Lansing – Republican Gov. Rick Snyder on Thursday signed into law controversial legislation to overhaul Michigan’s teacher retirement system and steer new hires into 401(k)-style savings accounts rather than hybrid pensions.
The plan faced opposition from public education groups but was a top priority for GOP legislators who say it could help the state avoid adding to the $29.1 billion in unfunded liabilities accrued in an older pension plan closed to new hires in 2010.
Snyder opposed an earlier plan to close the hybrid pension system completely. But he negotiated the final product and signed it one day after the Legislature approved a separate business tax incentive plan he had prioritized, his last chance to do so under a 14-day rule.
“Modernizing the school employee retirement system means these benefits will be there for retired school employees in the long term, while at the same time protecting taxpayers from escalating liabilities,” Snyder said in a statement after signing the bill in a private ceremony with Republican legislative leaders.
“We worked hard to make sure everyone was at the table in discussions about how to best revise the system and I’m thankful for all of the input and collaboration that led to a great outcome for current and future retirees as well as all Michigan taxpayers.”
Beginning in February 2018, new public school teachers and staff will automatically be enrolled in a 401(k)-style retirement plan unless they instead pro-actively choose a revised hybrid pension.
Both options are already available today, but the law is designed to encourage 401(k) enrollment. It would increase the maximum employer match rate from three percent to seven percent.
A hybrid pension could also cost public school employees more. It would require members to share in the costs of paying down any unfunded liabilities that accrue in the future. The retirement age, currently 60 years old, could also be extended based on mortality studies.
While the law does not end the hybrid pension option, it contains a trigger to close the system if it is less than 85 percent funded for two consecutive years and legislators do not kick in extra cash to sustain it.
Senate Majority Leader Arlan Meekhof, R-West Olive, said the new law makes the state “a champion of retirement reform.” Michigan moved all new state employees into 401(k)-style plans beginning in 1997.
House Speaker Tom Leonard, R-DeWitt, called it a “historic reform” that “gives our schools a way out from under their crushing debt and provides our students and teachers with a brighter future.”
“The bill we passed and the governor signed this morning finally fixes one of Michigan’s most significant and pressing issues and puts our state on an even stronger footing for continued growth and success for years to come,” Leonard said in a statement.
The current hybrid pension plan for public school employees is fully funded on paper. Critics say the new law will make it a bad option for teachers, leaving new hires to rely on a 401(k)-style plan that could be affected by market forces outside their control.
Teachers who protested the legislation last month also complained about the potential risk for new hires and argued the shift away from pension guarantees would hurt the ability of local school districts to attract teachers.
All Democrats in the House and Senate voted against the proposal.
The law does not pay down any of the $29.1 billion in debt associated with an older legacy pension system. But the 2018 state budget Snyder is expected to sign includes $55 million to cover two-year upfront costs for teacher pension reforms along with $200 million to pay down debt accrued in the state’s legacy pension system.
The non-partisan Senate Fiscal Agency projects changes to the retirement system will cost the state $23.1 million in the first year, an annual figure that could grow to more than $800 million over three decades.