Selling our Schools to Pay the Bills

Michigan's slow-moving school funding crisis tends to get lost in the shuffle amid the bad news about the Big Three, the threatened state shutdowns, and the "one-state recession". Most people think like the lady down the road who told me "As long as the bus shows up every morning to take the kids to school, I just figure our school is doing alright."

It's hard to think beyond the local. Even if my kids' school and your kids' school seem to be doing fine, that doesn't mean the system isn't messed up. An article in today's Lansing State Journal, New proposal would solve school funding woes describes the biggest problem, in terms of dollars facing Michigan's school districts:

A 2004 report from the non-partisan Citizens Research Council found "unfunded pension and health liabilities" for Michigan school employees now amount to around $19.3 billion.

In this case, a "liability" means money legally owed to pensioners who have retired, confident their pensions would take care of them after their years of service. "Unfunded" means just that. There are no assets on the books allocated to cover the $19.3 billion in pension and health care liabilities promised by the system.

School districts make annual contributions to cover pension and health care obligations for their employees, both active and retired. These contributions today consume around 23 percent of all local school budgets. And they're rising fast. Estimates by Citizens Research Council economists predict their contribution rate will increase to around 32 percent in about a decade.

And that means that school districts, already hit hard by inflation and the funding rigidities imposed by Proposal A, risk being eaten alive by their fixed costs. Even then, what the school districts are paying in isn't going to be enough to cover their obligations.

The author doesn't mention the historical basis for this problem, that former governor Engler decided that the pension fund did not need to be fully funded, and then drained that account to make his tax cuts possible. No use crying over spilt milk, I guess. And of course those health care costs are crippling this and a lot of other pension funds, just like health care costs are crippling a host of other governments and industries.

Likewise, he doesn't mention that one of the fine-print side effects of Proposal A was to raise the local districts' portion of retirement costs from 5% to 100%. The author moves right along to the great new solution: sell our school buildings!

Take all the school buildings and real estate in the entire school system. Sell them to, say, a real estate trust. Lease back the buildings needed for school purposes. Take the excess and use it to fund the unfunded pension and health care liability.

Bingo! You've resolved the problem by, in the language of the accountants, "securitizing the asset value."

.....Naturally, the schools will have to pay rent on the buildings they've leased. If the trust needs to get a 5 percent return on its $30 billion investment to buy the buildings, that's $1.5 billion a year.

But consider that the real estate trust would without doubt manage and maintain the buildings far more efficiently than school districts do. Department of Education figures for 2006 show a $1.8 billion cost for building operations and maintenance.

Could that be halved?

Possibly. What seems certain is that the figure could be greatly reduced. So even without counting building maintenance savings, there's enough money to provide a return for investors in the trust.

The article plows on from that point, with the implicit assumption that local school districts are poor money managers and with the requisite vague example of mismanaged costs.

Frankly, it's hard for me to pay attention at that point. I can only remember those many evenings I spent at our Leland Public School working on the School Facilities Committee in the late 1990's, trying to decide what sort of building project we needed, and where we would build it. I was one of thirty-some volunteers engaged in this process, a lot for this small community. Our committee was only the second generation in a process that took three different attempts to pass a construction millage. What eventually emerged was a compact, versatile building located in the village and used by everyone from early-morning weightlifters to the evening senior citizens group. The building itself came in well under budget, partly due to lucky timing in the construction cycle. Our school is a centerpiece for the community, and it sits on a choice piece of land, to boot. Sell it? To a Real Estate Trust?

Handing control of school funds over to the state has been a losing proposition for our school district. We send boatloads of money to Lansing, we are refunded a mediocre amount, and then are asked to cover more and more in fixed costs. It's hard enough dealing with the State of Michigan, now we are supposed to sell our building and deal with a landlord as well?

What a mess. I don't have the answers, but I know that if the rural areas don't pay attention, we are going to have to swallow someone else's solution.