UPDATE (11/30): Senate Fiscal Analysis of SB 102 shows significant costs for school districts
The Senate Fiscal Agency today testified in the Senate Appropriations Committee hearing that a proposal to dismantle the school employee retirement system would cost the state $1.6B to $3.8B over five years, as reported by the Detroit Free Press today.
“Dismantling the school employee retirement system would cost taxpayers billions of dollars
and would hurt kids and local schools in the process,” said MEA Director of Public Affairs Doug Pratt in a news release. “Ramming through this legislation in the final days of the legislature is utterly irresponsible, especially when so many fiscal experts are warning lawmakers about the negative financial consequences of this reckless proposal. We need to have a transparent, public debate about this issue, and lame duck is not the time for such a debate, especially when independent fiscal experts are sounding the alarm bells about the staggering price tag for taxpayers.”
MEA has generated a spreadsheet showing how much SB 102 could cost local school districts in cuts over the next five years, including tabs showing the combined cuts for all the schools in a Senator or Representative’s area. Contact them today!
Original Story (11/21): State budget experts say closing pension plan will cost taxpayers an extra $24 billion
A PowerPoint presentation making the rounds from the state’s Department of Technology, Management and Budget are blowing a major hole in the cost savings arguments of lawmakers pushing to close down the pension system and switch new hires to a 401(k)-style program.
According to actuarial data that’s being presented by DTMB to lawmakers and administrators, closing the current “hybrid” retirement plan for new hires will cost the state more than $24 billion over the next 30 years. Over just the next 5 years, the additional cost will be an extra $5.4 billion.
That begs the question — if lawmakers go through with this, where will the money come from? New taxes or cuts to programs for students?
That question needs to be asked of lawmakers right away. Please send a message to your representative and senator and urge them to oppose efforts to close the pension system for new hires. Our students and state clearly can’t afford these misguided plans.
The system is not broken, and recent reforms are working, according to the head of Michigan’s Office of Retirement Services (ORS), Kerrie Vanden Bosch, in a recent interview with MIRS, an independent news service focused on Michigan political and legislative issues.
“I don’t think most people understand (that) the liabilities on the MPSERS system are related to the legacy defined benefit plan, which has already been closed. The hybrid portion is 100 percent funded,” Vanden Bosch said. “Nothing you do to new employees can reduce that legacy liability. If you were to close the hybrid plan, which again is 100 percent funded, that will not do anything to touch the existing defined benefit liability and will only increase it.”
More on the numbers
According to the experts, the additional costs the state would incur come from a combination of factors, mainly stemming from the fact that no additional contributions would be coming into the pension system to help pay for benefits people have earned.
Currently, the pension system has an Unfunded Accrued Actuarial Liability (UAAL) of $26.7 billion dollars – that’s the gap between the total amount that people are owed over their entire lives and what’s currently sitting in the pension fund. Think of it like a mortgage – you owe thousands of dollars for your home, but that money isn’t due to be paid for many years.
The good news is that gap has been dropping, thanks to increased investment in the pension system by the state and investment growth since the economic crash of 2008. Like any investment, the pension fund needs more time to recover.
Shutting down the system would increase the UAAL by $550 million in the first year alone – which equates to a 6.1 percent increase in the contribution rate – because new money wouldn’t be coming into the system to invest and grow.
Making the problem worse, payments to close the UAAL gap would need to be accelerated, because the money being saved for future employees in a 401(k)-style plan can’t be used to help pay for benefits owed by the pension plan. In year one, that would cost another $613 million.
Finally, in order to provide an adequate retirement benefit for new hires in a 401(k)-style plan, schools would need to invest more money than they currently do in the hybrid system – to the tune of an additional $46 million in the first year.
That’s an extra $1.2 billion in additional costs in just the first year alone! Given the budget challenges already facing schools, the cuts that these changes would cause would be catastrophic.
Lawmakers need to listen to the state’s budget experts and drop these dangerous and costly pension changes immediately. Please send them a message today!
For more information, you can view the full DTMB PowerPoint presentation here.