Analysis of impacts—SB 1040

Unfortunately the House voted 57-48 in favor the (MPSERS) overhaul, a compromise that includes a study to fully transition from a defined benefit (DB) to a defined contribution (DC) system. Earlier in the day the Senate passed the bill, SB 1040, by a vote of 21-16, sending it to the House. The bill moved to the Governor's office for his signature.
 
The changes made in this version  include the following:

Employees hired before July 1, 2010 (non-hybrid employees), would have the following choices: 1) make higher contributions in order to continue receiving a 1.5% multiplier for future years of service; 2) continue paying current contributions but have a 1.25% multiplier for future years of service; or 3) freeze pension benefits earned to date and move to a defined contribution (DC) plan for future years of service.

Employees in the existing "hybrid" plan (those hired on or after July 1, 2010) would not be affected by these pension changes.
 

  • New hires (first hired on or after September 4, 2012) could choose an optional DC plan (with a 3% employer contribution if the employee contributed 6%) instead of the hybrid plan.
  • The employer contribution rate for unfunded accrued liabilities would be capped at 20.96% of payroll, with an annual appropriation if/when the rate for unfunded accrued liabilities exceeds 20.96%. Combined with an average 3.5% of payroll for normal costs, the total employer contribution rate will be capped at around 24.46% of payroll.
  • For new hires (first hired on or after September 4, 2012) or for members who choose this instead of existing benefits, retiree health care premium coverage would be eliminated and replaced with matching employer contributions up to 2% of compensation, deposited into a 401k account; new hires would not have to remit the 3% employee contribution for retiree health that is in the law for current employees.
  • Beginning January 1, 2013, the premium coverage paid by the State would decrease to a maximum of 80%, with retirees (both existing retirees and future retirees) paying at least 20% of health care premiums. However, current retirees who are Medicare-eligible as of January 1, 2013, would pay 10% of health care premiums instead of 20%.
  • Prefunding of retiree health care would be included; however, if employees' 3.0% contributions for retiree health care were found to be unconstitutional, funding for retiree health care would revert to a cash basis.
  • The early-out incentive costs associated with Governor Granholm’s pension stimulus would be amortized over 10 years instead of 5 years.
  • The retirement system would have to perform a study of university health care, and provide information to the universities for their own study of retiree health care.
  • The Department Director, Senate Majority Leader, and Speaker of the House would have to commission a study, costing not more than $150,000, on the existing system and potentially converting to a defined contribution plan for retirement. The study also would include a review of rates of return on investments, mortality, and longevity. The study would include specific recommendations for transitioning to a DC plan. The study would further include a review of stranded costs, and current operation expenses (COE), or other measures as a base for spreading unfunded accrued liabilities (but COE would not be implemented under the bill).
  • The retirement system would be required to disclose, post, and e-mail additional information related to financial statements and to maintain an electronic mail address for retirement allowance recipients and members.

The first series of changes under Senate Bill 1040 (H-3) relates to choices employees would have to make. They are as follows: 1) increase employee contributions and continue the multiplier (for pension calculation) of 1.5% for future years of service, OR, 2) keep the same level of employee contributions but have a reduced multiplier of 1.25% on future years of service, OR, 3) make no future contributions, but also receive no future years of service for a pension, and instead freeze existing pension benefits and convert to a defined contribution, or 401k plan.

Employees who wished to continue receiving the existing 1.5% multiplier for future years of service (for use in calculating a pension) would have to pay higher employee contributions than under current law. Specifically, employees hired before January 1, 1990 ("basic" plan members) who chose to remain in the basic plan would have to pay 4% of compensation; these employees currently make no contributions to MPSERS. All member investment plan (MIP) members hired before July 1, 2010, whether they switched from basic or were first hired into MIP, would have to pay a flat 7% of compensation; these employees currently make graded contributions based on salary, presently ranging from 3% to 6.4%. Employees hired on or after July 1, 2010, are in the "hybrid" system and would not be affected by the proposed changes; they would remain in the hybrid plan at their current contribution levels.

If employees did not choose to make the higher contributions listed above, they would have two choices: 1) pay the existing employee contributions, but receive a 1.25% multiplier for future years of service, OR, 2) freeze the earned benefit to date and convert to a DC plan. The DC plan would require the employer to deposit 4% of compensation into a 401k account, but no future pension benefits would accrue to an employee choosing this option. Regardless of the option chosen, previously accrued service would be calculated at the 1.5% multiplier when pension benefits earned to date were determined.

Current employees would have between September 4, 2012, and October 26, 2012, to decide among the above options with decisions (e.g., higher contributions, frozen earned benefits, etc.) implemented on the transition date defined to be the first day of the pay period that begins on or after December 1, 2012.

Two changes to retiree health care are proposed under Senate Bill 1040 (H-3). First, beginning January 1, 2013, State premium coverage would be reduced to not more than 80%, with retirees paying at least 20% of retiree health care premium coverage, an increase from the current roughly 10% cost sharing. This change would affect not only future retirees, but also people already retired. However, current retirees who are Medicare-eligible would pay 10% of premium coverage instead of the 20% for non­-Medicare-eligible retirees. This would only affect existing (not future) retirees who are currently Medicare-eligible.
 
Second, the bill would eliminate retiree health care coverage for new hires (first hired on or after September 4, 2012). Mirroring changes made for State employees under Public Act 264 of 2011, the bill would require an employer to make up to a 2% matching contribution into an employee's 401k account in lieu of retiree health care coverage. Employees would not be able to take loans out against the employer's contributions under this proposal, which was also implemented under Public Act 264.