Teacher' Union Redux

The final installment of Ron French's series on the impending fiscal problems of the Michigan Teacher's Pension plan is in today's Detroit News. Once again, we see how Teacher's unions are featherbedding their positions as the expense of taxpayers and the children the purportedly support.

The lessons that can be imparted are several from this series:

1. Actuaries are smart people. However, they have been lousy in terms of estimating life expectancies of retires and retirement costs of a group of people thirty years in the future. This not a criticism of their work (I took a lot of actuarial science courses in school - it is not easy stuff) but more so a reflection of the reality that we know crap about what will happen thirty years from now. The point is - defined benefit plans should be really called defined bankruptcy plans as they become unfundable due to unpredictable increases in life expectancies and new health care technologies.
2. Anything involving the government will not be solved until it is too late. Because things like public employee pensions are an "inside baseball" issue - politicians don't really deal with it - rather they just capitulate to the feather bedders in the public sector unions and give them what they want. This is another example of why public sector employees should never have the right to join a union. In fact, if this is not another example of why government should not run a lot things that they could contract out to the private sector.
3. The taxpayers and the kids ultimately get screwed. We already knew that all this increased education spending is not for education. Real education spending per pupil has in real terms increased several fold in the the last forty years with no improvement in student performance (actually student performance in the US has dropped during this period). This just reinforces the argument that all this spending "for the children" really goes to fat cat school administrators, corrupt teacher unions, white elephant "facilities", and now, as Ron French points out - a gold plated pension plan that is soaking up a huge portion of school budgets across the state.

Nice Work if You Can Get it

Go read Ron French's second installment on the failing Michigan Teacher's Pension Plan in today's Detroit News. Today's installment is titled "The $1,470-an-hour loophole: Retirees work for 13 days to earn lifetime health care"

The impending insolvency of public school pensions in Michigan

This special feature in the Detroit News by Ron French was an eye opener. This is one of the more acute examples of the impending crisis in government - the cost of all those lavish civil service pensions that will make the unfunded liabilities of the Big 3 auto makers seem like a pittance. I have to give Ron French credit for all the great investigative reports he puts in and the fact that he is generous with his time in responding to reader e-mails. If you like his work, send him a note telling him. Go to the News and read the article with the charts. This is a series worth reading.

Michigan's education time bomb: Costly, loophole-ridden retirement system threatens public schools
Ron French / The Detroit News
Michigan's school retirement system is riddled with loopholes and slipshod policies costing taxpayers hundreds of millions of dollars and driving the state's public education system toward financial crisis.

