Michigan’s Public Educator Retirement System – On the Road to Bankruptcy: A Legal Analysis of Michigan

introduction

Most public educators are fortunate to work in states that provide generous and guaranteed retirement benefits. In fact, most educators, especially labor organizations representing them, will pontificate that magnanimous retirement benefits compensate for perceived inequities in salary compared with private industry employees with similar degrees. Until recently, members of these retirement systems could actually calculate their benefit when they retire as part of a defined benefit plan – certainly anathema to private retirement programs. An element within public educator retirement programs is the added benefit of health care. Since 1980, Michigan retirees have been afforded health care benefits for which they were required to pay 10 percent of the premium upon retirement – the remainder was paid for by the state. Recently, the Michigan Legislature reduced the financial obligation of the State for retiree health care benefits, placing it on the individual member. In concert with the increased cost to members is the deterioration of the perceived “promise” that certain health care benefits would be provided at a fixed cost in perpetuity. Public educators, through their respective labor organization, took issue with this course of action, and have sought redress in the courts. Employing the legal technicalities of contracts, unjust enrichment, and due process, these plaintiff employees sought to reverse the enactment of the statutes making these modifications. The plaintiff education members constructed an argument that is lucid and legally viable. However, the Legislative reaction to the initial suit is shrewd, which nullified the plaintiffs’ legal theory. As a result, the legislation enacted by the State, while seemingly unfair to the plaintiffs, is ultimately constitutional. Nationally, public educator retirement benefits are being reduced and the cost to the individual and school district is rising. This series of legislation and subsequent litigation occurring in Michigan is a quality analogy that is being witnessed in other states around the country.

Michigan, like many states circa 2010, was faced with a mounting budget crisis as a result of a weak economy. Looking for ways to reduce general operating expenses became a necessity for most state legislatures. An element of many state general budgets targeted for reduction is the retirement benefit offered to public educators. There are two primary components that define the complete benefit: the retirement allocation and the health care benefit. Many members of state retirement plans, including Michigan, are now required to pay a percentage of salary for access to retirement benefits upon qualification.¹ In 2010, the national taxpayer obligation for public educator retirement was $1.38 trillion.² Of that figure, $757 billion was for pension benefits and $627 billion was for retiree health care.³ During testimony, Phil Stoddard, Director for the Office of Retirement Services of the Michigan Department of Technology, Management, and Budget amplified a growing concern that public educator retiree health care costs in Michigan exceeds $920 million.⁴

History of Public Educator Retirement in Michigan

Michigan has had a sequence of public acts dating back to the 19th century, which established the retirement system for public school employees. There were, at one time, three separate and distinct public educator retirement funds created by individual statutes:

Employees in the public school system in Michigan are all subject to one of three retirement plans. One plan covers employees in the Detroit system. Another plan covers public school employees outside the Detroit system who are eligible for Federal social security on account of their employment in the system. The third plan covers public school employees outside the Detroit system who are not eligible for Federal social security by virtue of their employment in the system.⁵

In 1980, PA 300 (The Retirement Act) was enacted, which replaced all statutes regarding public school employee retirement benefits. PA 300 of 1980, codified as M.C.L. 38.1301, established an algorithm to calculate retirement benefits:

Whereas, YOS is years of service, m is a multiplier and FAC is the final average compensation. Upon enactment, pension benefits were funded exclusively through employer contributions levied on the payrolls of local school districts.^7,8 The Retirement...