The Republican-controlled Senate Appropriations Committee voted 9-8 Wednesday to close the school retirement system to new members, despite expert testimony from the administration of Gov. Rick Snyder and others that the move will cost billions.
The bills moved to the full Senate, where they were expected to be taken up as early as Wednesday night, though that was looking much less likely for the fast-track legislation after the close committee vote.
Debate raged over the Michigan Public School Employees Retirement System at the Capitol, as a new Senate Fiscal Agency report pegged the cost of the legislation at $1.6 billion to $3.8 billion over five years.
The main reasons for the increased costs are that employer contributions to the 401(k)-style plan will be close to three percentage points higher than they are to the existing "hybrid" school retirement system -- which mixes a smaller defined-benefit pension with a defined contribution plan -- and that with no new money coming into MPSERS, more conservative investment strategies will be called for and expected returns will be significantly lower.
Administration officials from the Office of Retirement Services pegged the cost even higher than the fiscal agency did -- at $2.5 billion to $4.7 billion over five years.
"It will cost more money and put additional pressure on classroom funding," testified Kerrie Vanden Bosch, director of the Office of Retirement Services.
Republican Sens. Mike Nofs, Goeff Hansen and Marty Knollenberg broke with the majority to join Democratic Sens. Vincent Gregory, Curtis Hertel, David Knezek, Hoon-Yung Hopgood and Coleman Young in opposing the pension measure. Republican Sens. Dave Hildenbrand, Peter MacGregor, John Proos, Tonya Schuitmaker, Darwin Booher, Mike Shirkey, Jim Stamas and Jim Marleau voted yes.
The sponsor of the legislation, Sen. Phil Pavlov, R-St. Clair Township, did not dispute that the upfront cost could be $1.6 billion over five years, with about $214 million expected to be borne by school districts and the balance borne by the state.
But he said the move is still needed because otherwise the current MPSERS will continue to accrue new unfunded liabilities, putting the system and retirees at risk, as well as taxpayers.
"It's our mortgage," Pavlov told the Free Press. "It costs what it costs," but "we're protecting current retirees, future retirees, and taxpayers with these measures."
Under an amendment approved just before the legislation was reported out, lawmakers said the state School Aid Fund will cover the extra cost that would have been borne directly by school districts, estimated by the Senate Fiscal Agency at $214 million over five years.
The committee, over the objections of school employees, took up the legislation during the lame duck session to force new hires into a 401(k) style pension plan, instead of the blended pension and 401(k) system they can use now, known as the hybrid system.
Democrats denounced the legislation, noting that while MPSERS has an unfunded actuarial liability pegged at about $26.7 billion, the hybrid system has no unfunded liability.
"I'm trying to figure out what problem we are trying to solve," said Hertel, D-East Lansing, who questioned what impact the change would have on recruiting and retaining good teachers.
"I feel the speed with which we're moving this is wrong," said Young.
The move is backed by the Michigan Freedom Fund, which is bankrolled in part by the influential Republican DeVos family of western Michigan, and Amway President Doug DeVos spoke of the need to tackle public pension issues at the West Michigan Policy Forum in September. Americans For Prosperity, a conservative group funded in part by the Koch brothers, also pushed for the legislation.
Annie Patnaude, deputy state director of Americans for Prosperity, pointed to a recent poll her group commissioned which found 62% support for moving new school employees into defined contribution plans -- with support above 80% among younger voters.
"This is not only good, sound policy -- it's good politics," Patnaude told the committee.
But Catherine McLogan, a retired teacher from the Canton school district, told the committee that after hearing the testimony from the fiscal agency and Office of Retirement Services, she couldn't make out a coherent reason for closing MPSERS.
"You ... have a preconceived notion of what the retirement system should be," McLogan told Republicans on the committee.
Pavlov's legislation does not call for accelerated funding, which the Senate Fiscal Agency report said would be consistent with best practices, and which would push the five-year costs of the legislation to $3.8 billion. The administration estimate of the five-year cost, if accelerated funding is used, was $4.7 billion, though Vanden Bosch said making those extra payments would save the state $4.9 billion over 30 years, just as increasing payments on a mortgage can result in big long-term savings.