Schools are laying off teachers, scrapping programs and mothballing extracurricular ctivities to pay for the spiraling pension and health care bills of retirees -- some of whom qualify for generous benefits by skirting state retirement policies, often with the knowledge and assistance of the state office charged with administering the $3.5
billion program.
The impact could be devastating to public education in Michigan, the only state that makes its schools bear the entire burden of retiree pensions and health care. This year's bill -- an estimated $1,015 per student -- is more than schools spend on books, buses, computer technology and building maintenance combined. And it's going to get worse.
The retirement assessment -- set by the state but paid by individual school districts -- is now at a record high of 17.74 percent of each district's payroll. That rate is expected to jump to 30 percent by 2020 -- a level that all sides agree would break the backs of Michigan schools.
Phil Stoddard, head of the state office that administers the retirement fund, defends the system. "I wouldn't say that it's too generous," said Stoddard, executive director of the Office of Retirement Services. But Tom Clay, former director of the state's Executive Budget Office, disagrees. "It's a time bomb," he said. "It's a train wreck. Use whatever term you want. And it hasn't reached (the worst of the) crisis yet."
An analysis by The Detroit News of data obtained through the Freedom of Information Act found: An estimated $2 million per year in taxpayer dollars is spent on retirees who qualify for lifetime health care through a loophole. People who worked in state public schools for at least 10 years earlier in their careers can return to work for 102 hours -- about 13 work days -- at age 60 and receive taxpayer-funded health care for the rest of their lives.
Hundreds of "retired" school administrators are collecting pensions and retiree health care while continuing to collect a salary working the same jobs as contract employees, increasing the retirement burden. The practice, which one critic calls "a scam," costs taxpayers about $25 million a year.
As much as $1 billion could ultimately be lost through a program that sells early retirement at a discounted price. School employees can buy up to five years of service credit, paying the state so they can retire after 25 years instead of 30. But the purchase price of those years of service factors in the cost of pension benefits but not retiree health care. More than 23,000 school employees have purchased a total of almost 100,000 years of service. At current health care rates, that would cost school districts $1 billion -- as much as the state spends on road construction and repair each year.
Some districts are pushing more experienced teachers and administrators to retire early so they can save money by hiring younger employees. But those short-term savings quickly turn into long-term costs. Not only are schools losing some of their most experienced teachers before they have to, but also most of those retirees, some as young as their late 40s, begin drawing lifetime pension and health care benefits
immediately.
Schools may shave $30,000 from their payroll a year by replacing a veteran teacher with a teacher straight out of college, but that retiree will cost the overall state school retirement system about $50,000 a year. "They're saving money now but paying more later," said former state treasurer Doug Roberts, now director of the Institute for Public Policy and Social Research at Michigan State University. "There's no advantage to it."
Michigan pays for lifetime health care for employees who, in some instances, work as few as five years in public schools. That health insurance is considered to be a premier plan with excellent benefits and low co-pays, according to a health care insurance analyst. The schools paid $634 million in medical bills for retirees and their spouses and dependents in 2006.
Cobbled together by two decades of amendments, protected by a powerful union and ignored by a timid Michigan Legislature, the Michigan Public School Employees Retirement System (MPSERS) is headed for a financial crisis that could devastate schools and ultimately threaten the benefits of thousands of Michigan retirees. The crisis has been building for years, but reform efforts have been thwarted by a befuddling circle of unaccountability. Cash-strapped schools pay the bills but don't administer the system; the state Office of Retirement Services administers the program but is powerless to change policies; the Legislature can change policies, but has been in no rush because it doesn't pay the bills.
Today, the school retirement system is buried under $25 billion in unfunded liabilities for retiree pensions and health care. The ballooning cost of public pension plans like Michigan's school retirement system "have the potential to be the savings and loan scandal of the next decade," said Tim Braun, policy analyst of the Mackinac Center for Public Policy. Despite dire warnings, there is little appetite in Lansing to reform the system. "It represents a failure of political wills by the past two governors and the Legislature," Braun said. "(And) the costs are going up dramatically every hour we don't fix it."
The Michigan Education Association, the state's teacher union, scoffs at the plan's doomsayers. "People don't understand what they're talking about," said Allan Short, director of government affairs for the MEA. "It's an excellent system that serves as an incentive to keep people in education."
No one questions the need to provide good benefits to attract qualified employees for Michigan schools. But the benefits -- and the loopholes through which some qualify -- are threatening the very schools those benefits are meant to protect.
"The program is completely unsustainable," said former state treasurer Roberts. "Something has to be done."Main reason for budget cuts. Ten years ago, schools spent $485 per student to pay for pensions and retiree health care. Today, schools spend $1,015 per student. Driving those costs are rapidly rising health care costs and a growing number of retirees.
