The state of Michigan manages two major statewide defined-benefit pension plans.[*] The largest plan provides benefits for public school employees through the Michigan Public School Employees’ Retirement System, known as “MPSERS.” The second defined-benefit plan is provided through the Michigan State Employees’ Retirement System, which covers employees of state government and is known as “MSERS.” The MSERS defined-benefit plan was closed to state employees hired after March 1997; these employees were enrolled in MSERS’ new defined-contribution plan.[†]
Separate and distinct plans also exist providing other post-employment benefits, commonly known as “OPEB,” to MPSERS and MSERS participants. These benefits include employer-subsidized retiree medical, dental, vision and hearing insurance. In general, MPSERS and MSERS pensions are payable to eligible members and their beneficiaries, while OPEB provide coverage to qualifying plan members and their dependents.
This paper reviews MPSERS and MSERS pension and retiree medical benefits and confirms many of the published concerns related to the level of benefits provided and the associated fiscal challenges facing Michigan taxpayers in both the short and long term. The paper does not discuss retiree benefits for state employees not enrolled in MSERS or for employees of Michigan’s local governments, though these retirement benefits may raise similar concerns.[‡]
Similar to pensions, these MPSERS and MSERS OPEB plans have significant unfunded liabilities, which will be described in this paper.[§] (In the context of retirement plans, “liabilities” represent money owed to employees under current law upon their retirement, and “unfunded liabilities” are the amount by which the MPSERS or MSERS liabilities incurred to date exceed MPSERS or MSERS assets — i.e., the money the plans have set aside to meet current and future liabilities.)
As of Sept. 30, 2009 (the most recent data available), the unfunded liability of MPSERS and MSERS pensions combined was $15.1 billion, while the OPEB unfunded liability combined was in the range of $24.6 billion to $40.2 billion, depending upon the methodology used to compute the liability.[¶]
Despite recent legislative revisions, such as state Public Act 75 of 2010 and Public Act 185 of 2010, which affect MPSERS and MSERS pension and retiree medical benefits, it remains highly unlikely these programs will achieve a reasonable long-term cost structure. Specifically, it is highly unlikely that the plans will be “current,” so that school districts and the state[**] will be able to set aside sufficient money at regular intervals to ensure that employees’ benefits are funded as they are earned and in the aggregate are “paid up” by the time employees retire. It is also unlikely the plans will be affordable, so that the annual pension costs are between 5 percent and 7 percent of employee compensation — a common percentage among private-sector plans, and a cost achieved by MSERS’ defined-contribution plan, which has an employer contribution ranging from 4 percent to 7 percent of employee salary. And finally, it is also unlikely that the plans’ costs will be predictable, so that the state and school districts are able to project with reasonable accuracy what the annual payments to MSERS and MPSERS will be during the coming years.
Public Act 75 created a slightly reduced defined-benefit plan for new public school hires while establishing a new defined-contribution plan. Under the defined-contribution plan, an employee can contribute up to 2 percent of his or her salary to a personal retirement account. The employer then adds up to 1 percent of the employee’s salary to the employee’s account, so that the employer matches exactly half of the employee’s contribution.[††]
A prominent feature of Public Act 75 created an early-retirement incentive, which was accepted by 17,063, or approximately 31 percent, of the eligible employees.[‡‡] The most significant provision involved requiring public school employees to make a contribution of 3 percent of their pay to a health care trust fund to help defray employer costs for MPSERS retiree health care benefits. This particular provision is currently being challenged in court by several public school employees. A court order has temporarily placed collection of these funds into an escrow account pending resolution of this lawsuit.
Based upon a June 28, 2010, legislative analysis developed by the House Fiscal Agency, this new 3 percent employee contribution would represent a $3.5 billion savings over a 10-year period.
Of note, the Legislature recently passed Public Act 185 of 2010, a set of MSERS revisions similar to the MPSERS revisions in Public Act 75. The act offers an early-retirement incentive to 12,450 state employees, according to House Fiscal Agency estimates.[§§] The act also reduces by up to 11 percent the state subsidies for retiree health care benefits for MSERS members hired after April 1, 2010.
A third provision of Public Act 185 requires MSERS active members to contribute 3 percent of their compensation to a trust fund to help reduce employer costs for MSERS retiree health care benefits, but unlike Public Act 75, Public Act 185 requires these payments only through fiscal 2013 — a total of approximately three years.[***] The House Fiscal Agency estimates the state will save $239.2 million during the three years of these contributions. As of this writing, no legal challenge has been made against this provision.
[*] In defined-benefit plans, the employer assumes the responsibility of annually investing employer and employee pension contributions in amounts sufficient to finance a projected annual retirement income or projected insurance premiums for such items as retiree medical, dental and vision insurance. The projected benefits are generally set by a formula.
[†] In a defined-contribution plan, the employee and/or employer make ongoing contributions to a tax-favored account. These are invested, and they accumulate for the benefit of the individual at retirement. Generally, the investment decisions and the associated investment risks are the responsibility of the individual. Upon retirement, the employee can withdraw the account balance as either a lump sum or an annuity, according to the provisions of the plan. Michigan state employees who began work after March 31, 1997, are part of a defined-contribution pension program; see Public Act 487 of 1996, effective March 31, 1997. These employees are still part of MSERS and receive differing degrees of retiree health care benefits.