Senate Majority Leader Arlan Meekhof, R-West Olive, told reporters at the Capitol on Tuesday he expects the bills to pass the full Senate on Wednesday, but it wasn't clear that would happen by late Wednesday afternoon.
Under 2012 legislation affecting MPSERS, which modified earlier changes made under former Democratic Gov. Jennifer Granholm, new school hires can't fully participate in the defined-benefit pension plan that longer-serving school employees participate in. Instead, they can join a smaller traditional pension, combined with a defined contribution plan.
Snyder said last week that hybrid system for school employees is working well, and union leaders and some analysts say the state would face significant upfront costs to bolster the existing pension system system if all new hires are forced into 401(k) style plans.
Senate Bill 102 does just that. Meekhof suggested Tuesday the legislation would be modified to moderate the upfront costs. Pavlov also is the sponsor of related Senate Bills 1177 and 1178, addressing school employee retirement, which the committee also voted out.
According to the Senate Fiscal Agency, MPSERS had an unfunded actuarial liability of $26.7 billion as of 2015. The hybrid system has no unfunded liability, according to Senate Fiscal Agency analyst Kathryn Summers, but money is being paid today to avoid potential risk in future years.
The fiscal agency report also said closing MPSERS to new members could result in significant additional short-term costs, if best practices are followed, including $2.1 billion over five years in recommended accelerated funding, plus significant additional costs in increased funding related to shifting to a more conservative investment strategy, which would be recommended without new member money coming into the pension system, the report said.
Total costs, including expected impacts on other pension plans, could total $1.6 billion to $3.8 billion over five years, the report said.
The $1.6-billion cost includes $1.2 billion related to lower rates of return in MPSERS investments, $218 million in additional retirement contribution costs, borne by school districts, and $218 million related to lower investment returns that would be experienced by other state retirement systems, mainly the system for state employees, according to the report.
Vanden Bosch testified that because all state retirement funds are pooled for investment purposes, closing the MPSERS system to new members will also negatively impact the expected performance of the other systems, resulting in the need for higher employer contributions.
However, moving to a defined contribution system "would eliminate the potential for future unfunded accrued liabilities," the report said.
Not all the expert testimony opposed the move.
Anthony Randazzo, director of economic research for the Reason Foundation in New York, which has closed ties to billionaire businessman David Koch, testified that removing the risk of accumulating future unfunded liabilities is important.
There is "significant risk" the hybrid system will develop unfunded liabilities in the future, based on historic performance of equity markets, he testified.
"Under a defined contribution plan (such as a 401(k)), there is no potential volatility," and "we see a lot of positive in this plan," Randazzo testified.
Hildenbrand, chairman of the Senate Appropriations Committee, stressed that the legislation would have no effect on pensions already earned, existing employees or retiree health care.
For new employees, "we're giving them a modern, portable retirement system that will be fully funded, that they're in control of," Hildenbrand said.
Senate Minority Leader Jim Sen. Jim Ananich. D-Flint, said Republicans shouldn't expect support from Democrats, and that''s especially true if they go beyond the MPSERS system and try to reduce retirement benefits for workers at the local government level.
"We're hearing about some earned benefit cuts that Republicans want to take up," Ananich said Tuesday. "That’s the exact wrong direction that we want to go. People across Michigan sent a big message on election day – they want more economic security, not less.
"To take away from people who have been working hard – police officers and firemen and teachers – they say it’s only going to be the new folks, but they always say that. They won’t get any support from my caucus members and I think we’ll have unified support in the House as well."
Starting in 1997, all new state employees who would have otherwise joined the State Employees Retirement System were forced into 401(k) plans.
That move didn't cost the state billions, but Vanden Bosch testified the circumstances then were entirely different.
First, the plan was 100% funded at the time, compared to a little over 60% today, she told lawmakers.
Secondly, the employer contributions were reduced when state employees moved from the defined benefit plan to 401(k)'s, while employer contributions increase in the move from the school hybrid system to a 401(k).