Michigan lawmakers have approved legislation to implement fundamental changes to retirement benefits for teachers and finalize the state’s fiscal 2018 budget.
On Thursday the Senate gave final approval on two bills to finalize Michigan’s state budget. House Bills 4323 and 4313 passed 26-11 and 23-14 in the GOP-controlled chamber, with Democrats and some Republicans opposed.
The House passed the budget Tuesday on a mostly party line vote of 64-43 and 72-35 vote. The $55 billion spending plan for the fiscal year that begins Oct. 1. represents a 2% increase in state spending over the current fiscal year. The plan includes more money for K-12 education, career and technical education, and road and bridge projects.
The state will spend $255 million more than planned on the Michigan Public School Employees Retirement System. Much of it addresses $29 billion in unfunded liabilities in a legacy pension system for those hired before mid-2010 that is 60% funded. Another $150 million would be added to Michigan's savings account, and $35 million would go to a statewide infrastructure fund created last year in the wake of Flint's drinking water crisis.
State Rep. Laura Cox, R-Livonia, the chairwoman of the House Appropriations Committee, described the budget as based on “sound principles and priorities” that doesn’t exceed the rate of inflation.
“This budget maintains the programs that are vital to people in Michigan, with an emphasis on protecting our most vulnerable residents,” Cox said. “We also invest in our state’s future by increasing the amount of money for each student in K-12 schools."
Rep. Fred Durhal III, D-Detroit, said the budget does not do enough to address the state’s failing infrastructure or the funding shortfalls in a number of school districts. He wished that instead of putting money into changing teacher retirement benefits and the state’s rainy day fund, that the money went toward roads. “We’re still critically underfunding things like our roads and schools, and our state will continue to suffer for it,” he said.
The status of the teachers’ fund had been a central sticking point blocking final work on the 2018 fiscal budget. Legislation on teacher’s pension system was passed by the House on Tuesday in a 55-51 along party lines. The Senate approved its bill, which is identical to the House bill, last Wednesday.
Under the legislation a new defined contribution 401(k)-style plan and a new hybrid plan will be created. Employees starting on Feb. 1 would choose which plan to join.
The legislation closes to new employees an existing hybrid plan that was established in 2010 beginning on Feb. 1. 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 costs rises to $38.7 million in the next fiscal biennium and to $53 million in fiscal 2019-2020.
State Rep. Thomas Albert, R-Lowell, who sponsored the House bill, said that the legislation was a giant step in the right direction to addressing the problem of spending school dollars on pensions. “We will be on the path toward investing more money directly in the classroom to benefit kids, rather than funding services rendered decades ago,” he said.
State Rep. Sherry Gay-Dagnogo, D-Detroit, a former Detroit teacher, said the legislation will further erode the state’s ability to attract quality talent when it is already faces a teacher shortage.
“We are compromising a retirement system that was designed to give educators a reasonable allowance to cover their cost of living in their senior years, yet now we’ve deemed that an unworthy venture," she said. "Who will suffer most? Our children.”
The bills now head to Governor Rick Snyder’s desk for signature. Snyder is currently on a European tour.