LANSING, Mich. — Gov. Rick Snyder and Republican legislative leaders reached a budget deal Tuesday that would automatically enroll newly hired school employees in a 401(k)-only retirement plan unless they opt into a costlier pension benefit within 75 days.
The change would apply to teachers and other school workers hired next Feb. 1 or later and may cost the state much less than an earlier version of legislation introduced last month, according to a summary of the agreement circulated to GOP senators at a caucus meeting and obtained by The Associated Press.
New hires now qualify for a pension and a small 401(k).
Under bills that could begin advancing Wednesday, they would default into a better 401(k)-only plan like what state employees receive — a 4 percent employer contribution plus another 3 percent if they kick in at least 3 percent of their pay. They could still pick a pension, but it would cost them an unspecified amount more than what teachers now pay: 6.4 percent of their salary.
In the new hybrid plan, workers would be responsible for half of the cost-sharing, including any new unfunded liabilities. If the funding falls below 85 percent for two straight years, the plan would be closed to new entrants.
A more conservative investment return assumption of 6 percent would be adopted, too, instead of the current 8 percent. The retirement age to start receiving a pension — which is 60 for people hired since 2010 — could rise for new hires depending on a life expectancy study and if unfunded liabilities occur.
It was not immediately clear just how unappetizing the pension option would be for new teachers, but Republicans expect opposition from labor unions and their goal clearly is to steer many more teachers into a 401(k)-only system. Since 2012, when new hires began being able to choose a less attractive 401(k)-only plan, one in five has done so.
“I truly believe this ultimately is going to provide a better retirement option for our teachers. It’s going to protect taxpayers because, most importantly, we will stop digging this hole,” said House Speaker Tom Leonard, R-DeWitt.
But teachers’ unions questioned that premise.
“This seems to be little more than a shell game that goes about closing the hybrid pension plan in another way — something that is certain to cost Michigan taxpayers billions in transition costs, just as the original versions of (the legislation) would have,” the Michigan Education Association and AFT Michigan said in a statement.
The unions said requiring schools and their employees to pay more to account for even slight underfunding is unreasonable because the stock market fluctuates. They also criticized allowing future lawmakers and governors “to play games and force the fund to close.”
Legislative committees will hold hearings on the bills Wednesday, and the full House and Senate could take initial votes no later than Thursday. The agreement coincided with a deal on the state’s next $55 billion spending plan as well, though some details were still being ironed out.
GOP lawmakers had set aside nearly a half-billion dollars to cover transition costs in the first two years to keep new school workers from being eligible for a pension. According to the GOP-written document reviewed by the AP, the retirement agreement would cost the state about $51 million a year more on average over five years. That’s well below the $465 million annual cost that nonpartisan legislative fiscal agencies had estimated for an earlier version of the legislation to completely close off pensions to new hires.
Leonard said as part of the budget agreement, money will be spent to address debt in the Michigan Public School Employees Retirement System, to add to savings and to boost infrastructure spending.
Senate Majority Leader Arlan Meekhof, R-West Olive, said safeguards are needed to ensure the state does not accumulate billions more debt. Yet Senate Minority Leader Jim Ananich, D-Flint, said: “I continue to reject the premise that pensions are bad and our educators don’t deserve a secure or stable retirement. The current retirement system has helped Michigan draw in top-notch educators.”
Snyder, a Republican, had been excluded from budget negotiations after resisting GOP lawmakers’ call to prohibit new school workers from getting a pension. But they agreed to a tentative framework of the deal last week.