Washtenaw Community College will face financial crisis if proper actions are not taken
Washtenaw Community College will be taking an inventive approach if it pulls its part-time lecturers out of the state school pension system by converting them to contract employees.
The move makes sense. The current pension arrangement is a bad deal for the college and its employees, forcing both to pay into a system for retirement benefits that these workers are unlikely to ever collect.
But even if WCC can get these employees out of the system, that’s not the end of its problems with the state pension plan. It’s only the beginning.
The Michigan Public School Employee Retirement System, which covers more than 170,000 retires and some 275,000 current employees of public schools and colleges across the state, is alarmingly underfunded. Simply put, the state has promised generous pension benefits to current and future retirees that it doesn’t have the money to pay. This underfunded liability is already sapping the budgets of schools and colleges, and left unaddressed, it’s going to become a full-blown fiscal crisis for the entire state.
For now, though, WCC President Larry Whitworth would like to start by easing the burden created by having nearly 1,000 part-time lecturers included in the state pension system.
These employees are compelled to contribute 3 percent of their income into the system - and that will increase to 6 percent this fall. The college, meanwhile, contributes 19.4 percent of their income into the state fund. But these part-time employees have little or no chance of ever meeting the requirements to become vested and collect benefits.
The solution? Whitworth is proposing to turn these workers into contract employees. This move would avoid either them or WCC having to pay into state pension system on their behalf. Whitworth estimates the college would save $1 million in the first year.
But even if the WCC board approves this creative approach, the college still is in danger of being eaten alive by the costs of the state pension system. In 2001-2002, WCC paid $3.3 million into the system to help the state meet its retirement obligations. This fiscal year, it will pay $9.8 million into the system.
Over that same period, state aid to the college has fallen from $12.9 million to $11.8 million. That means that of the dollars it gets from the state, WCC is now sending 83 percent of that money right back to Lansing to cover pension costs, rather than spending on educating students. Given the trend, it is quite possible that this pension contribution will eventually exceed what WCC gets in state aid.
Something has got to give. Education employees vested in the pension system receive retirement benefits more generous than are found in the private sector these days. The state web site boasts that MPSERS members get “one of the best public pensions around.’’
How can the state afford such benefits? The answer is, it can’t. The pension fund is in serious trouble. Since 2008, the assets of the pension fund have lost $14 billion in market value. According to the state Bureau of Investments, the fund is now 20 percent short of what it needs to cover its liabilities based on actuarial value.
The system operates on a pay-as-you go basis. Current employees - and their employers - pay into the system to help cover the costs of benefits being paid to retirees. In fiscal 2009, employers and employees statewide paid $1.4 billion into the system, while the system paid out $3.3 billion to current retirees. You don’t have to be a CPA to understand that this can’t continue - or to understand that the coming crisis can’t be solved on the backs of employers and employees by forcing them pour more money into the system. They can’t afford it.
This is not a crisis that should sneak up on anyone. The underfunding of public pensions already has become a major issue elsewhere. This spring, Illinois was forced by borrow $3.7 billion to make a required payment into its pension system.
It’s going to take radical, dramatic action by our leaders in Lansing to deal with the impending crisis here. Unless they can identify a source for billions of dollars in additional funding (which we don’t imagine they can), then they are going to have to reassess retirement benefits for public employees covered by MPSERS.
Already, many state employees have been moved from a defined benefit system to a defined contribution system. Legislation currently in the state Senate would remove community college employees from the school retirement system. Whitworth supports that approach. He says community college presidents have concluded that they must become more vocal on this issue, because their financial health is greatly at stake.
For now, WCC is looking at one small step to begin relieving itself of a financial burden that neither it nor the state can afford. But the far greater concern is the coming crisis posed by the underfunding of the pension system. The longer this issue goes unaddressed in Lansing, the more painful the solutions will be.