Eighteen million dollars. 

That is how much unfunded pension debt burdens the Hillsdale Intermediate School District, according to official state audit reports. It’s worth nearly 80% of the district’s assets.

For Chuck North, superintendent of the special education district, this number isn’t alarming — it is a sign of a teacher pension system being reformed for the better.

“It’s not a completely broken system that’s going to break schools at some point,” North said. “We just need to let the system work and be maintained as it currently is for the future.”

Between 2021 and 2025, Hillsdale ISD’s long-term liability debt from pensions dropped from $24 million to $18 million, while Hillsdale Community School District’s debt dropped from $31 million to $19 million, according to publicly available school data. The cause? Mackinac Center for Public Policy Director of Fiscal Policy James Hohman said Michigan legislators woke up to the massive debt facing public schools and made effective changes.

“Lawmakers are doing what they can to catch up,” Hohman said.

According to Hohman, Michigan currently has $28 billion of unfunded pension debt due to underfunding the system for years.

“The state constitution requires that pensions are funded as they are earned, and we just kind of failed to live up to that constitutional standard,” Hohman said. “We’ve been doing that for a very long time.”

Michigan teachers can contribute to an investment fund that will continue to pay a portion of their salary during retirement. Under the current pension system, newly-hired teachers can choose contribution rates, or how much of a percentage comes out of their paycheck, based on different retirement dates and expected retirement returns — their contribution rates range from 0-6%, according to the Michigan Office of Retirement Services. The public schools are also required to contribute to the employee’s pension, with contribution rates ranging from 15-30% of the employee’s paycheck.

As a result, Hohman said schools are required to pay for pensions through these state-mandated compensation rates but could not pay down more if they wanted to.

“Their responsibility is pretty limited,” Hohman said. “The state says, ‘All right, Hillsdale Community Schools, every time you pay a teacher $1, you have to send us a check for 40 cents or 27 cents or 35 cents.’”

According to a report from the Reason Foundation, in 2023, Michigan public schools had an average long-term debt of more than $46,000 per student — greater than the national average of more than $26,000. 

According to Jordan Campbell, the managing director of government finance and senior quantitative analysis at Reason Foundation, Michigan has a higher debt-per-student ratio because of how it distributes the debt.

Campbell said Michigan is one of the few states that “assigns” debt from the Michigan Employee Retirement System to individual schools, although the schools have no control over how fast to pay down the debt.

“The pension liability that Michigan has gets distributed among the county or the school district,” Campbell said. “But how that is distributed depends a little bit from state to state, and a lot of it comes from state plans.”

Campbell said Hillsdale schools fit this overall Michigan pattern.

“What you see, particularly with Hillsdale schools, with both the county Intermediate School District and the Community School District, the majority of that long-term debt is just in pension obligations,” Campbell said.

Although seeing the huge debt balance on the school’s debt sheet is unsettling, North said distributing the debt to the schools helped increase awareness of the pension issues amongst districts.

“I think it became more prevalent, or more well known by people when districts had to start listing it on their audits, even though they don’t have to pay that,” North said. “When I had to list that $9 million of debt on my audit when I was at Reading Schools, then people were like, ‘Gosh, what is this?’ So then it raised awareness for it.”

North said Hillsdale ISD’s pension debt has no effect on the daily business of the school.

“For any educator, during their day-to-day, it doesn’t necessarily affect them,” North said. “When they get their paycheck, they can see how much they have to contribute to the retirement system, but then they will also see how much the district contributes to the retirement system on their behalf. So day to day probably doesn’t affect a whole lot, but in the big picture, it does make a difference.”

Ted Davis, superintendent of Hillsdale Community Schools, declined to comment due to a lack of expertise on the subject.

Michigan’s enormous pension debt started accumulating 51 years ago, according to Hohman, because of poor financial decisions by the state.

“The problem with the state system is that it’s never had enough money to pay for what it owes,” Hohman said. “It is perennially underfunded. Over the total value of all the pensions, they’ve been underfunded in 50 out of the past 51 years.”

North said the state failed to invest money properly in the pension system, reduced contributions, and kept outdated death estimates for retirees.

“There’s just been some poor planning over the years that have contributed to the debt,” North said.

Hohman said lawmakers changed assumptions on market returns and put more money into the pension system, all changes that are helping to manage the debt.

“There were a lot of years where lawmakers weren’t even paying the interest costs of their debt,” Hohman said. “But we’re not doing that anymore.”

North said it helped to have newer, less expensive pension tracks for teachers rather than to apply one expensive plan to everyone.

“The more expensive pensions over time will start to fade away, the newer pension choices that don’t cost as much will then become the majority, and it doesn’t cost as much,” North said. “If the state continues to contribute like they have on a regular basis, then each year they will be able to chip away at that debt.”

Between 2023 and 2024, the state put $738 million into the retirement system, decreasing the debt from $5.4 billion to $4.8 billion and accounting for much of the drop in the Hillsdale school debt.

North said the current system will pay off Michigan’s $28 billion debt in the year 2038.

“It’s a little bit in the future,” North said. “But it will fix itself.”