The state's 553 school districts have no control over their retirement bill. The cost is set by the MPSERS, which last year sent out checks for pensions and health care bills totaling almost $3.5 billion to more than 151,000 retirees and surviving spouses. Each year, MPSERS actuaries project the total cost of retiree pensions and health care, then bill individual school districts to cover the cost. Districts pay a percentage of their payroll -- the bigger the district, the bigger the bill.
Because between 80 percent and 85 percent of a school's budget is payroll, a small bump in the retirement assessment can lead to financial hardship.
For example, this school year, the retirement rate rose 1.4 percent. That small increase cost rural Fowlerville Community Schools an additional $200,000; suburban Troy School District more than $1.1 million; and the state's largest district, Detroit, a whopping $11.1 million. While other school expenses such as fuel costs also are rising, retirement costs are the main reason districts across the state are scaling back programs and staff. "The impact (of retirement costs) is huge," said Tim McAvoy, director of community relations at Troy School District. "We've made $27 million in budget adjustments in the past three years."
For Michigan schools to have paid the same amount in retirement costs this year as last, they would have had to cut $700 million in payroll -- the equivalent of laying off 9,300 teachers statewide.
Michigan schools receive about 70 percent of their funding from the state through a per-student allowance. Increases in that allowance are supposed to cover increased costs of everything from payroll to pencils. But in recent years, the entire increase has been swallowed up by escalating retirement costs. From 2003 to 2006, the state increased the per-student allowance by $175. During those same years, the MPSERS bill jumped $178 per student.
Utica Community Schools, one of the biggest districts in the state, slashed its staff by 215 people in the past four years, partly to pay for increases in the retirement assessment. "It (retirement costs) has a dramatic impact on our budget," said Utica Superintendent Rick Montcalm, who is searching for ways to cut another $8 million from next year's budget.
Southfield schools, which this year will spend $13.6 million for retirement, cut its child care service and adult education to save money. "It's been difficult," said Southfield Assistant Superintendent Ken Siver. Retirement costs now eat up 14.3 percent of districts' $7,085 per-student allowance and 13 percent of total school funding.
Citizens Research Council of Michigan, a state budget watchdog group, projects that the MPSERS contribution rate that was 12 percent as recently as 2002 will hit a staggering 30 percent by 2020 -- the equivalent of $6 billion in today's dollars.
"We don't want to wake up someday and find that our system has gone bankrupt," said Don Wortruba, director of legislative affairs for the Michigan Association of School Boards. "If nothing is done, we could reach a point where the classrooms implode or the (retirement) system implodes and people who have been counting on health care won't have it."
Plight mirrors that of Big 3 In many ways, the financial straits of Michigan's public schools mirror the plight of the Big Three. Detroit's automakers and the schools both have offered generous retirement benefits to retirees for decades. As retirees live longer and health care bills rise, retirement costs have skyrocketed. Most organizations that offer retiree health care are dealing with rising bills.
But the schools' predicament is magnified by a stampede of employees retiring at younger ages. In the past decade, while the number of public school employees rose 7 percent, the number of school employees retiring per year jumped 36 percent. Today, about 82 percent of all school employees retire before age 65; 64 percent leave by age 60, with 25 percent retired by age 55. The exodus begins around age 46, when employees with 25 years of service who take advantage of an early-out program retire and begin receiving their pension and retiree health care.
As the number of retirees increases, so does the cost to the schools. Schools spent $338 million on health care for retirees younger than 65 in 2005. That's more than the state spends to run its 29 community colleges. School superintendents such as Sandra Feeley Myrand of Lakeview Public Schools in St. Clair Shores have been warning of a crisis for a decade with little effect. The faults in the system are well-known and, in some cases, agreed upon by Democrats and Republicans. Yet there has been little action in the Legislature to address the problem.
"What legislators say is they don't know what to do," Feeley Myrand said. "They don't understand how the schools operate. What does that say about what they think of the value of education?"
Republicans and Democrats agree that the system is headed over the cliff. Yet reform measures that are introduced every year die quickly in the state Senate and House. The Mackinac Center's Braun calls the school retirement system the "third rail of Michigan politics," meaning it is political suicide to try to curb teacher benefits. Even loopholes that impact few retirees and cost the state millions have not been closed. "We've got these big problems we've been trying to fix for years," said Tom White, director of legislative affairs for the Michigan School Business Officials, a group representing public school business managers. "Yet we've not found a legislature that has the political will to make these changes." Even if the system were reformed now, it would take years to make a notable difference, Roberts said. MPSERS contributions will continue to rise as retirees covered by the current policy move through the system. "It will take time, but that doesn't mean the state shouldn't address it now," Roberts said. "Otherwise, in 20 years, somebody else is going to be writing about this issue, and it's going to be a lot worse."

