Mich. Senate Pushes Back Teachers’ Move to DC Plan

August 16, 2012 (PLANSPONSOR.com) - The Michigan State Senate approved changes to the school employee pension system that pushed back a decision on whether to move workers into a defined contribution (DC) plan.

The measure does give school employees the option of accepting a DC plan while senators wait for the results of a study on the costs of moving all school employees into such a plan. The study is expected to be delivered to lawmakers by November 15, according to a news report on www.mlive.com. 

The issue has divided legislators because some fear the switch would cost too much. The State House previously rejected the switch (see “Michigan Teachers’ Pension Reform Still Up in the Air”).  

The proposal calls for doubling health insurance premiums for school retirees; eliminating health coverage in retirement for new workers hired after July 1, and instead putting an extra 2% of their compensation into a DC plan; and “prefunding” retiree health benefits with a 3% employee contribution, currently the subject of a Supreme Court case, the news report said. If the court decides that the mandatory contributions are illegal, the health program will not be prefunded.  

Employees could give up the healthcare benefit and not make the 3% contribution, and instead receive a 2% matching contribution like new employees are expected to have. 

Lawmakers are pushing for changes to the plan because the state faces a $45 billion unfunded liability.   

School administrators were looking for $300 million in savings from the change, and districts were hoping for an answer before they got much closer to the start of the school year.   

Of concern to the districts is the contribution they will be making to the teacher pension pool, which will increase from 24.46% of each employee’s salary to 27%, with projections of the figure hitting 33% in a few years. Now that contribution would be capped, which lawmakers said will bring stability to pension funding, and bring money back to the classroom.