Editorial: Pass compromise fix on pensions

After years of mulling how to address the state’s ailing school employee pension system, both chambers of the Legislature are expected to vote today on a plan that would tackle $29 billion in unfunded liabilities while offering teachers a better alternative. That’s a win-win.

The legislation, if passed, could be on the governor’s desk as early as Tuesday. The votes are reportedly nearly there. Republican senators, who have had several previous pension reform go-rounds, are ready to pass it, but some of the new House members are less sure and need to get up to speed about why the status quo isn’t sustainable.

The Senate and House education committees approved the legislation Wednesday.

Earlier this week, legislative leaders forged a compromise with Gov. Rick Snyder, who had opposed the initial GOP bill. Snyder was concerned about the cost of transitioning new teachers out of the pension system and losing their help in covering current retirees.

And while that transition would entail upfront investment on the state’s part, a system that is a major — and growing — drain on school budgets and taxpayers demands action.

The compromise legislation is about 90 percent of what GOP lawmakers were hoping for, while earning Snyder’s support. The original bills would have closed the current Michigan Public School Employees Retirement System to all new hires, but the new version would allow some new teachers to choose a revamped hybrid pension.

“I think this hit on a good compromise,” says Gideon D’Assandro, press secretary for House Speaker Tom Leonard. “It protects taxpayers, addresses the long-term debt and is more generous for teachers.”

The legislation would enroll new public school employees into a more enticing, higher match 401(k)-style retirement account. Currently the majority of employees have chosen a hybrid plan, which is mostly a pension with a small defined contribution element. About 20 percent of teachers have opted for a 401(k) type plan the state started offering in 2012.

Employees would have a 75-day window to choose the new hybrid plan. That system would still provide lifetime benefits but it would require higher employee contributions, and those costs could go up if the plan accrues unfunded liabilities. In addition, the new plan would close off to new employees if it is less than 85 percent funded for two years in a row and the state doesn’t make up the difference.

In keeping the pension system open to new hires, the Senate Fiscal Agency says the transition costs are much lower that previous projections. The agency estimates it would cost $24.1 million in the next fiscal year and $265.2 million over the first five years.

The legislation also includes some cost-saving measures that would eliminate the ability of employees to purchase service credits that apply to retirement benefits. It would also put in triggers for the new hybrid plan that would raise the retirement age of employees based on recurring mortality studies conducted by the Office of Retirement Services. As life expectancy rises, so should the retirement age.

Those are safeguards that were missing from the current system. And these reforms won’t touch the pensions of current employees, so teachers in classrooms today don’t need to worry about benefits being stripped.

Senate Education Committee Chair Phil Pavlov, R-St. Clair Township, has made pension reform his top priority and while he would have preferred fully closing the pension system to new hires, he thinks it still contains the majority of necessary fixes.

Republican leaders are smart to tackle this growing problem for the state, and lawmakers should do the right thing for taxpayers and teachers and approve these bills.