Michigan teacher pensions targeted in budget talks

Jonathan Oosting
Detroit News Lansing Bureau

Lansing – Republican legislative leaders are gearing up for another push to close Michigan’s teacher pension system to new hires and move them to 401(k)-style retirement plans, pointing to growing unfunded liabilities of $29 billion that could drain money from classrooms despite recent reforms.

The developing proposal may quiet talk of personal income tax cuts in Lansing. House and Senate Republicans instead would use budget savings they’ve identified to help school districts pay down liabilities or cover up-front transition costs for the state, which held up action last fall on proposed reforms.

“We think there’s opportunity to help solve one of the nagging problems of growing debt for the state,” Senate Majority Leader Arlan Meekhof, R-West Olive, said Tuesday. “And this may be one of those opportunities to use that one-time money to make a down payment on that end and start moving in a direction that saves the state money over a very long time.”

Meekhof

Leaders entered the new budget cycle with a $330 million surplus.

House and Senate budget bills up for floor votes this week would trim at least $270 million in state spending proposed by GOP Gov. Rick Snyder for next fiscal year, an amount legislative leaders have said could be used for tax cuts, infrastructure investments or debt relief. They could also look to redirect $175 million currently planned as a deposit into the state’s “rainy day” savings fund.

House Speaker Tom Leonard, R-DeWitt, has pushed for a personal income tax cut as part of budget negotiations, but he reminded reporters last week that when he was elected to the leadership post in December, he said “fixing our broken teacher retirement system” was at the top of his to-do list.

“That has been my absolute top priority since the day I was elected speaker of the House,” Leonard said. “So if that’s an avenue that we can go, if that’s something we can get accomplished, I’m ready for it.”

Leonard

Meekhof first proposed closing the teacher pension system to new hires in late 2016, calling for the state to abandon a hybrid system adopted in 2010 and move all new school employees into 401(k)-style defined contribution plans.

The proposal faced opposition from Democrats and educators, who argued it would reduce benefits and discourage young people from going into the profession. The Snyder administration also rejected it, arguing the plan would not address unfunded liabilities but lead to $25 billion in new state costs over 30 years.

The teacher pension reform push stalled last year but talks have continued. Business Leaders for Michigan, an influential group of executives and company officials, threw its weight behind the effort last month, calling on legislators to move all new public employees into defined contribution plans.

Gov open to a review

Michigan shifted new state government employees to 401(k) plans in 1997, and few private-sector companies still offer pensions. But 401(k) plans don’t really save the state money, unwisely shift all risk to individuals and are rarely generous enough to fully support retiree needs, said Todd Tennis, a Michigan lobbyist with the Coalition for Coalition for Secure Retirement.

“This experiment of shifting our entire nation’s retirement security into a 401(k) plan is not working,” Tennis said. “We’re all going to pay the price for it when we have an entire generation who either can’t retire, or if they’re forced to retire due to health or inability to continue working … are going to be forced to go on public assistance.”

Michigan ended its traditional teacher pension system in 2010, moving newly hired school employees into hybrid retirement plans that include both a defined pension component and contribution component similar to a 401(k) savings plan. The new system, which is fully funded, spreads risk between schools and individuals but provides some guaranteed level of retirement income.

The hybrid retirement plan is working as intended, Snyder said last year, urging lawmakers to give it more time before abandoning it.

The governor is “open to reviewing” any reform proposals legislators put forward, Snyder spokeswoman Anna Heaton said Tuesday. “At this point, we haven’t seen anything specific.”

In 2012, legislators gave new school hires the option to choose only a 401(k)-style plan. Educators who contribute 6 percent of their compensation can get another 3 percent from their employer, which is less generous than the plan for state government employees, and few employees have opted in.

“I’m hoping that we come up with a better option for them,” Meekhof said, suggesting Republican leaders are “getting closer on the concepts” of a new proposal but are not yet ready to introduce bills.

“I think what we’d look at is what is the most affordable, portable and modern retirement system that people would want to be a part of.”

Teacher retirement reforms enacted in 2012 targeted unfunded liabilities. The law required retirees to pay more for their health care and capped school district contributions for unfunded liabilities at 24.46 percent of payroll. The state covers additional costs, which totaled more than $980 million this year.

‘We need to do better’

While teacher retiree health care liabilities have dropped since 2012, unfunded pension liabilities have continued to climb. The total now tops $29.1 billion, according to an annual actuarial valuation prepared for the state at the end of fiscal year 2016 by the Southfield-based firm Gabriel, Roeder, Smith and Co.

Pension payments for current retirees and employees still part of the old system are expected to cost school districts and the state $72 billion in the coming decades, but pensions system assets are valued at $42.9 billion.

The newer hybrid pension plan is fully funded, however, with accrued liability of $259 million and assets valued at $259.2 million.

The hybrid plan “seems to be working fine,” said former state Sen. Roger Kahn, R-Saginaw Township, who sponsored the 2012 reform package. While he wants to see details of the new proposal before drawing any conclusions, Kahn is generally concerned by the prospect of ending the teacher pension system, including transition costs and human impact.

“Pension plans are not just about the money that the state puts into them,” Kahn said. “Pension plans are fundamentally about the lives of the people who get pensions. There is no way to close the pension plan and provide a similar benefit without also costing the state a heck of a lot more money.”

Closing the hybrid pension system to new hires would eliminate the risk of having unfunded liabilities grow, but it entails significant costs in part because pension operators would have fewer contributions to invest and from which to generate revenue.

The Senate Fiscal Agency projected last year’s legislation would have cost roughly $600 million in first-year costs, $3.8 billion over five years and $28 billion over 30 years if the state chose to wind down the system through accelerated payments, which it recommended as a best practice.

Meekhof said legislators continue to work out details of the pending teacher pension plan and how the state could use existing resources to cover associated costs.

“The folks in our state will understand we’re looking out for their long-term interests and their kids and grandkids aren’t paying for stuff that is not welcome at this point,” he said. “We need to do better, and we can.”

Staff Writer Michael Gerstein contributed.