MICHIGAN PUBLIC SCHOOL EMPLOYEES RETIREMENT SYSTEM (MPSERS) REFORM SB 1040 PA 300 OF Bethany Wicksall, Senior Fiscal Analyst September 7, 2012

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1 MICHIGAN PUBLIC SCHOOL EMPLOYEES RETIREMENT SYSTEM (MPSERS) REFORM SB 1040 PA 300 OF 2012 Bethany Wicksall, Senior Fiscal Analyst September 7, 2012

2 MPSERS Basic Facts For the Fiscal Year Ending September 30, 2011 MPSERS Employers: 700+ Current Active Employees: 236,660 Retirees and Beneficiaries Receiving Benefits: 192,435 Retirees receiving Health benefits: 142,863 Pension Plan Assets: $41.0 billion Pension Actuarial Funded Ratio (9/30/11): 64.7% Pension Unfunded Actuarial Accrued Liability (UAAL): Other Postemployment Benefits (OPEB) Costs, i.e. Health benefits: OPEB UAAL: $22.4 billion $910 million $26.9 billion 2

3 PENSION BENEFITS

4 The Basic Plan The Basic Plan includes only employees who were hired prior to January 1, 1990 and who did not opt into the MIP when it was introduced in Key Basic Plan Characteristics: The Basic Plan is a non-contributory plan, in which the employees contribute nothing toward their pension. Members vest after 10 years of service. Normal Retirement eligibility = Age 55 with 30 years of service or Age 60 with 10 years of service Final Average Compensation (FAC) = Average of 5 highest consecutive years Pension Allowance Formula = 1.5% x FAC x Years of Service Cost of living adjustments = NONE 4

5 The Member Investment Plan (MIP) Initially the plan began January 1, 1987, and members could choose to remain in the Basic Plan or change into the new MIP plan. The MIP plan had better benefits but required an employee contribution. Beginning January 1, 1990 the Basic Plan was closed, and all new employees were automatically included in the MIP. The employee contribution has changed over time depending on when an employee was hired. The MIP plans and contribution rates include: MIP Fixed = 3.9% ( Prior to 1990) MIP Graded = 3% on first $5,000 ( ) $150 plus 3.6% on salary between $5,000 and $15,000 $510 plus 4.3% on salary in excess of $15,000 MIP Plus = 3% on first $5,000 ( ) $150 plus 3.6% on salary between $5,000 and $15,000 $510 plus 6.4% on salary in excess of $15,000 5

6 The Member Investment Plan (MIP) Key MIP Characteristics (Fixed, Graded, and Plus Plans): The MIP Plan is a contributory plan, which means that the employees contribute to the plan. Members vest after 10 years of service. Normal Retirement eligibility = Any Age with 30 years of service or Age 60 with 10 years of service Final Average Compensation (FAC) = Average of 3 highest years Pension Allowance Formula = 1.5% x FAC x Years of Service Cost of living adjustments = 3% fixed, non-compounding 6

7 The Pension Plus (Hybrid) Plan The Pension Plus Plan is a hybrid plan including both a defined benefit pension component as well as a defined contribution 401k style component. Includes employees hired after July 1, 2010 Key Pension Plus Plan Characteristics: The Pension Plan is a contributory plan with the same employee contribution levels as in the MIP Plus plan, which tops out at 6.4% on salary exceeding $15,000. Members vest after 10 years of service. Normal Retirement eligibility = Age 60 with 10 years of service Final Average Compensation (FAC) = Average of 5 highest years Pension Allowance Formula = 1.5% x FAC x Years of Service Cost of living adjustments = NONE 7

8 RETIREE HEALTH BENEFITS

9 Retiree Health Benefits Retiree health benefits include medical, prescription drug, dental, vision, and hearing. For members hired BEFORE July 1, 2008, MPSERS pays 100% of the medical benefits for a retiree 90% of the medical benefits for dependents 90% of dental, vision, and health care benefits for retiree and dependents However, for a retiree not yet eligible for Medicare, an amount equal to the cost chargeable to a Medicare recipient for Part B Medicare is deducted from a retiree s retirement allowance. For members hired AFTER July 1, 2008, MPSERS pays a graded premium depending on the retiree s years of service: Minimum 10 years of service required to vest in health benefits. 30% of premium beginning with 10 years of service. An additional 4% per year for each year after 10 Capped at 90% with 25 years of service. 9

