In This E-Mail:

• Dust Still Settling on MPSERS Reform 2017
• Budget Process Moving Forward

Dust Still Settling on MPSERS Reform 2017

Last week, the House and Senate both approved sweeping reform to the Michigan Public School Employee Retirement System (MPSERS). The measure has been presented to the Governor for his signature!

MPSERS reform is nothing new. School employee retirement plans have incurred many changes to benefit levels and payment responsibility over the last several years and now, see a migration to pushing the investment risks away from the state and to employees.

There are several changes that need a more detailed review. Although some of the changes may be familiar due to constant media attention, other changes may have unintended consequences, that as of today, are still unknown.

Here are some of the changes of interest:

“New” Defined Contributions Plan

• Employees hired after February 1, 2018 will be placed in 401k-style plan with an opt out to enter the new hybrid defined benefit (DB) plan if they choose.
• Existing school employees that chose the defined contribution (DC) plan upon employment will be placed into the “new” DC plan.
• The “new” DC plan consists of a 4% of salary contribution by the employer, and match the employee’s contribution up to an additional 3%. Maximum employer pension contribution of 7%.
• Require the School Aid Fund to reimburse districts for the employers matching contribution of up to 3% of salary.

“New” Hybrid Plan

• Lowers the actuary assumptions on annual rate of return for new hybrid plan to 6% from the current 7%.
• Require employees first hired on or after February 1, 2018 that opt for the hybrid plan to make normal cost and unfunded liability contributions on a cost sharing basis of 50% by the employer and 50% by the employee versus the current percentage of salary method.
• Sets a minimum funding limit of the hybrid plan for members hired since February 1, 2018 at 85%. If the funding limit falls below 85% for two consecutive years, the hybrid would be “closed” and members of the plan would be placed in a defined contribution 401k-style plan. Allows for the state to appropriate funds to avoid the closure of the hybrid plan.
• Establishes the regular retirement age to be 60-years old for those hired between July 1, 2010 and January 31, 2018 and age 60 for members hired on or after February 1, 2018 that opted into the hybrid system. The "new" hybrid plan regular retirement age could be adjusted in full-year increments if a study of mortality determined a difference of more than one year from previous studies of mortality and the funding level of the hybrid is below 100% after assuming the increase in mortality.

Other Changes

• Eliminates the ability to purchase service credit, for those eligible, in the legacy systems for all purposes except military service credit effective September 30, 2017.
• Use the change in district “Current Operating Expenditures” as a factor for adjusting the districts’ payroll for the allocation of unfunded liability payments.
• Sets the current contribution percentage for unfunded liability payments as the minimum level, allowing for increases that establish the new minimum level on an annual basis.

We still have some questions that are unanswered regarding the use of current operating expenditures as a factor for assessing the districts UAAL payments, as well as implementation questions of how districts will change procedures for any new reporting or payment requirements to the Office of Retirement Services (ORS). We have requested to be a part of any work group that may develop guidance for districts. This will be both an administrative and accounting issue that will need to be well thought out in its implementation.

Budget Process Moving Forward

There were plenty of details on the budget in our eblast dated June 8, but we think it’s a good time to explain where we are in the process and to review some changes that were made in the final conference committee for HB 4313 (H-1) (C-1), the 2017-18 Omnibus Education Budget (Ed Bus). The bill includes the budget areas of School Aid, Community Colleges and Higher Education. This is a compilation of the three individual budgets, however, changes can be made from the earlier individual conference committee reports.

There were some allocations that appeared in the final Ed Bus that were not in the individual budgets that we thought you should be aware of. We have updated our web page for the 2017-18 School Aid Budget with analysis of the final report.

Here are some notable changes that are included as part of the final Ed Bus:
MPSERS Assumed Rate of Return (AROR) – Employer Normal Cost Increase Offset (Sec. 147a(2))
Allocation that reimburses district, ISD’s and district libraries for the employer normal cost increase related to the AROR reduction from 8.0% to 7.5% at a cost of $48.9 million for FY 2017-18 and a total cost of $97.8 million in FY 2018-19, once fully phased in over 2 years.

MPSERS One-Time Deposit (Sec. 147c(2))
An appropriation of $200 million to make additional payments towards reducing the amortization period of the 2010 early retirement incentive cost.

High School Per Pupil Bonus (Sec. 22n)
$11 million is allocated to provide districts with an additional $25 per pupil for each pupil in grades 9 thru 12 to reflect the higher costs of high school instruction.

The Ed Bus is now in the Senate heading for “up or down” vote from the legislature. It is expected to be up for a vote tomorrow (Thursday) however until that occurs, we are still in a holding pattern. Assuming it passes, there is still an opportunity for the Governor to review and veto sections of the bill if he wishes.