A news service for the people of Michigan from the Mackinac Center for Public Policy

A plan to reform public school pensions and set them more in line with private-sector retirement standards — and thus save Michigan taxpayers an estimated $3.5 billion over the next 10 years — stalled in the Michigan Senate as that chamber prepared to leave for its spring break. Although GOP senators cast blame for the failure at Gov. Jennifer Granholm and Democrats, Republican sources said that only 18 votes could be mustered for the measure, leaving it two votes shy of passage in a chamber where Republicans hold a 22-16 majority.

A K-12 school aid budget recently passed by the Michigan Senate would use the savings from this plan to maintain the current year's per-pupil funding for Michigan's school districts. But without pension reform, the Senate funding plan would require a $118 per student cut for fiscal 2011.

Lobbying pressure from the Michigan Education Association — the state's largest public school employee union — was also cited by Republicans as a factor behind the lack of support for pension reform. The union is strongly opposed and began running statewide radio advertisements critical of benefit reductions shortly after the lawmakers went home for the break.

Sen. Jud Gilbert, R-Algonac, is the sponsor of Senate Bill 1227, the school pension reform plan. He told the MIRS News that at least three Republicans were refusing to support the bills. Just two of those GOP votes would have provided the margin necessary for passage.

Days earlier, MIRS quoted a "well placed source" that identified four Republican senators as possible "no" votes on SB 1227:

Sen. Roger Kahn, R-Saginaw

Sen. Mike Nofs, R-Battle Creek

Sen. Randy Richardville, R-Monroe

Sen. Nancy Cassis, R-Novi

Kahn, Nofs and Richardville have each received political donations from the MEA in recent years. Nofs' past support from the union — and his historical willingness to break from the GOP pack and cast votes in line with MEA concerns — led one Michigan Tea Party organization to circulate literature critical of the lawmaker's record during his recent election.

And late last year, both Nofs and Kahn were the only two Senate Republicans to refuse to vote for a proposal to change the Teacher Tenure Act and create a standard for removing "consistently ineffective" teachers. This education reform was also opposed by the MEA.

Michigan's teachers and other public school employees are beneficiaries of the Michigan Public School Employee Retirement System. The cost of this program is the reason for the Michigan Senate's reform proposals. Unlike the modern and portable 401(k)-style "defined contribution" plans that are the most popular retirement plans provided in the private sector, this is a conventional "defined benefit" pension more akin to what has been historically given to employees of Detroit's automakers and other industrial corporations.

According to the AFL-CIO, just 21 percent of private-sector workers have conventional pensions like MPSERS.

The MPSERS Web site maintains that Michigan's public school employees have "one of the best public pensions around."

In the mid-1990s, the conventional defined-benefit pension plan for most of Michigan's state employees was closed, and new hires have been placed into a modern 401(k) defined-contribution retirement plan. Largely due to lobbying pressure from the MEA, public school employees were exempted from this earlier reform and allowed to retain MPSERS as a conventional pension.

The major reform in SB 1227 would be an increase in the contribution that public school employees pay toward their retirement. An analysis from the Senate Fiscal Agency states that some who were hired before 1990 are in the MPSERS "basic plan" pension and currently "pay nothing" toward their retirement. The bill would boost contribution rates for all employees by 3 percentage points. Older workers now paying nothing would thus start paying 3 percent, and the youngest workers would pay a maximum contribution of 7.3 percent of their salary for every dollar earned above $15,000 per year.  

This co-pay would save taxpayers an estimated $207 million in fiscal 2011 and a total of more than $2.4 billion over a 10-year period.

Another reform would cap the service credit period for the defined-benefit pension at 30 years, starting on Oct. 1, 2010. Employees with more than 30 years at that point would receive all of their accumulated service credits, but could not accrue any more. No other employees from that point forward would be allowed to accrue more than 30 years of service credits toward their defined-benefit pension, but would instead receive additional 401(k)-style defined contribution payments from that point until they retired.

Capping the pension service credits at 30 years would save an estimated $41 million in fiscal 2011 and $479 million over a 10-year period through fiscal 2020.

Another significant reform would be to place new employees hired after this year on a "hybrid" retirement plan — a mix of a conventional pension and new 401(k) defined-contribution plan. While saving a modest $3.9 million in the first year, savings for this would gradually increase through attrition as employees with old-style pensions retired. The total 10-year savings through 2010 for the hybrid portion of the plan is estimated at $410 million.

Another provision to remove a generous dental and vision plan for future retirees would save an estimated $206 million over the next decade. Current public school retirees would retain their dental and vision coverage, which is 90 percent funded by the pension plan, with a 10 percent co-pay from the retiree. Dental and vision coverage for retirees is a feature not common in private sector retirement programs — particularly non-union programs.

As noted above, the total estimated savings from the MPSERS reform package would be more than $3.5 billion over the next 10 years.

Gov. Granholm proposed a version of the plan in her State of the State address, and her budget director has made (a thus far futile) attempt to round up Democrat support for SB 1227. If the bill is ultimately approved by the Senate, the governor's support for the concept may lead to it receiving serious consideration in the Democrat-controlled House of Representatives.

Senate Majority Leader Mike Bishop, R-Rochester, is a strong supporter of school pension reform and has announced that the Senate will take another run at SB 1227 when it returns later in April.

Contact information for members of the Michigan Senate is available at www.MichCapCon.com/9313.

Northern Michigan University economist Hugo Eyzaguirre discusses how raising the minimum wage will hurt emerging local economies. See more at "Raising the Minimum Wage, Lowering Opportunity."


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