You can reach Ron French at (313) 222-2175 or rfrench@detnews.com

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Michael Barone's Demographic Realignment of America

I cannot recommend enough reading this insightful article by Michael Barone on the Wall Street Journal. He discusses migration of non-immigrant and immigrant populations within the United States.

One of the key points he makes is about the flight of the middle class from the coastal cities to the interior cities. Putting on my CPA cap, I made this observation that Barone does briefly touch upon.

There is some sort of relationship between taxes and the patterns. The states with the largest middle class flight (MA, CA, NY, CT, NJ) also, interestingly enough, have the highest tax burdens, while the states with the largest growth (AZ, GA, NV, NC, TX) have much much lower taxes.

Those Pesky Constitutional Amendments

Reading through Captain's Quarters, Ed found an article advocating the disarming of America and turning it into a police state. This is the absurdity that only a socialist could advocate:

LAST week's tragedy at Virginia Tech in which a mentally disturbed person gunned down 32 of America's finest - intelligent young people with futures ahead of them - once again puts the phenomenon of an armed society into focus for Americans.

The likely underestimate of how many guns are wandering around America runs at 240 million in a population of about 300 million. What was clear last week is that at least two of those guns were in the wrong hands. When people talk about doing something about guns in America, it often comes down to this: "How could America disarm even if it wanted to? There are so many guns out there." Because I have little or no power to influence the "if" part of the issue, I will stick with the "how." And before anyone starts to hyperventilate and think I'm a crazed liberal zealot wanting to take his gun from his cold, dead hands, let me share my experience of guns. As a child I played cowboys and Indians with cap guns. I had a Daisy Red Ryder B-B gun. My father had in his bedside table drawer an old pistol which I examined surreptitiously from time to time. When assigned to the American embassy in Beirut during the war in Lebanon, I sometimes carried a .357 Magnum, which I could fire accurately. I also learned to handle and fire a variety of weapons while I was there, including Uzis and rocket-propelled grenade launchers. I don't have any problem with hunting, although blowing away animals with high-powered weapons seems a pointless, no-contest affair to me. I suppose I would enjoy the fellowship of the experience with other friends who are hunters. Now, how would one disarm the American population? First of all, federal or state laws would need to make it a crime punishable by a $1,000 fine and one year in prison per weapon to possess a firearm. The population would then be given three months to turn in their guns, without penalty. Hunters would be able to deposit their hunting weapons in a centrally located arsenal, heavily guarded, from which they would be able to withdraw them each hunting season upon presentation of a valid hunting license. The weapons would be required to be redeposited at the end of the season on pain of arrest. When hunters submit a request for their weapons, federal, state, and local checks would be made to establish that they had not been convicted of a violent crime since the last time they withdrew their weapons. In the process, arsenal staff would take at least a quick look at each hunter to try to affirm that he was not obviously unhinged. It would have to be the case that the term "hunting weapon" did not include anti-tank ordnance, assault weapons, rocket-propelled grenade launchers, or other weapons of war. All antique or interesting non-hunting weapons would be required to be delivered to a local or regional museum, also to be under strict 24-hour-a-day guard. There they would be on display, if the owner desired, as part of an interesting exhibit of antique American weapons, as family heirlooms from proud wars past or as part of collections. Gun dealers could continue their work, selling hunting and antique firearms. They would be required to maintain very tight inventories. Any gun sold would be delivered immediately by the dealer to the nearest arsenal or the museum, not to the buyer. The disarmament process would begin after the initial three-month amnesty. Special squads of police would be formed and trained to carry out the work. Then, on a random basis to permit no advance warning, city blocks and stretches of suburban and rural areas would be cordoned off and searches carried out in every business, dwelling, and empty building. All firearms would be seized. The owners of weapons found in the searches would be prosecuted: $1,000 and one year in prison for each firearm. Clearly, since such sweeps could not take place all across the country at the same time. But fairly quickly there would begin to be gun-swept, gun-free areas where there should be no firearms. If there were, those carrying them would be subject to quick confiscation and prosecution. On the streets it would be a question of stop-and-search of anyone, even grandma with her walker, with the same penalties for "carrying." The "gun lobby" would no doubt try to head off in the courts the new laws and the actions to implement them. They might succeed in doing so, although the new approach would undoubtedly prompt new, vigorous debate on the subject. In any case, some jurisdictions would undoubtedly take the opportunity of the chronic slowness of the courts to begin implementing the new approach. America's long land and sea borders present another kind of problem. It is easy to imagine mega-gun dealerships installing themselves in Mexico, and perhaps in more remote parts of the Canadian border area, to funnel guns into the United States. That would constitute a problem for American immigration authorities and the U.S. Coast Guard, but not an insurmountable one over time. There could conceivably also be a rash of score-settling during hunting season as people drew out their weapons, ostensibly to shoot squirrels and deer, and began eliminating various of their perceived two-footed enemies. Given the general nature of hunting weapons and the fact that such killings are frequently time-sensitive, that seems a lesser sort of issue. That is my idea of how it could be done. The desire to do so on the part of the American people is another question altogether, but one clearly raised again by the Blacksburg tragedy. Dan Simpson, a retired diplomat, is a member of the editorial boards of The Blade and Pittsburgh Post-Gazette.

