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The Michigan House and Senate introduced two bills designed to replace the state’s hybrid Pension Plus plan with a 401(k) alternative: HB 4647 and SB 401. MASA is opposed to both bills.

The proposed legislation undermines all the progress that has been made to stabilize MPSERS, and will cost the state $1.8 billion over the next five years. The bills are both short-sighted and irresponsible, saddling the state with more debt down the road. Read on to learn more.

History of MPSERS Reform

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Anderson Economic Group: MPSERS Proposals will Sharply Increase Costs for State, Schools

Schools will get hit hard up front; state will see long-term costs rise

LANSING – The Michigan Association of School Administrators today released a report from the highly-respected Anderson Economic Group with key findings that show the MPSERS reforms proposed in the Michigan House and Senate will have dire financial consequences for the state of Michigan and for schools – increasing long-term costs for the state and immediately increasing pension costs for school districts.

“Too much work has gone into stabilizing MPSERS and paying down its unfunded liabilities, while also reducing costs for the state and for school districts,” said Chris Wigent, Executive Director of the Michigan Association of School Administrators. “These proposals will undo all the progress that has been made and kick the can down the road, guaranteeing that a future legislature will have to fix the problems this will create.”

The AEG report examined three proposed reforms from last session: SB 102 of 2015, which would close the MPSERS hybrid plan to all future hires; and SB 1177 and 1178 of 2016, which would change the amortization schedule for paying off MPSERS’s unfunded liability from legacy plans.

Jason Horowitz, Senior Consultant with the Anderson Economic Group, states in the report: “Closing the hybrid plan and putting all new employees into a defined contribution plan would not reduce the unfunded liability, and would result in significant costs for school districts.”

The report finds that additional costs for school districts would range from $223 million to $813 million annually by 2048, money that won’t find its way into the classroom.

The report also states that extending the amortization period would result in higher long-term costs for the state, and that school districts would see much higher long-term costs – over $100 billion more than districts are projected to pay under the current amortization schedule.

Furthermore, the AEG report found the three sets of MPSERS reforms put in place in 2008, 2010 and 2012 that lowered employee benefits and increased employee contributions are working to set the state on solid fiscal footing. Governor Rick Snyder, who sought the 2012 reforms, has signaled that he is not interested in enacting more changes to MPSERS.

“This report confirms what we already know – closing MPSERS wastes billions of dollars with no return,” Wigent said. “The MPSERS reforms are working, and the legislature should focus its attention on ensuring our schools have the funding they need to provide every child in this state with a world-class education. Any proposal to close out MPSERS is a fatally flawed solution in search of a problem and should be dead on arrival.”

The full report can be found here.

HB 4647 and SB 401 mirror legislation that stalled in the state legislature late last year because they lacked support among lawmakers. The bills would eliminate MPSERS and replace the successful Pension Plus hybrid plan with a costly 401(k) style alternative for all new employees who start after Sept. 30, 2017.

Details of the bills:

· New employees who start after Sept. 30, 2017, would be placed into the Tier 2 401(k) plan. These employees – including employees who are currently in the 401(k) system – would have a plan based on the current state employee plan, which would have a base employer contribution of 4%, plus an additional employer match of up to 3%.

· Employer contributions would be paid by an appropriation from the School Aid Fund.

· Existing unfunded accrued liability associated with the old pension plan would be amortized over the next 21 years, and any unfunded accrued liability associated with changes made by this legislation would be amortized over the next 40 years.

· Require MPSERS to offer Lifetime Annuity Options.

· Require the normal cost contribution rate to not decrease beginning in FY 2020.

· Require the unfunded actuarial accrued liability contribution rate to not decrease until the liability is paid off.

· Beginning in 2020 and every four years thereafter, require ORS and the State Treasurer to submit a report regarding the rate of return on MPSERS investments, both actual and forecasted and on the assumptions being used in the course of managing the funds.

Legislation implementing a similar 401(k) style system was halted in December 2016, with policy experts, education groups, the Office of Retirement Services and Governor Rick Snyder all speaking out in favor of the current Hybrid Plan. The new MPSERS reform legislation contains no significant changes from the defunct 2016 proposal. Like their predecessors, these bills would burden the state unnecessarily with additional costs, all while adding 20 years of unfunded liability payments to the retirement system.

MPSERS – the Michigan Public School Employees Retirement System – provides retirement services and benefits for more than 200,000 retirees and beneficiaries through both the Hybrid “Pension Plus” Plan and a Defined Contribution program.

MPSERS was established in 1980 through the Public School Employees Retirement Act (PA 300), and has undergone many revisions over the years. Most recently, reforms made in 2010 strengthened the financial health of MPSERS by paying down debt and reducing future obligations.

In short, there is no problem to fix. However, this was not always the case.

There was a time when MPSERS was drowning in unfunded liability. At that point, there was no question that the system was broken and needed to be overhauled.

In 2010, the state created the Pension Plus hybrid plan, which is 100% funded and carries far less risk than the MPSERS legacy plans. In 2012, additional reforms sought by Governor Rick Snyder were put in place that eliminated $12 billion in debt and stabilized the system for future use.

