What started out as a routine budget cycle, quickly became mired in retirement controversy as members of the Legislature pushed hard for changes to the Michigan Public School Employees Retirement System (MPSERS) while Gov. Rick Snyder (R-Michigan) pushed back against any changes that resulted in a structural deficit. Members of the school community (including MASA) worked hard against any changes to the system citing concerns for costs, employee attraction and an ever-changing policy, but ultimately Gov. Snyder acquiesced to legislative leaders and signaled his willingness to sign a deal.
The structure of the current retirement plan selection process for all new hires remains essentially unchanged. The individual has a set amount of time to choose between a defined contribution (DC) and defined benefit (DB) plan. However, if no selection is made within this time frame, the proposal would change the default selection to the DC plan, which is a change from the current default. (SB 401).
The New Defined Benefit (Hybrid) Plan
• Pension formula: 1.5% x Final Average Compensation x Years of Service **
• Regular retirement age of 60, however the legislation compels the ORS Board to evaluate mortality tables to increase the retirement age under certain circumstances.
• Graduated employee contribution rates as income rises, averaging 5%**
• No cost of living increases**
• Investment rate of return assumption equal to 6%
• Additional DC benefit with a 50% employer match capped at 1% of employee compensation**
• Requires a 50/50 cost share between the employee and employer, including the costs of future unfunded liabilities. Essentially, if the new DB plan is ever funded at less than 100%, a portion of the employee’s take home pay will be used to make up that difference. These liabilities would be amortized on a 10-year level-dollar schedule.
• Creates a trigger under which the new hybrid plan would be closed to new employees if the actuarial funded ratio falls below 85% for two consecutive years. This trigger would not apply if the ratio fell due to a failure of the employer or state to make a required contribution or if the state appropriates sufficient funds to being the ratio above 85%.
• This plan is open to new hires after February 1, 2018.
Costs for the new DB Plan
• ORS estimates the employer normal cost for new hybrid would be ~6.2% (an increase from the current hybrid’s ~3.1%).
• Employee contributions would increase from approximately 5% to 6.2%.
The New Defined Contribution (401k) Plan
• Employer contributes 4% of the employee’s salary into a 401(k) or 401(k)-style plan and matches the employee’s contributions dollar-for-dollar, up to another 3% of salary. The automatic 4% contribution would begin with the first pay period after October 1, 2017, and the increased employer match would begin on February 1, 2018.
• The employer’s matching 3% is reimbursed by the School Aid Fund.
• Participants would vest employer contributions into their DC plan based on the existing statutory schedule: 50% after 2 years, 75% after 3 years, and 100% after 4 years.
• This plan is the default option going forward.
• All employees who are currently in the DC plan will get moved into the new DC structure.
Costs for the New DC Plan
• Employers would see an increase in costs equal to 1% of payroll for participants in the old DC moving into the new DC.
• SAF is responsible for the matching contribution up to 3%.
Other Changes to MPSERS
•Establish a “floor” for employer’s contribution rates as a percentage of payroll, beginning with fiscal year 2018-19.
• Require a school district’s payroll on which the UAAL rate is applied to be adjusted by the change in the district’s current operating expenditures, and require that the adjusted payroll become the basis on which the UAAL contribution rate is determined.
•Eliminate the purchase of service credit (other than credit for active duty in the armed forces or the repayment of refunds) in the Basic and Member Investment Plans for employees hired prior to July 1, 2010, unless the purchase is initiated by September 29, 2017.
Senate Bill 401 has yet to be transmitted to Gov. Snyder for his approval. There appears to a break down between the governor’s office and the Speaker of the House as to what other parts of the “deal” that was made to pass this legislation are still left on the table. It’s assumed that Snyder will sign SB 401 when it gets to his desk, but it’s wise not to take anything for granted this session.
Peter Spadafore is MASA’s associate executive director for government relations. Contact him at email@example.com.