MPSERS REFORM (Senate Bill 1040) FREQUENTLY ASKED QUESTIONS

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1 MPSERS REFORM (Senate Bill 1040) FREQUENTLY ASKED QUESTIONS What is MPSERS? MPSERS is the Michigan Public School Employees Retirement System, a statewide public employee defined benefit plan serving members from 551 K-12 districts, 70 public school academies, 7 universities, 28 community colleges, 57 intermediate school districts, and 11 libraries. As of September 30, 2010, the system serves 242,568 active members and 187,722 retirees and beneficiaries. The net assets of the Michigan Public School Employees Retirement System, were valued at $36.9 billion as of September 30, 2010, and in fiscal year 2010, the system paid retirement pensions totaling $3.5 billion. The system also provides retirees and dependents with comprehensive health, dental, and vision benefits at a cost of $705.2 million. Why does the state need to consider changes to MPSERS? MPSERS currently has far less money than what it would need to pay out promised benefits. This deficit, called an unfunded actuarially accrued liability (UAAL), was more than $45 billion as of September 30, The pension portion of the unfunded liability was $17.6 billion and the health care portion was $27.6 billion. Without changes, the system is not sustainable. How did the situation get so bad? The primary reason for the unfunded pension liability is that financial investments have performed so poorly over the past 10 years. On the health care side, the liability reflects the fact that the state does not pre-fund health care benefits for retirees. How would Senate Bill 1040 affect pension benefits? Senate Bill 1040 (Kahn) allows current school employees not in the hybrid plan to choose one of the following going forward: An increased contribution rate (to 5% for Basic or 8% for MIP), to retain the current multiplier of 1.5% for future years of service in calculating pensions. Same contributions, but a reduced multiplier of 1.25% for future years of service. Freezing benefits under the defined benefit system and going to defined contribution, with a 4% employer contribution to a 401(k). Employees hired after July 1, 2010 would remain in the hybrid plan, which includes both a defined benefit and a 401(k), at current contribution levels.

2 Would there be any changes to how the system calculates compensation for pensions? Yes. SB 1040 caps the salary amount used to calculate pension benefits for new employees at $100,000, adjusted annually for inflation. In addition, the bill excludes merit pay, tax sheltered annuities, and longevity pay from any future compensation after July 1, If merit pay, tax sheltered annuities, and longevity pay do not count toward compensation for pensions, will employers still make contributions based on that part of their payroll? This appears to be the case, yes. Employers would continue to make contributions on other forms of pay, although that would not count toward compensation for pensions. If an employee opts to accept a lower multiplier for future service instead of increasing contributions, will their final average compensation be applied equally across all their service, or will it somehow vary based on what multiplier they had at the time? An employee s Final Average Compensation (FAC) will not vary based on the multiplier or how much service was earned under each plan. Instead, one singular FAC period will be calculated (the highest) and applied to the respective multipliers and years of service. For current employees, does the prior earnings retain the 1.5% multiplier and earnings following July 1, 2012 get the 1.25% multiplier vested or non-vested? Yes. Article 9, section 24 of the Michigan Constitution states that accrued pension benefits are a contractual obligation and the state cannot diminish them in any way, so any prior service would retain the 1.5% multiplier. Gary Olson, former Senate Fiscal Agency director, even testified that the constitution might prevent the state from lowering the multiplier even for future service for current employees, but the courts will likely rule on that question if legislators go ahead with the change. Would the 8% contribution rate for MIP members be in addition to what is currently paid? No. The varying contribution rates based on enrollment date would only apply to service before October 1, After that dates, all MIP members would contribute 8% and all basic members would contribute 5% applied to all levels of salary. How would SB 1040 affect purchased service credit? Under the bill, employees could only count toward their pension service credit purchased before October 1, 2012 or service credit purchased under a payment plan that was in effect as of September 30, It is important to note that an employee does not have to have their entire service contract paid for by October 1, 2012, but a service contract must be in effect at that time.

