By Phil Power - February 1, 2008
If you can understand the language of accountants, you'll often find that their dry words all to often mask a rotting cesspool of financial trouble lurking beneath the surface.
For example: "Restrictions in credit availability and instability in the sub-prime housing mortgage market," sounds pretty tame … that is, unless you just got a note from your friendly mortgage company saying your house is about to be repossessed.
Here's another and even scarier case: A 2004 report from the non-partisan Citizens Research Council found "unfunded pension and health liabilities" for
In this case, a "liability" means money legally owed to pensioners who have retired, confidently faithful 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.
Think of it as the biggest elephant in the room. Those $19.3 billion in pension and health care obligations are long-term, legally binding and – duh! – very important to the nearly 410,000 active employees in the system and the 157,000 pensioners.
The number of pensioners, by the way, will soon dramatically increase. Sooner or later, Peter is going to have to pay Paul, and we might as well start thinking hard about how to do it. Most people I talked with don't have the beginnings of a clue. They throw up their arms when pressed for a solution. So here's one possible approach:
Pick up on the idea the auto companies and the United Automobile Workers union just adopted to meet their health care obligations. 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."
Want evidence that this idea might work?
Here are the numbers: A 2005 report from the Education Policy Center at Michigan State University and the Citizens Research Council puts total depreciated book value of buildings and infrastructure of
So let’s take $30 billion as a reasonable estimate. Now suppose that school buildings and land could be sold for $30 billion, once the dismal real estate market begins to revive.
From that, you take $19.3 billion to fund the entire unfunded pension and health care liability. That leaves you $10.7 billion.
(Maybe you use some of that money to fund the $8.7 billion that the Education Policy Center
estimates is needed to fix the building and infrastructure needs of Michigan's poorer school districts.)
Naturally, the schools will have to pay rent on the buildings they've leased. If the trust needs to get a five 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.
Here's another advantage. Selling school buildings to a real estate trust makes it possible for the trust to dispose of obsolete and unoccupied buildings on the open market. School districts are typically hobbled by local politics and neighborhood pride that interfere with the need to close and sell old schools to match population changes. Allowing the trust to take on this cumbersome task spreads fixed assets to match school needs better than is now possible.
Moreover, there's a lot of evidence that school districts don’t do a very good job in managing the costs of new construction. A new high school in Ann Arbor, for example, is going to come in more than double the original estimated cost. A competent real estate trust could make a big difference in holding construction costs down.
Naturally, there are all kinds of serious objections to this proposal. The biggest is that school districts and their citizens own the buildings in their district. That means they'd have to be persuaded that it's in their advantage to sell and lease back.
But if a consequence of the deal was to shed their rising pension and health care payments, they might be very interested.
The point here is that our state is in a financial bind, big time. And the best method of getting out of tight binds is to think outside the box. This proposal does that. It may well need tweaking. But it would make a lot of sense for the school system, the legislature and the governor to take a careful look.
7 Comments
Interesting idea!
When I ran for School Board here in Livonia people would get so mad there eyes would bleed when I talked about selling off even a small portion of huge tracks of vacant land for housing.
I agree 100% that we build huge, costly, bus dependent sports palaces now. The Governor is proposing smaller schools which would be much less costly to build (and tear down 30 years later!). The school buildings would match the goals of education: reading, math, english, languages,science, reading, reading!
Property managemnet professionals could respond quickly with appropiate buildings as demographic and student needs change generation to generation. Modular building technology is amazing now.
What? -- sell off school property to REITs? Or enter into long term contracts with them and become tenants?
This idea is a cousin of the "Give us more but charge us less" mentality; "Fix the problem but don't ask me to help pay for it."
Stop trying to invent new magic; none exists. Stop trying to fool people with sounds-too-quick-and-easy solutions.
We can afford to own and manage our own school buildings. And we can afford to fund teacher pensions. Remember, in most states we pay teachers substantially less than private industry, for comparable education and preparation. And also remember that teachers pick up some of the cost themselves, through employee contributions. A decent pension is a small cost to bear; teachers do a job that most people wouldn't even touch.
People, people, people....you will be so much happier when you finally grow up and realize that everything in this life has to be paid for. Everything.
What center is this?? Bail on promises?? There is no center in this?? If michigan was booming, this center would from what I have read been calling the teachers a scapegoat. MESSA is a thrid party provider that pools. Which is what the UAW has lauded and recently done, but what Michigan has been trying to derail. I believe this site, from this posting, like the Mackinaw Center is not from the Center, but far from what is even correct. This really article really disturbs me.
When we put ALL options on the table this is an idea that deserves a look. When looking at pensions more facts should be considered.
1) Selling building and leasing only what is needed could help in reconfiguring schools and districts based on changes in population.
2) Schools pensions are a part the State of Michigan pension system and when looking shouldn’t judges, legislators, state police and state employees all be considered at the same time since they all fit the same challenge and the taxpayers pocket.
3) It’s been recognized that educators are underpaid in comparison compared to what they make when they leave education. Several studies have said we need to raise salaries.
4) Most educators recognize they and many state employees are underpaid in salary and their pensions are the justification for such people to work in public positions for less $$ than what they would make in private industry.
5) In recognizing there are lots of options to consider, the idea is interesting yet I'm not sure we can discuss one and not ALL public pensions.
6) Lets not look at one time fixes. We will not be able to hire quality educators or public employees unless they are compensated properly.
First of All, WE all NEED to look at the expenses of operating a school system. In order to do this,take bids for a study of cutting costs for the district, something like the Grace Commission did for the federal government, except these suggestions on how to save money would be implented or used or adopted, and NOT neglected. I hve some other thoughts on this , but first let us have a study done and set a lmit as to how long the study should last.
In Our Lord's Love
Albert
Commission
A couple questions on your proposal
Who would pay upwards of $30 billion to buy all school buildings without a guaranteed payment stream to recover the investment? The state is not reliable for providing funds and that is where the money would have to come from.
Many schools are in a sad state of repair. That would take several additional billions to fix. Where would the funds to pay for that come from? The answer is easy, The state revenue and local millage. But here again, the reason they are not fixing things now is do not have the money to do now.
The cost of normal repairs and maintenance. Most sale leasebacks agreements require that the lessee (school district) pay for the ongoing repair costs
When schools are sold, it is usually for much less than the book value of the facility.
You need to have some tough economic evaluation done on this proposal before you talk to much about it.
The reputation of the Center for Michigan is at stake.
Post a Comment