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Deal on MPSERS restructuring?

UPDATE: 14 June. The state House of Representatives today passed a revised version of SB 1040, a bill that aims to restructure the public school employee retirement system. The changes in this compromise bill are less dramatic than those proposed in the Senate version, but they still represent a substantial change in retirement benefits for future employees and increased costs for current employees. While some financial pressure is being taken off local school districts, the added costs of the transition will still come out of the School Aid Fund. Absent other measures to increase revenues to the SAF, this bill will not remove the burden on the education budget in the near term.

However, the state Senate, which had approved a version forcing all new employees into a defined contribution plan, adjourned for their summer break today without voting on the bill. They resume session on 18 July.

As with earlier versions, current public school employees would see substantially higher costs in the form of added contributions to the retirement system. While the overall expected contribution from local school districts would remain frozen at today’s levels, the estimated $150 million in additional funding needed for next year would still come from the School Aid Fund. New employees would see the largest changes: new hires would not be offered retirement health care at all, and would (for the moment) be enrolled in the current hybrid pension-defined contribution plan. The matching terms for the DC plans is less than overwhelming, with the legislation offering a 1-to-2 match up to relatively low percentages of salary. Finally, retirees now and in the future would see increases in their expected contribution to health coverage, though current retirees age 65 and over would only pay 10% of those costs rather than 20%

One of the notable changes made by the bill is to broaden the base of spending which is used to calculate pension contributions. In an effort to cover "stranded costs" – retirement system liabilities caused by shifting school employees to outside contractors – the bill would require districts to pay 11.9% of "current operating expenditures" into the pension plan. This would be the equivalent of the current 24.4% of payroll districts must currently pay in, but it would avoid the problem with reduced contributions as school functions are privatized. This provision would not apply to charter schools, which typically contract out for nearly all services, or to universities or community colleges (which typically have only a small share of their staff covered by MPSERS.

The table below summarizes the key provisions of the House substitute for the bill, but without amendments added on the floor prior to the vote today.

This breakdown is based on the House Fiscal Agency analysis of the H-3 substitute for SB 1040 that passed today (14 June). "The HFA analysis can be found here. ":http://www.legislature.mi.gov/documents/2011-2012/billanalysis/House/pdf...HLA-1040-8.pdf

For reference, pension benefits for those in the traditional pension plan (hired before 2010) are calculated by the following formula: final average compensation ($) x years of service x 1.5%. So, for example, a school employee with 30 years of service at retirement would receive 45% of their final average salary (as defined in law) as their annual pension benefit. The 1.5% "multiplier" has been temporarily increased from time to time as an incentive for early retirement.

Neither employer nor employee contributions to the traditional pension plan are saved in individual accounts; they simply go to support the functioning of the system. The "Unfunded Accrued Liability" is the amount needed to cover future benefits that is not available in the system currently – either because of reduced contributions into the system (from fewer employees), or because of major shortfalls in the investment returns generated by the pension plan (a major factor right now).

  under current law under SB 1040 (H-3)
FY 2013 local employer contribution rate 27.37% of payroll 24.46% of payroll
Long-term unfunded liability – pension $17.6 billion $16 billion
Long-term unfunded liability – health care 27.6 billion 13.6 billion
Long-term unfunded liability – Total $45.2 billion $29.6 billion
Added state funding needed for FY 2013 $0 $150 million


Provisions in SB 1040 (H-3) Current law Savings or cost in year 1 Impact on Unfunded Accrued Liability (UAL)

Employees hired before July 2010 (those in the "Basic" or "MIP" plan) would have the following choices:

1) To continue earning pension credit with the current 1.5% multiplier, Basic plan members (hired before 1990) would have to contribute 4% of their salary, and Member Investment Plan members would contribute 7%

2) Continue with existing contribution rates, but receive a reduced 1.25% multiplier on future years of service

3) Freeze their pension and move to a defined contribution system with a 4% employer contribution for all future service.

Employees in the Basic plan currently do not make contributions to the pension system.

MIP members contribute a graduated percentage based on salary with a 6.4% top rate.
Reduces district contribution rate by 2.07% of payroll.

Increases employee contributions by $265 million in the first year.
Reduces UAL by $1.56 billion.
For new hires, would add a defined-contribution-only (401k-style) plan along with hybrid plan. The DC plan would qualify for 1-to-2 employer matches up to a maximum employee contribution of 6%. All new hires since 2010 are in a hybrid plan, with a 6.4% contribution for the pension component and a 1-to-2 employer match into a retirement account (maximum 1% match for 2% employee contribution). Short-term costs of the DC-only plan are slightly less than the hybrid plan. Savings depend on how many chose DC over hybrid. Employees choosing DC plan would never create unfunded liabilities.
Increase the share of retirement health care premiums paid by current and future retirees to 20% (or 10% for current retirees 65 or over in January 2013). Retirees currently pay up to 10% of health insurance premiums depending on age and dependents. Reduces district contribution rate by 0.75% of payroll.

Increases costs for current retirees by $47 million in the first year.
Reduces UAL by $1.6 billion
New hires would not receive retirement health care benefits; instead, they would get an additional matching contribution to their account of up to 2%. Employees receive between 30% and 100% of their retirement health insurance costs. Small cost increased from required match; will grow over time. Avoids added UAL for new employees.
Current employees would continue to pay an additional 3% for retirement health; this money would be used to pre-fund retirement health benefits. To avoid legal challenges, the individual contributions would be guaranteed and would be refunded if the employee does not qualify for retirement health benefits by age 60. Current employees pay 3% of their compensation as a straight contribution to current retiree health benefits. This provision has been challenged in court (because eventual benefits are not guaranteed). See below Reduces UAL by $5.5 billion.
Begin pre-funding retiree health care (for current employees) using 3% employee contribution plus district and state contributions Retiree health care is currently funded on a pay-as-you-go basis, where current district contributions pay for current retiree care. Increases district and state costs by 3.55% of payroll (a further 2.58% is covered by the employee contribution).

Long term savings as pre-funding dollars are invested and used to pay for future benefits.
Reduces UAL by 5.3 billion
Cap district contribution rates for UAL only at the current level and shifts responsibility for future increases to the School Aid Fund Local districts have had to pay all retirement costs out of their operational funding since Proposal A took effect in 1995. Caps district UAL rate at the equivalent of 20.96% (see below). "Normal rate" contribution for pensions is 3.5%, totaling 24.46% (the current district rate).

State costs would be $150 million in the first year and grow as the cost of pre-funding grows (because new employees are only in hybrid or not in pension plan at all).
To account for "stranded" unfunded liability costs (where fewer contributions to the system are made as more functions get contracted out), contributions for the UAL portion of the pension cost would be calculated over the district’s entire "current operating expenditures" rather than just MPSERS payroll. Currently, all pension costs are paid based on a percentage of payroll. As more functions go to contract employees, fewer contributions are made to the pension system. Beginning in 2013-14, for local school districts only, employers will pay 3.5% of payroll for "normal" pension costs and 11.9% of operating expenditures to reduce the unfunded liability. Charter schools, ISD, libraries, and other agencies with MPSERS employees would continue with the current system.
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