Refund of $32 million to be reinvested into endowment fund
A 19-year error made by the state in assessing pension fund payments means Central Michigan University is receiving $32 million from the Michigan Office of Retirement Services.
Six other universities received one-time payments to correct the error on Wednesday, including Western Michigan University, $24.2 million, Ferris State University, $18.6 million, Michigan Technological University, $11.7 million, Northern Michigan University, $9 million, Lake Superior State University and Eastern Michigan University. The error occurred each year when payments made to the Michigan Public School Employees Retirement System were incorrectly reported.
"Immediately it doesn't mean anything, the refund is of a liability that the university is going to owe in future years," Wilkes said. "It's not free money that we can just use anything. It is money that will go back through 2036 into the liability."
Wilkes said the $32 million will be reinvested into CMU's endowment fund so the money will gain interest until it is ready to be used to offset future liability payments. CMU will also receive an additional refund at the end of this year, because the university already paid this year's liability.
Mary Hill, associate vice president Financial Services and Reporting, said CMU overpaid $22.4 million. The state refunded this sum, plus compounded interest that would have accumulated over the 19 years. The $32 million accounts for about 6 percent of CMU's revenue this year.
Hill said the error was caught because there was a change in accounting at the state level. Michigan K-12 schools and community colleges also pay into the MPSERP fund and auditors discovered a piece of CMU's payment during the 19 years had been attributed to the K-12 portion of the fund.
Students reacted to the news Thursday morning on social media, wondering if the funds could be applied to areas of the campus that would benefit them directly.
Does this mean they can lower our tuition to what it was last year? https://t.co/HyNgPMRgwV— danæble (@DanaEble) October 1, 2015
Sweet, lower tuition now https://t.co/HLzIuc9Ly9— Jon Kelly (@JonWeasley) October 1, 2015
"We thought a lot about how to use those funds and anticipated that there would be a lot of folks across campus who could list good ideas of how to spend the money," Wilkes said. "But the thing that I'd like folks to focus on is we still have a liability. The $32 million we received needs to go back to MPSERS. It would be a small impact for student (tuition) next year, but that liability has been paid by existing students and will be paid for by future students. I don't think it's appropriate to advantage students for one year when everyone will be paying."
The seven universities were mandated by the state to participate in the retirement system when moving from college to university status in the late 40s. They were required to participate until 1996, but employees hired before that time are still a part of the system.
This does not affect the $93 million in long-term liability payments required by the Governmental Accounting Standards Board. Wilkes said at the September Board of Trustees meeting that CMU will make payments of about $10 million per year until 2036.
The university’s external auditing firm, Plante Moran, estimated that CMU will owe an additional $40 to $50 million in health care liability by 2018. The firm presented their report the the CMU Board of Trustees during their September meeting.
"That plan has some legislative requirements about how pensions are funded and as a result, consistent with all defined benefit plans across the country, it is significantly underfunded," said Plante Moran auditor Vicki VanDenBerg after the meeting. "All of the participating employers will ultimately have to pay the difference, which is adjusted every year."
VanDenBerg said the seven participating universities only make up 2 percent of the entire fund.
"It is underfunded in the billions of dollars," she said. "This is mostly a K-12 issue however."
The audit will be finalized later this fall, after the Michigan Auditor General determines CMU’s share of a pension liability to the Michigan Public School Employees’ Retirement System. The liability is expected to be about $93 million.
“This is a substantial hit,” President George Ross said. “This pension liability is a major cost for CMU, for other colleges and universities, and for K-12 schools — a multimillion dollar cost over which we have no control.”
CMU's full audit won’t be available until the state pension liability numbers are finalized. A special meeting will be called by the Board of Trustees to approve the audit once this occurs.