Where do I begin to cut this up. The logic and ignorance of the law and basic freedoms is so breathtaking - usually the kind that I only associate with Academics. This idea is akin to saving social security with the "Logan's Run" solution of killing all the elderly upon reaching a given age.

The real tax grab in Michigan

It seems that everyone talks about how the SBT is a "job killer" in Michigan. Granted, the single business tax is a onerous one that is responsible for its share of jobs leaving the state, but a lesser known tax is probably taking a bigger toll on Michigan businesses. That would be unemployment taxes, otherwise known in the business as SUTA.

The state of Michigan has been aggressively, and often over zealously targeting businesses for "SUTA dumping". That is, by definition, the transfer of employees from one entity with a high experience rating for SUTA taxes to one with a lower rate. The Michigan Treasury has been targeting businesses, rightly and wrongly, with huge assessments under this premise, because they hope to get quintuple penalties if they can make the charges stick.

The state has been targeting professional employer organizations (PEOs) with huge (sometimes multi million dollar) assessments, then try to bully the taxpayer into paying the amount. I know of a case where the treasury had a agent back date reports to say that SUTA dumping existed when it did not. This agent, in a tax tribunal hearing, took the fifth when asked whether or not he back dated a report stating he thought there was SUTA dumping. This agent, when I worked in Metro Detroit, did the SUTA audit on the client, and after several weeks at my former office going through all the records, originally reported that there was no wrong doing by the taxpayer. A few months later, the client received a massive assessment, and was accused by the Michigan Treasury of SUTA dumping. A good friend and former colleague of mine represented the client in tax tribunal when the fifth was taken.

This is not the first time the state treasury has bended the rules in order to revert to the Roman tax collection method. This harassment of Michigan employers, along with their back door methods to raise taxes by jacking up payroll taxes for employers, is not a good way to keep them in the state.

Way to go Governor Granholm! Back door payroll tax increases and egregious behavior by your auditors is not the way to bring jobs into the state.

Finally back

Hi everyone,

After an exceptionally busy tax season, where I started to ramp up the 60+ hour work weeks in early January, I finally am not burnt out to the point where I don't feel like writing. But, not like there hasn't been a lot of interesting stuff going on.

The first thing that catches my attention is the collective stupidity that is the Democratic party up in Lansing, Michigan. I've been reading the Detroit News rather religiously over the past few months, so when I read some of the stercoraceous ideas emanating from the state house, all I can think of is Bob Rae's illustrious stewardship of the province of Ontario.

