CHICAGO — In a victory for Gov. Rick Snyder, Michigan's top court found that the state's 2011 pension reforms are constitutional, a ruling that will offset some of the state's pension obligations in the future.
The Michigan Supreme Court, in a split opinion, ruled on July 30 that Michigan is allowed to require employees to contribute 4% of their salaries to their pensions or shift to a defined contribution plan. Four of the court's seven justices joined in the majority, two both consented and dissented and one dissented entirely.
The Michigan ruling is the latest in a series of decisions by top state courts on proposed pension reforms as states struggle to address climbing retirement obligations. Illinois, New Jersey, Oregon and Florida among others have all litigated pension overhaul efforts.
"It's disappointing in a bigger scale for the whole country, because you're not going to see our defined benefit plans anymore and I don't know how our kids are going to make it," said John DeTizio, labor relations director for the Michigan Association of Government Employees, Local 2012 of OPEIU. "We were actually surprised," DeTizio said, adding that the adverse court ruling came after a lower court and appeals court both ruled in favor of the labor groups. "It's a little more difficult now in this state."
Unlike most states, the bulk of Michigan's state employees already have defined contribution plans, which are known as tier 2 and structured more like 401(k)s, starting in 1997 with all new hires. The state shifted all new hires to a contribution plan in 1997, with those employees totaling roughly 34,000.
Last week's Supreme Court ruling affects roughly 15,000 state workers hired before 1997 and 2,000 former employees. Michigan says it has collected about $134 million from the increased contributions since 2012.
Gov. Rick Snyder and the Legislature in 2011 approved the legislation that required employees to either contribute 4% of their salaries to the pension plan or shift to a defined contribution plan.
A coalition of labor groups, led by the Michigan Coalition of State Employee Unions, challenged the amendment to the State Employees Retirement Act, arguing that only the Michigan Civic Service Commission has the power to manage and oversee the system.
In its majority opinion, HERE, the Supreme Court ruled that the commission does not have legislative powers, and that the ratifiers of Michigan's 1963 Constitution understood compensation to mean only salary and wages, not "pensions or other fringe benefits."
The ruling is positive for Michigan's credit, Moody's Investors Service said in a brief comment released Monday. A ruling against the state would have meant Michigan would have to return $134 million, analysts said. "An adverse ruling also would have removed a key source of annual pension funding that the state would have to assume going forward, an amount we estimate totaled more than $40 million in both 2013 and 2014," analyst Tom Aaron wrote in the comment. "Although these employee contributions are relatively small compared with the state's annual operating budget of more than $25 billion, they have recently helped bolster annual plan funding relative to the annual required contribution determined by plan actuaries."