From Michigan to Illinois to Ohio, Teacher Pension Problems -- and Changes -- Fuel Political Debate

Published: Wednesday, April 25, 2012, 10:59 AM     Updated: Wednesday, April 25, 2012, 2:36 PM

 Nancy Derringer | Bridge Magazine

Teacher and public-employee pensions are in the news nationwide, and Michigan’s are not unique. Across the country, pension funds are suffering from the same confluence of factors, including rising health-care costs, falling returns on investment, lax oversight and more.

It is very difficult to directly compare public-employee pensions; individual states each have their own rules, and funds, cautioned Gary Olson, a former Senate Fiscal Agency director currently preparing a paper on Michigan’s school-employee pension bind. But, in general, elsewhere in the Midwest, states are taking the same steps Michigan is deploying in trying to shore up underfunded pension systems: increasing contributions and changing eligibility rules

“Pension contributions are crowding out other spending at the state level -- just as they are doing at the (school district) level in Michigan,” Wetmore said, adding that the total state pension contribution in fiscal 2012 will be $7.6 billion or 19.3 percent of state general fund dollars. This is an increase from $526 million in 1996.Illinois splits its educators into two retirement accounts. One, run by the city of Chicago, covers teachers there. The other, the Illinois Teachers Retirement System, covers educators across the rest of Illinois -- and was recently declared on the road to insolvency by 2030. The Illinois system is mostly funded by the state, and, in March, the TRS board approved a resolution declaring “the fiscal situation of the State has deteriorated to the point that the Board no longer has confidence that the State will be able to meet its existing funding obligations to TRS,” explained Sarah Wetmore, research director of the Civic Federation. 

Anxieties over the shortfalls have led to some reforms. Employees hired after Jan. 1, 2011, are in a different tier of benefits, for example.

Recent discussion among state leaders has focused on shifting some of the state’s share to local employers, for those who don’t actually work for the state. For teachers, that means local school districts, which would reduce the amount districts can spend on education. But without at least some reform, the state wouldn’t be able to contribute as much to education itself, Wetmore said.

Trouble in the Buckeye State

Public employees in Ohio do not pay into Social Security, and their retirement benefits are calculated with that in mind. Teachers, in general, pay a great deal more for their pensions, and receive higher payments, but without the supplement that Social Security provides one in Michigan.

In Ohio, the State Teachers Retirement System proposed a plan last year that raises retirement eligibility and service totals every two years beginning in 2015. By 2023, teachers will have to be 60 years old with 35 years of experience to retire with unrestricted benefits. (Members may retire at 65 with five years of service.)

The benefit formula would change as well. Those who make it to 60, with 35 years of service, would receive 77 percent of their final average salary. Cost of living increases were tweaked, too.

And members will contribute more. Ohio teachers were already paying more than Michigan teachers would under the Senate Bill 1040 reforms; under the plan, they’ll pay 3 percent more, phased in over three years.

However, the plan has not been enacted yet, said Melissa Cropper, president of the Ohio Federation of Teachers.

“No matter what you do, someone will be unhappy,” she said. “Retirees are ticked off because the cost-of-living increase will be reduced. Active teachers don’t want to pay more. Everybody is angry. But we have to save the pension system. We can’t let it fall apart.”

The Hoosier State hybrid

In Indiana, the pension situation is less dire than in neighboring states. But in Indiana, teachers receive smaller pensions -- and no state health insurance.

The state has had a hybrid pension plan for years. Teachers contribute nothing to the defined-benefit portion, but do contribute to a separate annuity savings plan, which they may invest in a menu of funds. A minimum contribution of 3 percent is required, which is sometimes used as a bargaining chip in contract negotiations, said Jeffrey Hutson, chief communications officer for the Indiana Public Retirement System. Individual districts pick up the whole amount, a portion, or none at all.

Indiana’s pension multiplier is 1.1 percent of the average of the employee’s highest five years of annual compensation multiplied by years of service. For example, a teacher retiring with a $60,000 average salary after 25 years of service would receive $16,000 annually, with no health care.

(The current MPSERS multiplier is 1.5 percent. Under SB 1040, educators would have to contribute additional sums to continue that multiplier, or accept a lower 1.25 percent multiplier on years served after the bill's enactment.)

“Relative to other plans, it’s not considered overly generous,” said Hutson. But, the plan “is very well funded. somewhere in the high 80s, low 90s.”

(MPSERS' funded ratio was at 71 percent, as of September 2011. As pointed out by Girard Miller of Governing magazine, federal law requires private-sector pensions that have funded ratios below 80 percent to take "immediate remedial action.")

"For years, benefits (in Michigan) were modeled on auto workers. Now we're changing. Salary and benefits for state workers have been recalibrated, and (school employees) are the last ones. It's also the most difficult," said Craig Thiel, director of state affairs for the Citizens Research Council, which first sounded the alarm on pension distress in 2004. "At the end, what this reform is about is breaking promises. No one I know wants to do that."

Staff Writer Nancy Nall Derringer has been a writer, editor and teacher in Metro Detroit for seven years, and was a co-founder and editor of GrossePointeToday.com, an early experiment in hyperlocal journalism. Before that, she worked for 20 years in Fort Wayne, Indiana, where she won numerous state and national awards for her work as a columnist for The News-Sentinel.

Copyright Bridge Magazine, reprinted with permission

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