Legislative leaders have hammered out a tentative deal with Gov. Rick Snyder for the 2017-18 Michigan budget, coupling some of the governor's budget priorities with a more fleshed out plan for reforms in the teacher pension system.
The deal could include some things that Snyder called for in his original budget – deposits into the state’s rainy day fund and an infrastructure fund – that the House and Senate didn’t include in their versions of the budget.
Speaker of the House Tom Leonard, R-DeWitt, said the theory behind the deal to reform the teacher pension system is to do it in a way that new school employees would find the defined contribution or 401(k) type plan so attractive that they wouldn’t want to to go into the new version of a hybrid pension system that will replace the existing hybrid system.
"We are finalizing numbers on how much it will cost," to transition to the new plans, he said. "But this is big, this is monumental for this state."
Committee hearings are scheduled to start at 8 a.m. Wednesday on the school retirement plan, which has the state contributing 4% of a school employee's salary into the plan. The employee would also be able to contribute, and the employer would match the first 3% of an employee’s contribution.
Currently, the state provides up to a 3% match into a teacher's defined contribution account. About 20% of new teachers are now in the state's 401 (k) plan. If the new plan is approved, those teachers in a 401 (k) plan now will automatically begin getting up to a 7% match from the state If the employee doesn't contribute anything into his or her 401 (k) plan, the employee will only get a 4% contribution from the state.The average payment for a teacher in the traditional pension plan is now about $1,860 per month.
The new hybrid system would require a bigger contribution from teachers and other school employees into the new hybrid plan and would close it to new hires if it were less than 85% funded for two years in a row.
“Everybody will default into a (defined contribution) plan and they’ll have to opt out” of that plan to get into the hybrid pension plan, Meekhof said.
“I think it’s a hard sell for Democrats to say that they wouldn’t give a teacher the same retirement benefit that they get,” he added.
State employees, except for school employees, used to be in a pension plan until 1998 when they switched to a 401 (k). Republicans have tried several times since them to get teachers into a defined contribution plan, but those proposals haven't gained much traction until now.
Senate Minority Leader Jim Ananich, D-Flint, said the plan seems to be better than the original GOP plan, which would have automatically closed the current hybrid pension system to new school employees.
“We’ll keep trying to find ways to find a solution that works for everybody. I think they’re getting to a place that’s a little bit better,” he said. “I’m willing to listen, but I’m not going in assuming I’m a yes or no vote.”
Nick Ciaramitaro, legislative director for AFSCME Council 25, which represents about 8,000 non-instructional school employees, said the plan is getting better, but he's worried about shutting the new hybrid system down if it falls below the 85% funding threshold.
"That's a veiled attempt to try and close a viable pension plan," he said. "It’s not unusual for a pension plan to fluctuate in funding. Eighty percent is generally considered to be sufficient funding because of the nature of the business cycle."
The pension system reforms are expected to move at the same time as the $55 billion state budget, which will include money to make a payment on the $29 billion unfunded liability in the Michigan Public Schools Employee Retirement System or MPSERS, and deposits into the state's rainy day fund and an infrastructure fund. Specific dollar amounts for those three funds weren't immediatley available Tuesday.
Snyder had proposed putting $20 million into an infrastructure fund that can be used by communities as a down payment on rebuilding and repair needs in their townsand a $260 million deposit into the state’s rainy day fund. Both the House and Senate rejected the infrastructure fund in their version of the budget. The Senate cut the rainy day fund money entirely, while the House kept it in its budget.
While the Senate and House were tentatively scheduled to break for the summer on Thursday until after Labor Day, the session could be extended into the next two weeks to accommodate the new deal on the budget and teacher pensions.
The teacher pension reform bills are: SB 401 and HB 4647.