CHICAGO – Michigan lawmaker sapproved changes to the teachers’ pension system that were part of a final budget deal reached earlier in the week by the legislature’s GOP majorities and Gov. Rick Snyder.

The Senate approved the pension changes to the Michigan Public School Employees Retirement System in Senate Bill 401 on Wednesday. The House then approved identical changes through House bill 4647. Procedurally, one chamber must concur with the other before the package reaches Snyder, said Gideon D’Assandro, a spokesman for House Speaker Tom Leonard.

Rick Snyder, governor of Michigan, speaks during a grand opening ceremony at the expanded Toyota Motor North American Research & Development (TMNA R&D) center in York Township, Michigan, U.S., on Thursday, May 4, 2017.
Michigan Gov. Rick Snyder and fellow Republicans who control the legislature reached a compromise on changes to the teachers' pensions system. Bloomberg

The status of the teachers’ fund had been a central sticking point blocking final work on a $55 billion spending plan for the fiscal year that begins Oct. 1. GOP leaders had set a target funding level of $55 billion without Snyder’s input as the governor resisted their efforts to end a hybrid teachers’ pension plan which he said was too costly.

It was estimated to cost as much as $500 million if fully closed and all new employees were shifted to the defined contribution plan. Lawmakers are now working in a conference committee to resolve budget differences and final floor votes are expected by the middle of next week, D’Assandro said.

“This reform will enable us to fulfill our obligations to those teachers who dedicated their lives to the critical task of educating the next generation of Michigan leaders,” said Sen. Jim Stamas, R-Midland.

The GOP has been pressing for the proposed changes to deal with a $30 billion unfunded liability, which has grown from $246 million in 2000, according to the nonpartisan Senate Fiscal Agency.

Under the agreement between leaders and the Republican governor, 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.

Bowing to GOP lawmakers, the new plan could be closed if its funded ratio falls under 85% for two consecutive years.

“If that trigger happened, the state, if it chose, would have 12 months to appropriate funds to bring the system's funded ratio above 85% and keep the system open. Otherwise, all new hires after those 12 months had elapsed would be placed into the DC plan,” the Senate fiscal report said.

The aim is to steer more employees into the defined contribution plan through improved perks.

The existing plan was established in 2012. 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 an 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.

Snyder unveiled a $36 billion budget proposal in February. Last month, the state’s revenue estimating conference released revised estimates for the current fiscal year and 2018 and 2019 that left some minor red ink to address.

The group reduced net general fund-general purpose revenues by $179 million to $10.1 billion. Net school aid fund revenues were raised by about $153 million to $12.6 billion. The group lowered general revenues by $114 million in the next fiscal year but raised education revenues by $187 million.

"Today’s consensus agreement reaffirms that Michigan’s economy is on solid footing and we anticipate continued growth in state revenues," said state Treasurer Nick Khouri. The numbers were revised from January estimates used to craft the budget.

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