Michigan GOP lawmakers unveil pension reform plans

Jonathan Oosting
Detroit News Lansing Bureau

Lansing – State House and Senate Republicans on Tuesday unveiled their plan to close Michigan’s teacher pension system to new hires and move them into 401(k)-style plans despite an impasse with GOP Gov. Rick Snyder that has already strained annual budget negotiations.

Frustrated legislative leaders suspended budget talks with Snyder last week after the governor continued to voice concerns over transition costs associated with the pension reform plan, which could be significant.

Snyder met earlier Tuesday with Senate Majority Leader Arlan Meekhof and House Speaker Tom Leonard. There was “no progress but a polite discussion,” according to a Senate Republican spokeswoman.

Negotiations are moving very slowly – it’s a “snail mate,” not a stalemate, Meekhof told reporters. But the Senate leader made clear Republicans remain committed to reforming the teacher pension system alongside the fiscal year 2018 budget.

Snyder and the Republican-led Legislature have completed budgets by early June six straight years, “but if the governor wants to be seven for seven and eight for eight, he’s probably going to want to figure out a way to get the budget done,” Meekhof said.

Identical bills introduced in the state House and Senate would close the state’s current “hybrid” pension system to new hires on Sept. 30 and set a new schedule for attempting to pay down $29.1 billion in unfunded liabilities or debts that have accrued in an older traditional pension plan.

New teachers and staff in participating K-12 schools, community colleges and universities would be enrolled in privately managed investment funds and would qualify for employer matches of up to 7 percent, similar to current 401(k)-style plans for all state employees.

“There is an opportunity here to change the course of Michigan, to stop digging the hole and to give a responsible retirement system to the teachers,” Meekhof said.

In addition to 401(k)-style retirement plans, the legislation would allow teachers and school staff to select annuity options offered by insurers that would provide set retirement payments based on deposits and investments.

The legislation makes clear that pension benefits for current retirees and active plan members are constitutionally guaranteed. They are a “contractual obligation of this state that shall not be diminished or impaired,” according to the bill.

The legislation will “ensure our promises are kept to our school employees and retirees and also protect vital funding for educating our children,” sponsoring Sen. Phil Pavlov, R-Port Huron, said in a statement referencing annual costs of paying down pension liabilities.

Snyder has argued that the state’s “hybrid” plan for new hires since mid-2010 is working well. That system is fully funded and provides teachers with a retirement plan that includes a combination of defined-benefit and defined-contribution components.

The governor would prefer to offer a more generous 401(k)-style plan to new teachers rather than eliminate their option to join the hybrid pension plan. He’s warned that the legislative proposal could ultimately be more expensive for the state and school districts.

Recent estimates from the state Office of Retirement Services suggest that closing the hybrid pension system to new hires and using “best practices” to accelerate payments on pension debt would cost $683 million in 2018 and a total $20.6 billion over 30 years.

Legislative leaders have disputed the estimates but have not yet publicly provided any figures of their own. They’re working with conservative and free-market groups like the Reason Foundation and the Mackinac Center for Public Policy.

Snyder has told legislators he wants the retirement reform package to reduce risk and costs for taxpayers, protect retirement for teachers and school employees and ensure the sustainability of the pension system using long-term budget planning, according to a spokeswoman.

“He appreciates the positive tone of ongoing discussions with the Legislature and will continue working with them on a compromise plan and timely completion of another balanced budget,” Anna Heaton said.

Democrats argue that eliminating the hybrid pension plan for new hires could ultimately make the teaching profession less attractive, and they’ve generally sided with Snyder in the ongoing budget debate.

“I think all it takes is two minutes looking at the numbers and anybody with a sound mind would reject this proposal,” said Sen. David Knezek, D-Dearborn Heights. “But what we think we’re leaving out of that conversation sit he real impact it has on people’s lives.”

A group of more than 100 activists with the liberal Michigan United group gathered outside Meekhof’s state Capitol office on Tuesday afternoon to protest the potential pension reforms.

“We’re here supporting a dignified retirement that only comes with a guaranteed pension,” said activist leader Samuel Johnson. “Our children deserve good educations. That requires good educators.”

Republicans argue portable 401k-style retirement plans would benefit young professionals who could lose accrued pension benefits if they change careers before vesting.

The current hybrid teacher pension plan is a “Band-Aid for a bullet wound,” said sponsoring Rep. Thomas Albert, R-Lowell, who added that larger reforms are needed to provide “real numbers and certainty” to a pension system saddled with $29.1 billion in unfunded liabilities.

Speaker Leonard, R-DeWitt, is backing the reform push, arguing that Michigan schools are drowning in debt. Current law caps their annual costs for debt payments at 20.96 percent of payroll and requires the state to pick up any additional tab.

“The bills introduced today will finally begin to fix this crushing problem by paying off the long-term debt, eliminating future liabilities and eventually putting billions more right into the classroom,” Leonard said in a statement. “That means more funding to hire new teachers, buy new books and begin critical building repairs.”

The legislation would lower the assumed rate of return on “hybrid” plan investments and set a schedule for attempting to pay off current debt by 2038. Any additional liabilities resulting from lowered assumed rates of return could be paid off over up to 40 years.

The legislation does not specify costs, which could be significant. But it would generally prohibit the state from reducing payments for “normal” costs or liabilities in any given year until the debt is paid off.

As The Detroit News reported Monday, closing Michigan’s state employee pension system to new hires in 1997 did not stop the accrual of nearly $6 billion in unfunded liabilities.

But Republicans contend that hole would be much deeper were it not for the reforms and insist they are committed to making full payments to pay down liabilities in the teacher pension system.

“The economy and many factors will determine how that debt does way, but we owe it and we’re going to pay it,” Pavlov said.