State Employee Retirement and Healthcare Reforms Passed by the House

Governor Snyder and the legislature are intent on tackling the hard long-standing issues regarding our state’s finances. We started with balancing a budget by June 30 and revising the tax codes to eliminate the structurally imbalanced budget status that has bedeviled the state year after year in the past. Of equal importance, however, are the large unfunded liabilities existing due to our government employee retirement and healthcare programs. This post will deal only with the State Employee Retirement System (SERS), leaving the Michigan Public School Employee Retirement System (MPSERS) for a future post once the proposed solution to that problem has been selected.

The unfunded liability under SERS is of two parts: the pension and the healthcare components. The unfunded liability for the pension piece was $3.1 billion as of September 30, 2009, at a 78% funded level. http://www.michigan.gov/documents/orsstatedb/SERS_2010_Published_1-10-11_342741_7.pdf, p. 42. The unfunded liability for the healthcare piece on the same date was $12.6 billion. However, more recent calculations would put that number at either $14.7 or $15.1 billion, depending on the calculation date. http://www.michigan.gov/documents/orsstatedb/SERS_-_Health_2010_-_2011-05-16_355930_7.pdf These amounts are obvious symptoms of a problem crying for a solution.

The Michigan House of Representatives has passed House Bills 4701 and 4702 to amend the State Employees' Retirement Act to require state employees in the defined benefit plan to contribute to the funding of their pensions and introduces a new retiree healthcare reimbursement program. The major provisions include:

• Within two pay periods after the effective date of the legislation, discontinue the existing 3% contribution all State employees are currently making into the irrevocable trust created in the Public Employee Retirement Health Care Funding Act. Contributions made between November 1, 2010, and the discontinuation date would be refunded on or before May 13, 2012, with interest.
  
• Require a Defined Benefit (DB) member (an employee hired before March 31, 1997 who chose to stay in the DB plan instead of moving to the DC plan) to choose whether to

- contribute 4% of salary (pre-tax) to remain in the DB system, or

- not pay the 4% and instead "freeze" his or her compensation and years of service and convert to the Defined Contribution (DC) system for future service. The DC plan consists of a state contribution of 4% of wages, plus a 3% employer match to voluntary employee contributions.

• Exclude overtime premium payments, or payments for services in excess of 80 hours in a biweekly period, from the calculation of compensation for the purpose of pension payments, for overtime after January 1, 2012.
  
• Employees hired before March 31, 1997 will see no change in their healthcare plan as they are fully vested in the retiree healthcare premium program.
  
• Allow DC employees hired by the State before January 1, 2012, to choose to

- remain in the graded health care subsidy plan for retiree health care (30% vested after 10 years plus 3% per year thereafter) or

- monetize existing years of service and credit that monetization to a 401(k) or 457 plan payable 100% upon retirement or 50% upon separation prior to retirement with 10 years of service and participate in the following DC type healthcare plan.

• Eliminate retiree health insurance coverage from the State for any new employee hired on or after January 1, 2012, or for any existing DC employee choosing to convert to the 401(k) or 457 plan for health care. Instead, the State would make a matching contribution up to 2% of the employee's compensation to an appropriate tax-deferred account, such as a 401(k) or 457.
  
• In addition, for employees hired on or after January 1, 2012, the State would deposit into a health reimbursement account $2,000 when the employee terminated employment after age 60 with at least 10 years of service, or $1,000 upon termination with at least 10 years of service.
  Senate Fiscal Agency analysis, http://www.legislature.mi.gov/documents/2011-2012/billanalysis/Senate/pdf/2011-SFA-4701-S.pdf

The many pension and healthcare benefit obligations threaten our future solvency.  These are structural problems that continue to grow and will soon burden our children and grandchildren.  These proposed changes will save Michigan taxpayers billions and make forecasting our finances easier. At the same time, these bills keep the retirement and healthcare benefits programs strong for state employees, securing their future. 

I am sure that these changes will be opposed by the state employees’ unions and their elected legislators. Nonetheless, these changes can also be viewed as not going far enough. See “Public-Sector Retiree Health Care Benefits are Unreasonable” at http://www.michigancapitolconfidential.com/15971

These changes will have significant fiscal impacts. With the reforms in HB 4701 and 4702, taxpayers would continue to pay for retiree health care costs of current employees and retirees, but in a way that caps future taxpayer costs. The bills also call to begin funding the unfunded benefits being paid to retirees. By changing from the current pay-as-you-go system for the healthcare benefits to a pre-funding approach, the annual required contribution (ARC) under accounting rules must be calculated differently. Prefunding benefits at current rates will require annual contributions between $713 and 743 million a year —much more than the pay-as-you-go amounts (an estimated $420 million in FY 2011-12 for retired government workers). The state would be responsible for paying this for the next 26 years to amortize the unfunded liability. The “unfunded liability” would change from the current $15.1 billion on the SERS balance sheet to $9.4 billion with pre-funding, but this is only due to the difference in interest or “discount rate” assumptions the two methods of payment require according to the accounting rules.

These bills are in the State Senate as of this writing (11/15/11), so we don’t know whether the changes made by the House will be those ultimate concurred with by both houses and signed by the Governor. Stay tuned!