Lame Duck MPSERS Reform: Fact or Fiction?
Back in early October, I told attendees at the MASSP Principal's Summit that, depending on the outcome of the election, MPSERS reform was one possible issue that could come up during this year's lame duck session. Since then, I've lost track of the number of emails I've received with questions about what the legislature intends to do. With lame duck slated to start in just a few days, let's review what little we actually know and how much we don't.
Rumors abound…details do not. There is lots of talk about what "MPSERS reform" might look like with some of the rumors so extreme that they are unrealistic. Until legislative leadership comes forward with an actual plan, everything is just speculation, but the two most common rumors seem to be:
- Changing the amortization schedule for unfunded liability payments, which currently make up the bulk of the MPSERS rate. Think of this like refinancing your mortgage…lowers your payments, but extends the life of your loan. Since a significant portion of the unfunded liability is paid off the top of the School Aid Fund, this could free up money in the short term, but at a long-term cost. So why do it? Because it could allow for things like a foundation increase (if you're an optimist) or more money that the legislature can divert to the higher education budget, freeing up general fund dollars to pay the $600 million price tag for their roads plan (if you're more cynical).
- Closing the hybrid pension system and moving all new employees to a 401k-style defined contribution system. This is the proposal preferred by policy purists who don't believe that the state should be in the pension business and that employees, not their employers, should shoulder the long-term risk of investing in their retirement. Unlike the first option, which has a short-term financial benefit, this shift would come with a significant initial cost. NOTE: to be clear, under this version of MPSERS reform all current employees would be unaffected and would continue to accrue years of service in their current pension plans.
There is a big difference between political interest and political will. Political interest in closing MSPERS, which has long been a conservative policy talking point, has definitely increased. For example the influential West Michigan Policy Forum voted at their September meeting to make government pension reform their top Michigan policy priority. But bills have been introduced on this topic for longer than I've worked in politics and MPSERS still exists. What is unclear is whether the interest is intense enough that lawmakers are willing to pay the price—financially and politically—to make the switch.
Closing MPSERS is expensive…really, super duper, prohibitively expensive. If the MPSERS system were closed to new employees, the Michigan Office of Retirement Services calculates that the state would be on the hook for $33.4 BILLION in unfunded accrued actuarial liability (UAAL) costs. While it's only an approximate translation, the easiest way to think of UAAL is "the difference between what MPSERS has promised to pay employees and the money the system actually has in the bank." Even if the state amortized these costs over 30 years, closing MPSERS would cost $5.2 billion over the next 5 years…money that it would be difficult to find.
There is less urgency in the Michigan legislature since the balance of power remains unchanged after the election. A sense of urgency can turn political interest into political will and give lawmakers a reason to make difficult financial choices (like finding $33.4 billion). Before the election, there was lots of speculation that Democrats might close the power gap in the state House or even take control of the chamber. This fueled rumors that Republicans would view this lame duck session as their last chance to pass controversial policies (like closing MPSERS) before having to share power with Democrats. The shift in power didn't happen. It remains to be seen if the controversial policies will.
Regardless of what form it takes, closing MPSERS would have no impact on pension benefits already earned. So if you have 29 years in the system and a countdown calendar on the wall with a bunch of red Xs on it…take a deep breath. Any service credit already earned is guaranteed. Even if the state went to the furthest (and completely unlikely) extreme possible and froze the pension system so that current employees could not earn any more time in the system, you would still be guaranteed a pension benefit based on your current years worked and current final average compensation. That's why the unfunded liability makes closing out the system so expensive…because unless the state basically goes bankrupt (and no, that's even less likely, so don't go there) they still have to pay out your pension benefits.