To address Michigan’s chronically deficit-laden pension system, Michigan Senate Republicans are reviving an effort to switch new public school employees to 401(k)-style retirement plans.
Senate Bill 1040 would close the current system to new employees and implement a defined-contribution plan to pay employees’ retirement benefits as they earn them, instead of promising a defined benefit that pays out regardless of how much the fund contains.
The switch met resistance in the House. The House bill would have preserved a “hybrid” pension plan combining elements of both proposals while capping school districts’ contributions. Senate Republicans rejected the House version July 17. Lawmakers will reconsider the subject during a scattering of fall session days.
The House bill doesn’t fully address the state’s $45 billion unfunded liability, Senate leaders said.
“This is the most predictable crisis that we have,” said state Sen. Phil Pavlov (R-St. Clair), the Senate Education Committee chairman. He has been working on legislation that can pass both chambers and avoids the “exploding debt” created by a defined-benefit system.
The current system has put off taxpayer-sponsored pension payments until retirees begin drawing them out rather than prefunding it decades ahead as most private plans do.
“The idea is we’re setting aside taxes today to make the payments in the future,” explained Gary Wolfram, a Michigan economist and Hillsdale College professor. “But at some point enough teachers retire that the problem comes home to roost.”
The state made a similar switch for its nonpublic school employees in 1997. It saved taxpayers $167 million in annual pension costs and $2.3 billion to $4.3 billion more in unfunded liabilities, wrote James Hohman in a report for the Mackinac Center for Public Policy.
By capping at 24 percent the amount school districts contribute, a priority in both chambers, districts are estimated to save up to $300 million in contribution costs this school year.
“That’s how much we’ve been robbing classrooms,” Pavlov said.
Transition Cost Concerns
Some lawmakers have voiced objections over transition costs. Hohman said transition costs are “a convenient excuse” and shouldn’t prevent closing the system to address its ballooning costs.
“Only the Senate plan fixes the problems of the pension system. The House plan doubles down on the current defined-benefit system,” he said.
Gov. Rick Snyder (R) supports the House version but urges capping contributions and prefunding healthcare to contain costs.
The current situation “is strangling our school districts,” a Snyder spokesman said.
“The last thing we should do is ‘reform’ the system in such a way that we accrue future liabilities,” said Michael Van Beek, Mackinac’s director of education policy studies.
Image by Bradley Gordon.