Senate acts on teacher retirement benefits

*The Republican majority in the Senate passed changes in the state teacher retirement system today, the first plank of their "reform" platform to emerge from the chamber.* Senate Republicans have insisted on significant changes in public expenses, many of which focus on public school teacher retirement and health benefits, as the price of allowing (and implicitly supporting) a vote to increase taxes for the next fiscal year (see related story). The measures, "SB 546":http://legislature.mi.gov/doc.aspx?2007-SB-0546 and "SB 547":http://legislature.mi.gov/doc.aspx?2007-SB-0547, would increase employee contributions into the pension system, require retirees to pay a portion of their health benefits, and tighten eligibility for full retirement benefits. The measures passed on party-line votes. Critics of the plans point out that the main factor driving pension costs is the cost of health care in general, and these provisions do nothing to change that. Moreover, benefits have often been used to make up for modest salaries for teachers, critics say, and cutting these benefits will make it even harder to attract and retain the best teachers. The state-run retirement system, the Public School Employees Retirement System (MPSERS), has come under pressure in recent years as the cost of health care has increased rapidly, the number of beneficiaries has grown while the number of active - contributing - employees has stagnated, and stock market volatility has at times undercut the value of the system's assets. While the pension portion of benefits is pre-funded - meaning that current benefits are paid from contributions invested in earlier years - health benefits are funded on a "pay-as-you-go" basis. That is, health benefits for current retirees are paid from current employee contributions. Health benefits were a small portion of the total when the system was created, but as health care costs increased for the economy as a whole, the cost of retiree health benefits has come to rival the costs of pension payments. Several studies, including "one by the non-partisan Citizens Research Council":http://www.crcmich.org/PUBLICAT/2000s/2004/rpt337.pdf, predict that the cost of health benefits will overtake pension costs within a few years. MPSERS is funded by employee contributions and payments from school systems; in the last fiscal year, districts were required to contribute an amount equal to just under 18% of their gross payroll into the system. School districts make these payments using a portion of the "foundation allowance" allocated to them by the Legislature, so that increasing retirement costs put direct pressure on current spending for school operations. The measures as passed by the Senate make changes to the terms of the system for employees who first join the system starting July 1 of next year. Those employees would have to make larger contributions while working (6.4% for salaries over $15,000, instead of 4.3%); pay 10% of retirement health costs (currently fully covered for the retiree, 90% for dependents); wait until age 60 or have 30 years of service credit for health benefits to kick in; and receive prorated benefits if they have less than 30 years of service at retirement (current retirees can receive full benefits with 10 years of service). The bills would also place tighter restrictions on when school employees could purchase service credit to receive benefits under the system. While the bills do not make a much ballyhooed switch from a "defined benefit" to a "defined contribution" plan, the Senate Fiscal Agency estimates the changes would save schools statewide over $7 million in the first year, and an equivalent amount on top of that each year thereafter as new employees came in under the revised terms and made higher contributions. The much larger anticipated cost savings would not emerge for at least 10 years, when retirees covered by the revised rules began to draw benefits.