Teacher pension plan moves fast in Michigan Legislature

Jonathan Oosting
Detroit News Lansing Bureau

Lansing – Michigan’s Republican-led Legislature is moving fast on a controversial teacher pension reform agreed to Tuesday by Gov. Rick Snyder and GOP legislative leaders but quickly opposed by public education groups.

House and Senate education panels on Wednesday approved heavily amended bills hours after they were publicly unveiled, setting the stage for potential floor votes as soon as Thursday while Republicans attempt to finalize the 2018 state budget by the end of next week.

The proposal would automatically enroll new public school employees into enriched 401(k)-style retirement savings accounts rather than the “hybrid” pension plan most join now. They would have a 75-day window to instead choose a revised hybrid pension option that would guarantee lifetime benefits but require larger employee contributions than the current version.

Costs for new hybrid pension members could increase annually if the system accrues any unfunded liabilities, with higher employee and employer contribution rates used to pay down the debt. The pension system could close to new hires if it is less than 85 percent funded for two consecutive years and the state does not kick in extra money to save it.

While the current hybrid pension system is fully funded on paper, reform advocates say the new legislation will reduce the risk of adding to $29.1 billion in unfunded debt in a legacy teacher pension system closed in 2010. It would honor pension promises for existing employees.

“We have in front of us a solution that does both of those things,” said sponsoring Sen. Phil Pavlov, R-Port Huron. “It protects retirees and taxpayers while offering (new teachers) a better plan, quite frankly.”

But critics raised questions about the new plan and questioned the rush to act on the day-old deal.

“Democrats are not going to sign up to transfer risk and cost to classrooms and teachers,” said Rep. Adam Zemke, D-Ann Arbor, vice chairman of the House Education Committee.

The House panel advanced the legislation in a 9-5 party-line vote. The Senate Education Committee approved an identical bill in a 3-1 vote with opposition from the lone Democrat. Sen. Marty Knollenberg, R-Troy, sat out the vote after indicating he had unanswered questions.

House Speaker Tom Leonard, R-DeWitt, and Senate Majority Leader Arlan Meekhof, R-West Olive, had pushed a more aggressive plan to close the pension system to new hires. But Snyder argued the hybrid plan was working well and balked at hefty transition costs the House Fiscal Agency pegged at $46 billion over 40 years.

The revised plan Snyder is backing has a much smaller projected price tag because it would not require closure. The Senate Fiscal Agency estimates it would cost $24.1 million in the next fiscal year and $265.2 million over the first five years, with annual costs likely rising each year after that.

“The bottom line of all of this is cash flow issues,” said Senate Fiscal Agency analyst Kathryn Summers. “Closing the system stops the flow of cash that in the future helps to support benefit payments. Leaving the system open leaves some cash flow coming back into the system still to avoid these transition costs.”

The accuracy of the new cost projections could vary depending on how many new public school employees stick with the default 401(k)-style retirement plan or choose to take a revised hybrid pension option. The Office of Retirement Services is assuming that 59 percent of new hires will choose the 401(k)-style savings plan, while 41 percent will choose the hybrid pension that includes both a defined pension benefit and defined contribution component.

If all teachers chose the 401(k)-style plan, “it would basically be the same as closing the system because there would be no money coming and no contributions coming in,” Summers said. “That’s one extreme.”

Public school employees who stick with the 401(k)-style plan would qualify for employer matches of up to seven percent of their annual salary, much like retirement plans provided to state employees and legislators since major reforms in 1997. A school district would automatically kick in four percent, and the state would add another three percent if the employee did the same.

Employee costs for the hybrid pension option would depend on how well-funded the system is. Costs would be split equally between the employer and public school employees, with any additional payments used to pay down new debt.

If debt continued to accrue anyway and the hybrid pension system was less than 85 percent funded for two consecutive years, it could be closed to new hires unless state legislators decided to prop it up with an extra appropriation. Closure could not be triggered by missed payments from the state or school districts.

“If it’s tanking, we certainly don’t want to put new people in it to ride it to the bottom of the ocean,” Pavlov said.

Conservative and free-market groups such as the Reason Foundation, Mackinac Center for Public Policy and Michigan Freedom Fund testified in support of the bills. But public education associations and unions have lined up against the new plan.

“We feel it’s a thinly veiled attempt to close the viable and effective hybrid pension system,” said Nick Ciaramitaro of the Coalition for a Secure Retirement and AFSCME Council 25. “We feel that it’s the wrong choice not only for school employees, who would be directly affected, but for Michigan’s fiscal stability.”

But state Sens. Hoon-Yung Hopgood, D-Taylor, and Knollenberg questioned whether an unexpected economic recession or stock market crash could force quick closure of the pension system.

“Could it happen? Absolutely,” said state Treasurer Nick Khouri, who emphasized the Snyder administration’s support for the legislation. “There’s always the nuclear war probability, but we did put in enough layers we don’t think it will happen.”

The legislation would lower the assumed rate of return on investments for the new hybrid pension option. Reform advocates contend the Office of Retirement Services has relied on unrealistic expectations and regularly underestimated actual pension debt.

Public school employees can currently qualify for pension benefits at 60 years old, but the legislation could push back the retirement age for new hybrid members if mortality studies show state residents are living considerably longer.

Benefits for current employees would not be directly affected – pensions are guaranteed by the Michigan Constitution — but members of the legacy pension system would lose the ability to purchase service credits used to determine eligibility for retirement.

“It alters the credit purchasing around parental leave,” Zemke said. “That is an important consideration. Existing teachers are not held harmless in the plan that passed out.”

The policy proposal includes a $5 million appropriation designed to help the Office of Retirement Services implement required changes. Hopgood questioned whether the appropriation was designed to make the bill immune to public referendum if it is unpopular.

The new pension reform legislation is expected to free up more money for final budget negotiations after the Legislature set aside $495 million to cover transition costs associated with an earlier proposal.

Extra money is expected to be directed toward pension debt payments, along with deposits in infrastructure and rainy day funds the Legislature had cut from Snyder’s $56.3 billion budget proposal.