Agency: Switching new teachers to 401(k) costs billions
Lansing — Making newly hired teachers and other school employees ineligible for a pension and instead giving them a 401(k) would cost Michigan $465 million more annually in the first five years, legislative experts said Wednesday.
The analysis was released by the nonpartisan House Fiscal Agency a day after House and Senate Republicans proposed identical bills to close the 7-year-old hybrid pension/401(k) plan to school workers hired after Sept. 30.
Roughly two-thirds, or $280 million, of the $410 million cost in year one reflects an actuary’s recommendation to incrementally lower long-term investment return assumptions for the Michigan Public School Employees Retirement System for cash-flow reasons, starting in 2034.
The pension plan’s portfolio would become more conservative because benefit payments to retirees eventually would significantly exceed contributions if no new employees are allowed to join. Increased unfunded liabilities associated with lower return assumptions “increases the annual required contributions necessary to fund the system,” the analysis said.
First-year costs would increase by $96 million in the retirement systems for state workers, police and judges because their assets are pooled with MPSERS. Another $33 million in additional spending is included because the 401(k)-only plan would cost more on an ongoing basis than the hybrid system.
The legislation could cost as much as $46 billion over a 40-year amortization period, according to the analysis.
Gov. Rick Snyder, a Republican, has cited upfront costs as a reason he opposes the switch. Unlike the legacy pension plan for school employees hired before mid-2010, which has unfunded liabilities of $29 billion, the newer hybrid system is fully funded and saw other changes in 2012 to curb costs. But GOP legislative leaders doubt that the plan will remain adequately funded and say Michigan must stop adding debt that is squeezing classroom spending.
They want the legislation to coincide with passage of the next state budget and have canceled budget talks with the Snyder administration for now due to the impasse over pensions.
Nick Ciaramitaro, chairman of a coalition of public-sector labor unions lobbying to protect teacher pensions, said the bills “will actually cost the state a great deal more in the long run. They are willing to spend a huge amount of tax dollars to address a ‘problem’ that the reforms to the school employees’ pension in 2012 already fixed.”
Gideon D’Assandro, spokesman for House Speaker Tom Leonard, said half of the $46 billion number “is simply from changing the rate of return. That is something that should have been done 20 years ago. That’s not an extra cost. That’s simply acknowledging a cost that has always been there.”
He said additional costs in the first few years are lower than previous estimates and “are very doable” with conservative budgeting.