10 MPSERS Reforms SB 1040 PA 300 of

11 PA 300 Active Employee Changes Both current and new employees will have a number of choices to make regarding pension and health care benefits. Elections must be made by October 26, 2012, and will apply beginning with the first pay period after December 1, The following five slides lay out the changes and options for 3 groups of employees depending on hire date: Basic/MIP employees hired before July 1, 2010 Pension and Health Pension Plus (Hybrid) employees hired after July 1, 2010 Health New Employees hired beginning September 4, 2012 Pension and Health 11

12 Basic/MIP Current Employees PENSION (Hired Before July 1, 2010) Choose between 1 of 4 Pension Options: Increase contribution rates and maintain a 1.5% Pension Multiplier for all future years of service. Basic members from 0% to 4% MIP members from between 3% and 6.4% to 7% Increase contribution rates and maintain a 1.5% Pension Multiplier until you reach 30 years of service after which you move into DC plan with 4% employer contribution. Maintain current contributions with a lower 1.25% Pension Multiplier for all future years of service. Freeze existing pension and FAC and receive a flat 4% DC contribution for all future service. 12

13 Basic/MIP Current Employees HEALTH (Hired Before July 1, 2010) Choose between 1 of 2 Retiree Health Care Options: Continue to pay 3% of compensation for future retiree health insurance premium subsidy of 80%. Employee contributions would be returned if an employee is not eligible to receive health benefits upon request of employee after reaching age 60. Discontinue paying 3% and opt out of retiree health insurance. Previous 3% contributions would be deposited into a 401(k) plan. Employers would contribute 100% match of an employee s contribution up to a maximum of 2% of compensation into the 401(k) plan. 13

14 Pension Plus (Hybrid) Current Employees (Hired After July 1, 2010) No Change to Pension for Current Hybrid Employees Choose between 1 of 2 Retiree Health Care Options: Continue to pay 3% of compensation for future retiree health insurance premium subsidy of 80%. Discontinue paying 3% and opt out of retiree health insurance. Previous 3% contributions would be deposited into a 401(k) plan. Employers would contribute 100% match of an employee s contribution up to a maximum of 2% of compensation into the 401(k) plan. 14

15 New Employees PENSION (Hired After September 4, 2012) Choose between 1 of 2 Retirement Savings Options: Participate in the Pension Plus (Hybrid Plan) described above. Contribution rates are the same, 6.4% for pension component and optional DC match of up to 2% of compensation. Choose a 401(k)-style plan with an employer contribution equal to 50% of an employee s contribution of up to 6% of compensation (maximum employer contribution of 3%) 15

16 New Employees HEALTH (Hired After September 4, 2012) No retiree health insurance offered to new employees. In lieu of retiree health care, they receive the following: Employer contributes 100% match of an employee s contribution up to a maximum of 2% of compensation into a 401(k) plan. Additionally, upon retirement and reaching age 60, an employee receives either $1,000 or $2,000 (depending on whether they had less than or more than 10 years of service) deposited into a health reimbursement account. 16

17 PA Current Retirees No pension changes, but increased health insurance premium contributions beginning January 1, 2012: Current retirees who are 65 by January 1, 2012 will have to pay 10% of their insurance premium. Current retirees who are not 65 by January 1, 2012 will have to pay 20% of their insurance premium. 17

18 PA Additional MPSERS Reforms Begin Prefunding retiree health care using a combination of the employee s 3% contributions, employer contributions, and a State contribution from the School Aid Fund. Cap the employer s contribution rate for the unfunded liability at 20.96% with an estimated annual normal rate of approximately 3.5%, totaling 24.46% to maintain FY levels. Provide balance of funding necessary to meet the annual required contribution using School Aid Funds 18

19 PA Additional MPSERS Reforms Provides for a study to be completed by November 15, 2012, regarding the following: The costs and implication of alternative retirement benefits including closing the Hybrid plan completely and replacing it with a 401(k) like the one provided to State Employees (Flat 4% employer contribution plus 100% employer match of an employees contribution of up to 3% of compensation.) Alternative employer contribution methods rather than using payroll. Due to diminishing payroll and stranded unfunded liabilities, other measures such as current operating expenditures may be a better option, but may only be appropriate for certain employers like school districts as opposed to colleges. 19