Michigan is a state that has been economically hammered. It's core industry is fighting to survive. Major employers have either downsized (Big Three, Tier One auto suppliers) or relocated (hello Pfizer and Comerica). The state has the highest mortgage foreclosure rate in the nation, and people are leaving the state in droves (myself included).

All these signs scream for leadership. Drastic action must be taken to help Michigan right a listing ship with bold ideas. What have we seen from Jennifer Granholm and her allies in the state legislature in order to solve these issues and the huge budget deficit that is a result of this? Some of the ideas have been:

1. 6% sales tax extended to services
2. 2% sales tax extended to services
3. Implement an estate tax
4. Change the income tax from a flat 3.9% to a graduated rates

See a trend here? Tax your way back into prosperity... worked so well for Clement Attlee in the 1940's and Bob Rae in the 90's.. hey.. third time's a charm!

Why Ontario will go broke

In my previous post, I looked at Michigan's economic and fiscal woes, and after a little digging, I found this chart from the Canadian Taxpayer's Federation that shows how the Stalinist single payer model will bankrupt Ontario. If in a mere ten years health spending doubled, and went from consuming 31.5% of provincial expenditures to around 40%, what will happen in the next ten years in light of the baby boomers retiring? Some of this spending is due to population, with the population increasing to over 12.3 million (estimated) in 2006 from 11.4 million in 1991. Also considering that this ten year period was one of low inflation, we can discount that as a major contributing factor as well.

So here are the facts as it stands:

• Health care spending is the fastest growing part of the provincial expenditures on a per-capita real basis. At current rates, health care will eat up over 50% of government expenditures if the status quo is maintained.
• With an aging population, and the baby-boomers starting to retire, you'll have additional demands for health care resources. These people will be retired and will not be contributing the much less in taxes as they're not working. So you're looking at lower revenues and increased expenditures going down the road.
• Since this is a government run system, it automatically makes it a political system. They baby-boomers want all the bells and whistles (costs be dammed), and will not tolerate tax increases to pay for it. They will be become a large voting bloc that politicians ignore at their peril.
• We haven't mentioned that since it is government run, it is inherently inefficient, and featherbedding for self serving unions and health care bureaucrats takes precedence over patients. This accelerates the problems above.

So what is a politician to do? Especially a politician who treats single payer, government run health care as an article of faith? The options for such a politician are as follows:

• Start cutting all other expenditures. Education? Kids don't vote and there are more retirees than parents with school age children. Won't get much love from the teacher's unions, but the retirees are more powerful by this point.
• Ration as much health care as possible. But then there is a tipping point when the voters revolt over this.
• Raise taxes. Retirees on fixed incomes are really ornery over taxes, and it has to be done where it soaks everyone but retirees. So business taxes and income surtaxes are increased, which leads to;
• Every major employer moving shop somewhere else. No workers and no business equals no revenues.

The vicious circle of socialism in a nutshell. Demographics + supply & demand + governmental inefficiency + status quo thinking = bankruptcy.

SCTV - Mel Torme's rendition of the Star Spangled Banner

Michigan's descent into the fiscal abyss

This article from the Detroit News discusses warnings from Michigan governor Granholm that the state could face a budget deficit of $1 billion dollars. Now with the Democrats controlling the state assembly for the first time in a long while, this key quote is of note:

The governor would not say if she was considering a tax increase to keep the
state afloat.

The last thing Michigan needs are tax increases in such dire economic circumstances. One of the reasons why Michigan has lagged all other states is due to its tax system. One of Grahnholm's proposals to exacerbate the Michigan economy was her proposal to replace the state's hated Single Business tax with a more onerous tax regime which is part gross receipts tax, part tax on assets, and part income tax.

The two biggest reasons that businesses are avoiding Michigan like the plague are high taxes and unions. Granholm's refusal to rule out tax increases and her coutnerproductive business tax proposals will make businesses even more leery of investing in the Great Lakes State, which will fuel the exodus of people out of the state in search for better prospects.

As a friend of mine said who still lives in Metro Detroit is, "Thanks to Jennifer Grahnolm's economic policies, the deserted roads make my commute to work that much easier."