Lansing — Republican lawmakers could be headed next month for a showdown with public-sector unions about how to ensure the financial stability of school teachers’ retirement health care costs.
In the lame-duck session that is scheduled to begin Tuesday, Senate Majority Leader Arlan Meekhof may pursue a proposal to switch future public teachers' retirement health plans to 401(k)-style or defined-contribution plans that would be less costly for the state. It would not affect teachers who are already retired, said Meekhof, R-West Olive,.
Despite reforms the Legislature made four years ago, the Michigan Public School Employees Retirement System has a $26 billion unfunded liability.
“I think at the rate we’re going, it is definitely unsustainable,” Meekhof said in an interview.
Meekhof said in addition to closing MPSERS off to new pensioners, senators also are exploring creating incentives to get existing employees to agree to freeze their pension and switch to a 401(k) defined-contribution benefit for the remainder of their public school careers.
The House also appears prepared to act before year’s end. A spokesman for House Speaker Kevin Cotter, R-Mount Pleasant, said he and other House Republicans are still determining what reform to back before the end of the 2016 session.
“Everyone agrees something needs to get done with so many local governments struggling to provide services because of old debt,” said Cotter spokesman Gideon D’Assandro. “We’ve made reforms in this area before, and it remains a priority for us. We are still collecting ideas to find the best reform to make this year.”
A coalition of public-sector employee unions and retiree groups says it is open to reforms, but doesn’t want the issue rushed through a scheduled nine-day session. It would prefer that lawmakers take their time to thoroughly study and debate the issue in the new year.
“To try and push through a one-size-fits-all reform in one month with an issue that really has not been widely addressed at the legislative level, we just don’t think that’s a good idea,” said Todd Tennis, a lobbyist for the Coalition for Secure Retirement. “There’s way too much that can go wrong.”
The coalition includes the following: Michigan Education Association; American Federation of Teachers-Michigan; American Federation of State, County and Municipal Employees; and the Service Employees International Union.
The administration of Gov. Rick Snyder considers it an important issue, but Lt. Gov. Brian Calley downplayed the possibility of a lame-duck retirement showdown.
“I don’t think it’s particularly realistic that something that large would happen in such a small period of time as lame duck,” Calley said last week.
Retirement costs rise
The issue has taken on urgency among Republicans and conservatives in the past two months.
The state has $51.4 billion worth of unfunded retirement liabilities and ranked Michigan in the country’s bottom 10 states for its “relative financial positions,” according to a report prepared by former U.S. Comptroller General David Walker for the West Michigan Policy forum in late September.
The report commissioned by the Grand Rapids Area Chamber of Commerce also showed the cities of Grand Rapids, Ann Arbor, Lincoln Park, Saginaw, Port Huron, Kalamazoo and Traverse City have $1.69 billion in unfunded retirement liabilities. The seven cities have another $1.15 billion for other retirement plan liabilities, especially in health care where costs could balloon, according to the report.
In a rare public address, Amway President Doug DeVos announced at the September forum that attendees ranked restructuring government employees’ pension plans as the No. 1 policy priority in Michigan.
Participants at the Grand Rapids policy forum discussed restructuring government employees’ retirement benefits to a 401(k)-style benefit plan, which cuts costs for the government employer and requires employees to contribute more money to their retirement plans. Retirees are required to pay more toward their care to give them an incentive to manage costs.
In the past five years, the powerful DeVos family and others have helped persuade the Republican-controlled Legislature to make Michigan a right-to-work state and reform the state’s business tax system. Right-to-work was rushed through in the 2012 lame-duck session.
“I think lame duck is a bad time to make policy when you’re relying on people who are not subject to the will of the voters to pass your agenda,” Tennis said. “Plus, it doesn’t give you much time to really review it. This is a tremendously complex issue.”
The issue is important, Calley said, because benefit promises made to public workers are coming due.
“And yet they weren’t really saved for,” he said. “And so you have these liabilities that are out there, they need to be dealt with. But it’s important that as we do that, it’s done in a collaborative fashion, meaning that there should be a high level of engagement with all of the people that are impacted.”
Proposals under discussion
A proposal being bandied about in Lansing is requiring municipalities to set aside money to fund retirement health care benefits ahead of time instead of the pay-as-you-go model.
Four years ago, Snyder and the Legislature adopted such a plan for school employee health insurance benefits that is now costing the state’s School Aid Fund nearly $1 billion annually.
A coalition of public-sector employee groups and labor unions oppose any attempt to apply this prefunding approach to local government employees. Tennis said funding retiree health insurance ahead of time could affect municipalities unevenly, depending on their benefits, number of retirees and overall financial health.
“It might be fine for Oakland County, which is already doing some of this. But it could be absolutely devastating for some other counties or cities,” Tennis said. “Those especially that are right on the brink, this could push them into bankruptcy, potentially. Or at least an emergency manager.”
Four years ago, the group fought legislative efforts to close the state’s pension system to newly hired public school employees. Instead, the Legislature created a hybrid retirement benefit consisting partly of a traditional pension and a 401(k)-style plan for new school employees.
Some conservative political groups, including the Michigan Freedom Fund, want to completely close the Michigan Public School Employees Retirement System (MPSERS) to new employees as a way to prevent rising costs.
In 2012, lawmakers opted against doing so because it would stop the flow of employee contributions to MPSERS and add tens of millions of dollars to state’s annual cost of paying off a $26 billion unfunded pension liability.
“Closing the system doesn’t get rid of the unfunded liability,” Tennis said.