Lansing — A plan to close the state’s teacher pension system to new hires and instead offer them 401(k)-style retirement plans met resistance Wednesday in the state Senate, which delayed a planned floor vote following new cost projections and forceful opposition from Republican Gov. Rick Snyder’s administration.
Kerrie Vanden Bosch of the Michigan Office of Retirement Services blasted the GOP-backed proposal Wednesday morning in testimony before the Senate Appropriations Committee, telling legislators the three-bill package would lead to billions in transition costs for the state.
The plan would “do nothing” to address $26.7 billion in unfunded liabilities accrued in the Michigan Public School Employees Retirement System, Vanden Bosch said. “In fact, it only serves to drive the liability upward and the annual costs upward,” she said.
The state adopted a “hybrid” defined-benefit and defined-contribution retirement plan for new teachers in 2012. That portion of the pension system is fully funded, Vanden Bosch said, and has reduced the risk of additional unfunded liabilities.
“Closing the hybrid plan does not translate into freeing up more school aid dollars for the classroom, in the short term or the long-term,” she told legislators. “To the contrary, it will cost more money and put additional pressure on classroom funding.”
Despite the harsh assessment from the Snyder administration, the GOP-led committee approved the three-bill teacher retirement package in a series of 9-8 votes. Three Republicans joined all five Democrats in opposition.
Senate Majority Leader Arlan Meekhof, R-West Olive, had planned to call a floor vote later Wednesday but held off after a series of closed-door discussions with fellow GOP legislators.
Republicans pushing the reform package fear the teacher pension system could collapse without further reforms. They argue that closing the hybrid system to new teachers is the only way to guarantee the system won’t accrue further unfunded liabilities, even if it will cost more up front.
“We’re fixing a bankrupt unfunded system that may not be there when (teachers) retire, and we’re giving them a modern, portable retirement system they’re in full control of,” said Senate Appropriations Chairman Dave Hildenbrand, R-Lowell. “Young people want that.”
The state and school districts are expected to spend a combined $2.6 billion to pay down unfunded pension liabilities in the current budget year.
“We’re protecting current retirees, future retirees and taxpayers with these measures,” said sponsoring Sen. Phil Pavlov, R-Port Huron.
Democrats, badly outnumbered in the Senate, argue the legislation is unnecessary and that closing the pension system to new hires would make teaching a less attractive career option for young people, further exacerbating high turnover rates.
“We’re de-professionalizing the profession, that’s why they’re leaving. This is only going to make that worse,” said Sen. Curtis Hertel Jr., D-Meridian Township. “Why would anyone want to stay in this profession if they’re constantly attacked?”
Under the legislation, public school employees hired on or after July 1, 2017, would be put into a 401(k)-style retirement plan. A school district would automatically contribute an amount equal to 4 percent of an employee salary. Under an amendment adopted Wednesday, the state would match an additional employee contribution of up to three percent.
The Snyder administration anticipates the plan would lead to $25 billion in new state costs over the next 30 years, in part, because it would force the state Treasury to make more conservative investments, which are a primary source of revenue for pension funds.
The Senate Fiscal Agency projects transition costs could top $33 billion over the next 40 years, including $3.8 billion in the next five years. But the plan would eliminate the possibility of future liability growth in the pension system, said chief SFA analyst Kathryn Summers.
“You pay the money today to avoid potential risk in the future,” she said.
Some of the transition costs would be borne by the state School Aid Fund, drawing down dollars that could otherwise be used to fund local districts. The budget implications prompted a “no” vote from Sen. Goeff Hansen, a Hart Republican who chairs the appropriations subcommittee on school aid.
“I have concerns about coming up with school aid dollars at the end of the day,” Hansen said. “We’re just getting to where we’re able to fund some of the things we need to fund.”
While the hybrid teacher retirement system is fully funded right now, it’s still new and is “barely above water” despite a strong economy, said James Hohman of the Mackinac Center for Public Policy, a free-market group that supports the proposed retirement changes.
“Over the long-term, the ability to contain these unfunded liabilities is the issue facing school districts,” he said. “It’s what’s driving a lot of school districts to do layoffs and seek concessions from employees. It’s important for lawmakers to get serious about pension funding.”
Critics are urging the Senate to delay any action on the pension proposal until next year, arguing that the bills deserve a more thorough vetting than the lame-duck period will allow.
Wednesday’s hearing was the first public discussion of the legislation but included more than four hours of testimony, much of it from individuals and groups opposed to the proposal.
The legislation would increase short-term costs while reducing benefits for teachers, said Julie Rowe of the AFT Michigan teachers union.
“This is just another way to slash teacher compensation and undermine them as professionals,” she said. “It’s just one in a long line of attacks coming from the ideologies that are driving this legislature.”
Hildenbrand and other supporters stressed that the legislation will only apply to new hires. An amendment adopted in committee reaffirmed the state’s constitutional responsibility to cover current pension obligations.
“It is also my intent that these benefits will continue to be funded as a top priority in our state budget process,” Hildenbrand said.