LANSING, Mich. (AP) — Republican lawmakers’ renewed push to do away with pensions for newly hired teachers will become a reality only if they can persuade a skeptical Gov. Rick Snyder, the accountant-turned-governor whose number crunching has left him hesitant about the upfront cost of transitioning to 401(k) plans for future school employees.
Legislation to close the state’s hybrid pension/401(k) system to new hires may be introduced in the coming week. The bills would come days after the House and Senate passed budget plans that leave between $272 million and $542 million uncommitted — money that GOP legislative leaders have signaled could be used as a down payment toward overhauling the Michigan Public School Employees Retirement System.
They say the state should “stop digging” and piling on more debt to provide a benefit that few private workers get. But such a move would bring upfront costs, a reason Snyder opposed past Senate attempts to close the system and made other changes instead.
One transition cost, which the nonpartisan Senate Fiscal Agency has likened to a “required” expense, stems from increased unfunded liabilities associated with lowering investment return assumptions. The pension plan’s portfolio would have to become more conservative because participants would age without new employees adding payroll contributions that could be invested for decades.
Another cost, which is seen as a “best practice” but would likely be too pricey, comes from accelerating payments for cash-flow reasons and to save money in the long run by investing more sooner.
Senate Majority Leader Arlan Meekhof said he had a “very preliminary” call with Snyder on Wednesday in which the governor was given “a bunch of new information” from independent, third-party analysts about the costs and mechanics of switching to 401(k)-only benefits. Senate Republicans, in their failed bid to end pensions late last session, felt that the state Office of Retirement Services had misled lawmakers about transition costs and assumptions.
Meekhof said Snyder recognizes that ORS officials “didn’t do a very good job.” Snyder spokeswoman Anna Heaton denied that, adding that he is open to continuing the discussion but will weigh how any proposal would impact the budget.
A nonpartisan legislative fiscal analysis of the 2016 bills estimated costs ranging from $1.6 billion to $3.8 billion in the first five years.
New state employees in Michigan have been in mandatory 401(k)-style plans since 1997. School employees hired since mid-2010 qualify for a combination of a lifetime pension after retirement and a 401(k) or 457 plan.
Snyder and lawmakers in 2012 forced existing school workers to pay more toward retirement or receive a smaller pension, eliminated cost-of-living adjustments for new hires, and ended their retiree health insurance and replaced it with extra contributions to their 401(k).
Making new school hires eligible solely for a 401(k) is “going to save the state money over the long term. But the key issue is just stopping the state from racking up further unfunded liabilities. There’s $29.1 billion in pension debt in the (legacy) system,” said James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, a conservative think tank in Midland.
The Coalition for Secure Retirement, a group of public-sector labor unions lobbying to protect teacher pensions, said legislators will be hard-pressed to persuade administration officials to close a fully funded hybrid system without spending at least $600 million in the first year.
“If you don’t do this right, it can blow up in your face,” spokesman Todd Tennis said.
He said MPSERS withstood two economic downturns in the last 15 years and pension systems are designed to last in the long run. Tennis credited Snyder’s moves such as prefunding health care liabilities and said pension funding was starting to trend upward last year, but a decision to adopt a more conservative rate of return — while reducing risk — will lead unfunded liabilities to go up immediately.
Tennis said there should be more focus on other reasons for higher debt such as the expansion of charter schools, whose employees are not in the pension system, and the privatization of school services.
But conservatives say the hybrid plan may become underfunded. They add that it is flawed because teachers must work 10 years to fully vest and younger millennials want the portability of a 401(k). Districts pay 37 percent of their payroll toward the retirement system, mostly to catch up on unfunded liabilities.
“Defined benefits have bankrupted large cities like Detroit and large employers like General Motors. I think they’re dinosaurs and we need to move to a more modern retirement system,” said Senate Appropriations Committee Chairman Dave Hildenbrand, a Lowell Republican.
Sen. Curtis Hertel Jr., an East Lansing Democrat, countered that Michigan has a teacher shortage that would be exacerbated by eliminating new educators’ pensions — which only one other state, Alaska, has done.
“To make any further cuts in their benefit programs while costing taxpayers hundreds of millions of dollars makes no sense to me,” Hertel said. “When you’re actually trying to recruit the best and brightest into our state, the best way to do that is actually to keep the same benefits that are standard other places. Teachers don’t work for large salary increases. The one promise you have is you have a future pension.”