[‡] There are also three smaller plans managed by the state: the State Police Retirement System, the Judges Retirement System and the Legislative Retirement System. Local governments may adopt their own retirement plans, but the Municipal Employees’ Retirement System, which is managed by an independent board, offers pension benefits to local governments and governmental organizations, and 692 of these governmental units participate in the system voluntarily. See “The Report of the Sixty-Third Annual Actuarial Valuation as of December 31, 2008 and 50-Year Actuarial Projection Covering Participating Municipalities in the Municipal Employees’ Retirement System of Michigan” (Municipal Employees’ Retirement System of Michigan, 2009), 3, http://www.mersofmich.com/formfiles/annual_actuarial_report2008.pdf (accessed Sept. 5, 2010); “About MERS” (Municipal Employees’ Retirement System, 2010), http://www.mersofmich.com/index.php?option=com_content&task=view&id=42&Itemid=176 (accessed Sept. 5, 2010).
[§] As noted later in the text, however, the liabilities for MPSERS and MSERS retiree health benefits may be subject to unilateral modification by the Michigan Legislature in ways that MPSERS and MSERS pension liabilities are not.
[¶] The computed liability depends on the percentage growth rate assumed in the calculation; the higher liability estimates are based on a 4 percent annual investment return assumption, while the lower liability estimates are based on an 8 percent annual rate. Computations based on “Michigan Public School Employees’ Retirement System 2009 Annual Actuarial Valuation Report” (Gabriel Roeder Smith & Company, 2010), B-1; “Michigan State Employees’ Retirement System 2009 Annual Actuarial Valuation Report” (Gabriel Roeder Smith & Company, 2010), B-1; “Michigan Public School Employees’ Retiree Health Benefits 2009 Annual Actuarial Valuation Report” (Gabriel Roeder Smith & Company, 2010), A-2; “Michigan State Employees’ Retiree Health Benefits 2009 Annual Actuarial Valuation Report” (Gabriel Roeder Smith & Company, 2010), A-2.
[**] For MPSERS, the state Legislature and the MPSERS board, which is composed of state appointees, effectively design the plan and instruct the districts how much to deposit each year. The districts are legally bound to disburse the amount. Since public schools are funded primarily by state and local taxes, both state and local taxpayers bear most of the cost, though some of the MPSERS pension cost is covered by mandatory pension contributions from MPSERS members.
[††] Under Public Act 75, public school employees hired after July 1, 2010, are still part of a defined-benefit MPSERS pension plan, but they will receive annual pension payments determined by a 5-year final average compensation level (as opposed to the final three years), will get no scheduled cost-of-living adjustments, and will face greater retirement age restrictions. In addition, employees may apply to school district officials to increase their defined-contribution employer match to 3 percent of the employee’s salary if the employee contributes a total of 6 percent. See Public Act 75 of 2010; see also Bethany Wicksall, “Legislative Analysis: Public School Retirement Revisions, Senate Bill 1227 as Enacted” (Michigan House Fiscal Agency, 2010), http://www.legislature.mi.gov/documents/2009-2010/billanalysis/House/pdf/2009-HLA-1227-7.pdf (accessed Aug. 3, 2010).
[‡‡] Bethany Wicksall, “Legislative Analysis: Public School Retirement Revisions, Senate Bill 1227 as Enacted” (Michigan House Fiscal Agency, 2010), 3, http://www .legislature.mi.gov/documents/2009-2010/billanalysis/House/pdf/2009-HLA-1227-7.pdf (accessed Aug. 3, 2010). This incentive increased the multiplier on the members’ pension payout from 1.5 percent to 1.6 percent if they were already eligible for retirement and they retired by Sept. 1, 2010. Employees who were not otherwise eligible to retire could still retire by Sept. 1, 2010, with a 1.55 percent multiplier if they had a combined age and years of service totaling 80 or more. See MCL 38.1381b(2).
[§§] Bethany Wicksall, “Legislative Analysis: State Employees’ Retirement Revisions, Senate Bill 1226 (H-38 as amended)” (Michigan House Fiscal Agency, 2010), 5, http://legislature.mi.gov/documents/2009-2010/billanalysis/House/pdf/2009-HLA-1226-5.pdf (accessed September 29, 2010). The incentive increases the multiplier on the members’ pension payout from 1.5 percent to 1.6 percent if they are already eligible to retire and they retire by Jan. 1, 2011. Employees who are not otherwise eligible to retire can still retire by Jan. 1, 2011, with a 1.55 percent multiplier if they have either 30 or more years of service or a combined age and years of service totaling 80 or more. See Public Act 185 of 2010 (State of Michigan, 2010), Sec. 19j(5), http://www.legislature.mi.gov/documents/2009-2010/publicact/pdf/2010-PA-0185.pdf (accessed October 6, 2010); see also Wicksall, “Legislative Analysis: State Employees’ Retirement Revisions, Senate Bill 1226 (H-38 as amended),” 1.
[***] Public Act 185 of 2010, Sec. 35(1)-(2); Wicksall, “Legislative Analysis: State Employees’ Retirement Revisions, Senate Bill 1226 (H-38 as amended),” 2. According to Public Act 185, MSERS active members make the 3 percent payments toward retiree health care “beginning with the first pay date after November 1, 2010 and ending September 30, 2013. …”