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A Closer Look at MPSERS Reform

Aaron Keel

By Aaron Keel, MASB Assistant Director of Government Relations

DashBoard, June 21, 2017

Last week, the full House and Senate passed reforms that will overhaul the MPSERS system by creating an entirely new 401k-style and hybrid plan.

In the House, House Bill 4647 passed 55-52, the minimum number needed to pass legislation through the chamber. Of the 52 no-votes, seven Republicans (Reps. Joe Bellino (R-Monroe), Gary Howell (R-Lapeer), Martin Howrylak (R-Troy), Mike McCready (R-Birmingham), Dave Pagel (R-Berrien Springs), Brett Roberts (R-Charlotte) and Jeff Yaroch (R-Richmond)) joined all of the Democrats in opposition.

In the Senate, Senate Bill 401 passed 21-17, one more than the minimum number of votes needed for passage. Six Republicans (Sens. Tom Casperson (R-Escanaba), Rick Jones (R-Grand Ledge), Mike Nofs (R-Battle Creek), Margaret O'Brien (R-Portage), Tory Rocca (R-Sterling Heights) and Dale Zorn (R-Ida)) joined the 11 Democrats in opposition. The legislation will create a new 401k-style plan that will include a 4% employer contribution and an additional match up to 3%. This will go into effect on Oct. 1, 2017, for all employees currently in the defined contribution plan. However, if a person hired on Feb. 1, 2018 does not make an election for either the hybrid or DC plan, the person will default to the DC plan.

While we heard promises that any proposal would not affect current employees, the legislation does prohibit current employees from purchasing retirement credit and does not allow retirement credit to be provided during parental leave. No other changes will affect employees currently enrolled in the hybrid system.

For employees hired on or after Feb. 1, 2018 who choose the new hybrid plan, the new option will include more risks for the employee. If the system becomes underfunded by any amount, there will be 50/50 sharing of costs between the employer and employee to make the system whole. We are especially concerned about this provision because there is no cap on the amount an individual might have to pay out-of-pocket through their paycheck if the plan becomes underfunded. Also, an individual in the hybrid plan has no control over the investments made by the state for the plan.

The new hybrid also allows the MPSERS board to change the retirement based on mortality information. This change would affect all employees in the new hybrid system. It would protect employees within five years of the retirement age, or up to eight if the board extends it the extra years. This makes a person’s retirement age a moving target. We are concerned these provisions in the new hybrid plan will make it even harder to attract and retain talent when employees will be putting their paychecks on the line under this new proposal.

The legislation also includes a trigger where, if the new hybrid system is funded at 85% or less for two consecutive years, the Legislature would have 12 months to fund it at 85% or it will close to any new hires. Any closure of the system brings back the transition costs we’ve been concerned about all along, except now we can’t calculate exactly what those costs will be since we can’t be certain when it will happen. But any closure of the system would come with significant costs.

The Senate Fiscal analysis of the plan shows an additional cost of more than $23 million in the first year and nearly $260 million over the first five years. Further, analysis shows the increased costs continue to grow each year, and Treasury testified to that as well. At the time of passage, there was no analysis beyond year five. And since passage, those numbers have changed and we now understand the 30-year employer cost to be more than $810 million with no guaranteed long-term cost savings.

In committee, the argument was made that costs to districts would be revenue neutral with the School Aid Fund paying for the increased normal cost under the new DC plan. In the new hybrid plan, however, normal costs will increase for the employer. There is an appropriation in the School Aid budget to cover this increased cost on the individual district but only for the first two years. Either way, it will diminish funds available to districts from the SAF.

We are disappointed the Legislature rushed through this plan that will impact the lives of thousands of school employees and potential employees across the state before a more thorough analysis could be performed. The Legislature and education community should have had time to better understand the long-term costs to districts and the state, and the potential transition costs should the plan close by reaching the 85% funding trigger.

We are also disappointed because, early on in this process, MASB along with other education groups were brought in to discuss the proposed framework for a deal with Gov. Rick Snyder. We left that meeting cautiously optimistic that changes could be made to make the system better for both employees and districts. Unfortunately, when we were brought back in for details, it was far from what we had first discussed. We could have supported making the current defined contribution plan more attractive and were open and willing to adjusting actuarial assumptions in the current hybrid plan, but believe that creating an entirely new hybrid plan is an expensive solution in search of a problem. Further, this plan does nothing to address the $29 billion debt for the legacy pension system.

Since the House and Senate passed identical bills and the agreement is supported by Gov. Snyder, State Treasurer Nick Khouri and the Office of Retirement Services, it is extremely unlikely that any changes will be made. The House concurred with Senate Bill 401 on Tuesday and we expect the Senate to send it to the Governor for his signature later this week. We will keep you updated on its progress, but in the meantime we have updated our policy brief for your quick reference.

While the final outcome is discouraging we thank all of you who took action and talked to your legislators over the last couple of weeks. Your efforts led to the close vote we saw, especially in the House.

We appreciate your advocacy!

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