20 PA 300 Legal Issues Employee 3% Health Care Contributions Court of Appeals ruled against the State based on original implementation but Governor plans to appeal to Supreme Court. PA 300 made changes to the use of the contributions and requires reimbursement if employee does not qualify for benefits. If 3% not upheld, retiree health care prefunding would revert to pay-as-you-go because employee contributions would have paid for almost half the prefunding cost. Pension/Health Care Election Time Period This week Circuit Court Judge issued a temporary restraining order saying that the election period was too short. MIP/Basic Increased Contributions No legal challenge yet, but State employees are challenging a similar change implemented in the State retirement system in

21 40.0 Projected MPSERS Employer Contribution Rates Presented on Statewide Payroll-Equivalent Basis 35.0 Baseline (Current Law) SB 1040 as Passed Senate 30.0 PA 300 as Enacted % of Payroll Local Employer Maximum Rate (House-Passed Only) State-funded Portion of Rate Fiscal Year 21

22 PA Estimated Savings for Colleges FY 13 Estimated Total Savings FY 14 Estimated Total Savings COLLEGE ALPENA COMMUNITY COLLEGE $241,676 $580,209 BAY DE NOC COMMUNITY COLLEGE $203,296 $488,068 DELTA COLLEGE $1,045,684 $2,510,449 GLEN OAKS COMMUNITY COLLEGE $99,691 $239,336 GOGEBIC COMMUNITY COLLEGE $134,690 $323,359 GRAND RAPIDS COMM COLLEGE $1,851,616 $4,445,310 HENRY FORD COMMUNITY COLLEGE $1,510,615 $3,626,643 JACKSON CO COMMUNITY COLLEGE $522,217 $1,253,724 KALAMAZOO VALLEY COMMUNITY COLLEGE $778,693 $1,869,464 KELLOGG COMMUNITY COLLEGE $413,493 $992,703 KIRTLAND COMMUNITY COLLEGE $256,263 $615,229 LAKE MICHIGAN COLLEGE $351,629 $844,181 LANSING COMMUNITY COLLEGE $1,702,301 $4,086,839 MACOMB COMMUNITY COLLEGE $1,773,231 $4,257,125 MID MICHIGAN COMMUNITY COLLEGE $348,961 $837,777 MONROE CO COMMUNITY COLLEGE $403,504 $968,722 MONTCALM COMMUNITY COLLEGE $208,179 $499,790 MOTT COMMUNITY COLLEGE $967,307 $2,322,285 MUSKEGON CO COMMUNITY COLLEGE $376,257 $903,308 NORTH CENTRAL MICHIGAN COLLEGE $199,106 $478,008 NORTHWESTERN MICHIGAN COLLEGE $483,481 $1,160,728 OAKLAND COMMUNITY COLLEGE $2,102,350 $5,047,267 SCHOOLCRAFT COMMUNITY COLLEGE $1,155,957 $2,775,191 SOUTHWESTERN MICHIGAN COLLEGE $158,181 $379,756 ST CLAIR COUNTY COMMUNITY COLLEGE $419,339 $1,006,738 WASHTENAW COMMUNITY COLLEGE $1,262,164 $3,030,169 WAYNE COUNTY COMMUNITY COLLEGE $1,387,702 $3,331,558 WEST SHORE COMMUNITY COLLEGE $153,374 $368,217 TOTAL $20,510,957 $49,242,155 Note: FY 13 and FY 14 wages assumptions based on FY 11 MPSERS wages and actuarial assumptions of 3.5% annual growth. House Fiscal Agency: August

23 FY School Aid Budget MPSERS Appropriations MPSERS Reserve Fund Deposit: FY 12 = $133.0 million FY 13 = $41.0 million Balance = $174.0 million MPSERS State Contribution: FY 13 = $130 million Future School Aid Fund growth will have to be entirely directed toward MPSERS contributions for the next 5-6 years rather than funding other K-12, College, or University increases. 23

24 ORS Resources ORS - MPSERS Employer Website: ORS Webinars and Tutorials: ORS Reform Tools Website: 24

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