3 If an employee opts to freeze pension benefits and move into a 401(k), will future service still count toward vesting requirements? Yes, future service would still count toward vesting requirements. Will the 401(k) be outside MPSERS? Will colleges need to set up their own plan? The 401(k) would be separate from MPSERS, but like the 401(k) system state employees have had access to since 1997, the state would set up the system for all employees who would otherwise participate in MPSERS. When would current employees have to decide how to handle their future retirement benefits? Employees would have a window from July 2, 2012 until August 31, 2012 to decide whether to stay in the defined benefit system or to use a 401(k) going forward. If an employee did not actively elect to stay in the defined benefit system, under SB 1040 he or she would automatically cease accruing service credit for a pension and would move into the defined contribution plan. Would this affect a college s ability to have eligible employees participate in an optional retirement program (ORP)? Will part time employees be able to opt into ORP? No. That option and all of its provisions are in a separate act, which SB 1040 cannot change. A second bill could move at the same time if legislators chose to change the ORP, but that is not part of the proposal at this time. Will these changes affect the contribution rate employers, including colleges, pay for MPSERS employees? Yes. The Senate Fiscal Agency analysis breaks down, section by section, how much each change is projected to change contribution rates. Although most of the changes result in savings, some changes could actually increase the contribution rate to the extent that employees leave MPSERS or compensation otherwise decreases. Of course, all these changes work together so changing any one part of SB 1040 would require Senate Fiscal to work together with the Office of Retirement Services to determine the new fiscal impact. What would be the immediate cash impact to the plan if a large group of current employees decides to retire in the short term? That decision, which seems likely, would increase employer contribution rates, both because there would be more retirees to support and because the compensation of newly hired employees to replace them would likely be lower. Any impact from a large influx of new retirees because of SB 1040 is not reflected in any of the fiscal impact statements prepared to date.

4 How would Senate Bill 1040 affect retiree health care? Under SB 1040, MPSERS would pay no more than 80% of the retiree health care premium, both for current retirees and for current employees hired before July 1, The bill also applies a graded premium retiree subsidy for all active employees, which would provide 30% coverage after 10 years of service with an additional 3% subsidy for each additional year of service. All future retirees would have to reach age 60 before becoming eligible to receive subsidized retiree health care benefits. Could an employee take their pension before age 60, but not draw health care benefits until they are eligible at age 60? Yes, SB 1040 would allow an employee to do that. SB 1040 does not make any changes to pension eligibility, only to retiree health care eligibility. Could an employee who retires before age 60 pay the full premium to participate in the retiree health care plan until he or she reaches age 60? Yes. Current law would remain in effect that allows a retiree excluded from health care subsidy payments to participate in the benefits at his or her own cost. Would new employees continue to be eligible for retiree health care? No. SB 1040 creates a retiree 401(k) account for new employees, who would have no retirement health care premium subsidy. Employees could contribute up to 2% of their salary to the account and earn an employer match. Those accounts would be invested according to an employee s choices just like other 401(k) benefits, and would increase or decrease in value based on investment market fluctuations. Would these changes affect to former MPSERS members who are already retired? Although there was some question about whether Senate Bill 1040 as introduced would impose new limitations on existing retirees, subcommittee members made it quite clear that their intent was to only change the health care subsidy from 90% to 80% for existing retirees, and impose no further changes. Would SB 1040 affect the 3% current health care contribution? No, SB 1040 maintains the 3% employee contribution for health care for current employees. What if the courts rule that the 3% health care contribution is unconstitutional? If the courts rule against the 3% health care contribution, it would cease but the other changes in the bill would still go forward. Since employers are also currently contributing the equivalent of 3% toward retiree health because employee contributions are in escrow, if the courts rule against the 3% there would be no change in employer contributions. However, if the courts find in favor of the 3%, then the employer contribution rate would decrease 3 percentage points.

5 If the major and growing deficit is related to an unrealized expectation in investments in the pension plan, is there any consideration to a more relevant investment policy. Historically, the state has assumed that assets set aside for pension investments will earn an average return of 8%. While this assumption proves accurate, and even conservative, over many decades, more recently the state has failed to achieve these returns, leading to the existing UAAL on the pension side. For employees hired on or after July 1, 2010, the state now assumes a return of only 7%. Unfortunately, while assuming a lower rate of return might be safer and more accurate for the short term, it would also increase the contributions required from employers to make up that shortfall. In a highly unionized environment, is there any consideration that the loss in benefits would be bargained back in the short term? That is certainly a possibility. However, it is not clear whether any savings would go directly to employers or might go instead to make up shortfalls in the pension system itself.