-11 level school aid fund revenue of $11.3 billion. Recall that in 2010-11, the Michigan Business Tax was pumping in $750 million to it.

The future looks brighter as well. In the words of the Senate Fiscal Agency, “Continued gains in employment and income result in a revised estimate of FY 2013-14 SAF revenue of $11.5 billion, an increase of 2.7% or $301.9 million from the revised estimate for FY 2012-13.”

In short that was Snyder’s blustery day bet. Jobs have been created. Michigan ranked 6th among U.S. states in economic growth, according to the U.S. Bureau of Economic Analysis.

These are the tailwinds. All good stuff. But headwinds remain. The question then becomes, how will Gov. Snyder leverage the tailwinds to offset the headwinds?

The biggest headwind for Michigan public schools is surging retirement costs. In our local school district’s case, the trajectory of rising retirement costs would increase its proportional consumption of our per pupil aid from 12% in 2007-8 to 22% in 2013-14. I’m certain this is generally representative of nearly every Michigan public school.

As this cost has risen, even in the few years when the Foundation Allowance has increased, it’s been outpaced by rising retirement costs. Throw in the recent years of actually Foundation Allowance reduction, and the misery was palpable.

This is where the retirement reform bill and Michigan’s rising school aid fund revenue come in. For the 2012-13 budget year, the Snyder and legislative plan gives a moderate $120 per pupil increase for lowest revenue school districts, but the bigger story is the allocation of $326 million to offset retirement cost increases and begin the effort to pre-fund retiree health costs. This is over $200 per pupil that benefit districts not seen in the Foundation Allowance.

The retirement reform bill does a great many things, not the least of which is to shift more costs to the employee and retiree. But look what it does for the local school district:

Beginning in FY 2013-14, charge the normal cost of pension and health care (3.41%), meaning the amount necessary to prefund the benefit earned by current employees in any given year, on each employer’s MPSERS payroll, but shift the cost of paying unfunded accrued liabilities (UAL) (13.1%) to an employer’s cost of operating expenditures (COE). The total rate would be the equivalent of 24.46% on payroll. Community Colleges, District Libraries, ISDs, and Public School Academies would still be charged based on MPSERS payroll.

Translated, it will freeze employer contributions at the equivalent of 24.46% of payroll (2011-12 levels) and, over time, the state’s school aid fund (combined with higher employee contributions) will make up the difference in the unfunded liability. Tying this all together, the projected rise in economic growth, which translates to higher school aid fund revenues, will solve for the long term the state’s biggest headwind problem, unfunded pension and health liability.

All I can say is – finally! This is exactly what needed to happen and the smartest thing Michigan legislators have done in an awfully long time. And it gets better.

The reform would also shift the basis for employer contributions from a percentage of salary to a percentage of the larger Cost of Operating Expense (COE). So ALL those districts that have been chiseling down salary cost by outsourcing and therefore bypassing retirement costs are now back on the hook, as they should be. I treated this topic in my April 22, 2011 Detroit Free Press guest op/ed, Legacy Costs are Crippling Schools.

And this shift to COE also rightfully lassos charter schools into this stew, who effectively outsource everything (more on that here).

Holding district retirement cost rates at 24.46% is a huge boon to local budgets. In our district’s case, every percentage point of retirement obligation is equal to about $1 million in cost. The retirement rate without this reform is projected to increase to a high water mark of 33%, or $8 million annually. There’s simply no way that cost could be absorbed without massive sacrifice to service offerings.

All of this combined paints this picture in my eyes. Michigan Gov. Rick Snyder is, for now, proving himself to be the business savvy pragmatist that this state sorely needed. Headwinds to economic recovery remain, but at least the course Snyder has charted has long-term stability as the destination, while avoiding the siren call of the political ideologues.

As I’ve often said, the pathway to recovery will not be without pain and sacrifice, but our past debts must be paid for the well-being of our future, mainly that of our children.