- DPS Emergency Financial Manager Robert Bobb
Robert Bobb made headlines again today when he announced Detroit Public Schools would outsource custodians and engineers to save $75 million.
I recently wrote of the immensity of DPS’ budget problems so it’s tough to argue against anything that could stand to improve their financial condition. But then again, it’s more complicated than that. As much as no one wants to admit it, Proposal A binds all of our economics together in ways that aren’t so evident. Let’s look at some numbers.
Proposal A shifted the employee retirement burden to the local school districts. The state sets a percentage amount applied against all employee salary costs that funds school retiree health care and pension costs. In 2010-11, this percentage is 20.66%. Ten years ago the rate was 12%. So in Grosse Pointe Public Schools’ case, if our rate this year were the same as 2002 our costs would be about $5 million lower. That’s 5% of our total expenditure – a big number.
This obligatory retirement rate is THE number one reason schools outsource. With contracted employees, you don’t pay this retirement. This is an attractive option for school districts. Retirement costs are routinely any district’s second largest expense.
Districts have gone this path – aggressively. Since 2003 the number of employee salaries contributing to this retirement pool has decreased by a staggering 27% as school districts outsource anything they can – mainly substitute teachers, custodians, food service employees and bus drivers. So school districts have saved a ton of money, right?
Maybe not. As all those salaries drop off from the contribution pool, the state retirement system’s unfunded liability has skyrocketed. How do you fix that? Well, you raise the retirment contribution rate. And now the bill has come due as the Michigan School Business Officials now estimate the retirement rate may rise from the current 20.66% to 27.5%.
How significant is that? The total of all Michigan school district salary costs are about $9.5 billion. 20.66% of that is just under $2 billion. If the rate were to increase to 27.5%, the retirement burden borne by the local school districts would increase by $654 million. So remember that entry about the healthy increase in the School Aid Fund and its $523 million projected surplus? Buh-bye. It’s not even enough to cover this bill. Schools could see their most significant per pupil funding increase in years and be as bad off as ever.
The “no free lunch” lesson is learned again. More and more districts have outsourced and one effect has simply been that the temporarily reduced cost resurfaces in higher retirement costs.
Not an uplifting message or analysis, but it’s important that as we read these headlines we realize that you can’t outsource a liability.