DALLAS – Legislation that overhauls retirement benefits for Michigan teachers, headed to Gov. Rick Snyder this week, will make it easier for schools to contain and predict pension costs while significantly increasing state financial investment, according to S&P Global Ratings.
Under the legislation that passed earlier this month, the state can expect to shoulder $24 million in additional fiscal year 2017-2018 costs but over the long term schools will benefit from lower unfunded liabilities and less investment risk, S&P said in a report.
“Over the long term, we expect Michigan schools will benefit from lower unfunded liabilities and less investment risk with the burden of new costs shouldered by the state,” S&P wrote. “Based on current assumptions, we consider the additional state contributions affordable, accounting for less than 1% of its fiscal 2018 budget.”
The legislation closes to new employees an existing hybrid plan that was established in 2010. Creation of a new hybrid is a compromise between Snyder and GOP leaders who wanted close off any hybrid to new employees.
The new plan requires a 4% employer contribution plus an optional 3% employee contribution that would be matched by the state, for a total of 10% of the employee’s salary. The legislation requires a 6% assumed rate of return in the new hybrid plan and imposes new reporting and analysis requirements. The existing plan assumes a 7% return.
The state would incur about $24 million in additional fiscal year 2017-2018 costs including $11.8 million for the defined contribution changes and $11.3 million for the hybrid plan, and $1 million for a higher match proposed for the existing defined contribution plan. The overall cost rises to $38.7 million in the next fiscal biennium and to $53 million in fiscal 2019-2020.