Debate raged at the Capitol on Wednesday over Republican plans to close the school employee retirement system to new members, 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 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 of that borne by school districts and the balance borne by the state.
But he said the move is still needed because otherwise the current Michigan Public School Employees Retirement System will continue to accrue new unfunded liabilities.
"It's our mortgage," Pavlov told the Free Press. "It costs what it costs."
The Senate Appropriations Committee is taking up legislation today, over the objections of school employees, 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 Sen. Curtis Hertel, D-East Lansing, who questioned what impact the change would have on recruiting and retaining good teachers.
Pavlov's legislation does not call for accelerated funding, which the Senate Fiscal Agency report said would be consistent with best practices, which would push the five-year costs of the legislation to $3.8 billion.
"We're protecting current retirees, future retirees, and taxpayers with these measures," Pavlov said.
Senate Majority Leader Arlan Meekhof, R-West Olive, told reporters at the Capitol on Tuesday he expects the bills to be reported out of committee this morning and pass the full Senate later today.
Under 2012 legislation affecting the Michigan Public School Employees Retirement System, 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.
Gov. Rick 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, sponsored by Sen. Phil Pavlov, R-St. Clair Township, which the Senate Appropriations Committee took up today, would do just that. Meekhof suggested Tuesday the legislation will be modified to moderate any upfront costs. Pavlov has also introduced Senate Bills 1177 and 1178, addressing school employee retirement.
According to a Senate Fiscal Agency report released today, 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.
However, moving to a defined contribution system "would eliminate the potential for future unfunded accrued liabilities," the report said.
Sen. Dave 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 were forced into 401(k) plans.