MASA opposes any effort to eliminate MSPERS and the Pension Plus hybrid plan.

Eliminating MPSERS is an irresponsible and shortsighted plan that will undermine the work that went into stabilizing they system. It would dramatically increase the financial burden on tax payers, schools and the state, while producing a system that entirely fails to reduce the unfunded liability of the state’s legacy retirement plans.

The reforms of 2010 and 2012, including the creation of the Hybrid Plan itself, went a long way towards solving the state’s unfunded liability crisis. The new plans are the result of a great deal of hard work put in by the legislature, MASA, and countless other parties, and have led to a strong retirement system for both retirees and employees.

Simply put, the current plan works.

The Pension Plus plan, more commonly known as the Hybrid Plan, includes both a defined benefit component as well as a defined contribution 401(k)-style component. The Hybrid Plan was introduced in 2010 in response to the rising UAAL, allowing both employees and employers to share the risks associated with retirement investments. All new employees hired after July 1, 2010, are placed into the Hybrid Plan (unless they opt out and choose to use the optional 401(k) or 457 plans that were created in 2012).

Unlike the outmoded Basic Plan and MIP, the Hybrid Plan has a total zero unfunded liability. Since its inception, the plan has had a 100% fund balance (compared to the roughly 60.5% funded legacy direct benefit programs), often exceeding 100% and allowing excess returns to be used to pay down the existing liability from the older plans. In fact, without the Hybrid Plan to offset the costs of legacy liability, the state would face $550 million in additional liability fees in the first year alone.

As new employees enter into the Hybrid Plan, they begin to accumulate retirement benefits of their own. According to the Office of Retirement Services (ORS) within the Michigan Department of Technology, Management, and Budget, these new benefits (and subsequent employee contribution into the system) are of vital importance to state’s ability to pay down the $27 billion existing UAAL.

ORS estimates that any proposal eliminating the Hybrid Plan as an option for new school employees in favor of a defined contribution plan would increase costs to the state in three ways:

  1. Initially, such a closure would cause the total amount of unfunded liability to drastically increase, given that most of the benefits received by retirees and beneficiaries are derived from new contributions into the Hybrid Plan. If the plan was closed to new members, contributions into MPSERS would need to increase in order to preserve the fund’s principal over the long term.
  2. In much the same way, the second increase in costs would come from a need to greatly accelerate UAAL payments. Again, without the asset pools of new members to draw on to pay for the inherited liabilities of the older plans, the UAAL would need to be funded at an increased rate.
  3. Finally, in order to provide “adequate” benefits through a defined contribution alternative, normal operating costs would be 67% higher than the Hybrid Plan. These higher normal costs are well documented, and not limited to Michigan. A study by the National institute on Retirement Security found that the direct benefit plans were safer and produced greater returns than defined contribution models, with the latter costing 48% more nationally.

All told, the three major cost increases associated with eliminating MPSERS and the Hybrid Plan would saddle Michigan with over $20 billion in additional fees over the next 30 years.

Talking Points

  • Those reforms, sought by Gov. Snyder, strengthened the financial health of the system by paying down debt and reducing future obligations.
  • The Pension Plus plan (hybrid plan) created in 2010 for school employees is 100% funded and carries less risk than the MPSERS Legacy plans.
  • The hybrid plan is financially manageable with a cost to employers of just over 4 percent of payroll.
  • Replacing the hybrid plan with a defined contribution plan – whether it’s modeled after the state employee plan or other similar proposals – will cost more, and begs the question of where the money will come from to pay for it.
  • Gov. Snyder has defended the hybrid system calling it, “A good program.” He signaled he has no “intention to … talk about changing it at this point,” and pointed to the major upfront costs associated with a change.
  • Closing MPSERS comes with a high price tag and does not eliminate one dime of existing liability. There will be zero savings over the next 30 years.
  • Costs associated with closing the system are estimated to be $550 million in the first year alone, and an additional $2.5 billion over the next five years.
  • Closing the system would result in a 67% increase in the money paid by school districts to fund retirement. This will result in higher costs for schools in the short term, and will immediately impact kids in the classroom.
  • Failing to address these costs would hearken back to the days of accounting gimmicks that led to Michigan’s structural deficit. We cannot afford to move backwards.
  • A lot of hard work and smart planning went into reforming MPSERS, which has resulted in a strong retirement system for current employees and retirees. Closing MPSERS will destabilize the system and harm our schools as we work to make Michigan a Top 10 in 10 state.
  • Short-sighted action on MPSERS will make it harder to attract talent to the teaching profession and further exacerbate the teacher shortage in Michigan.

Sources

  • Impacts of Closing the Hybrid Plan, ORS (August, 2016)
  • Close MPSERS Hybrid Plan and Replace with Defined Contribution, House Fiscal Agency (May 24, 2017)
  • Michigan Public School Employees’ Retirement System (MPSERS), House Fiscal Agency (October, 2016)
  • A Look at the History of MPSERS…, M-Live (April, 2012)