1. Closing the Michigan public school employees’ retirement system?
Presentation to the Michigan community college association
March 17, 2017
Kathryn Summers, associate director, Senate fiscal agency

2. What does mpsers offer to employees?
For employees hired since September 4, 2012, mpsers offers two choices:
Hybrid, or “pension plus” – a traditional defined benefit pension, payable no earlier than at age 60 with 10 years of service, plus a defined contribution/401K component
Defined contribution – 2% employee contribution generates 1% employer match
Straight defined contribution/401k option
6% employee contribution generates 3% employer match
New hires are no longer eligible for any retiree health care premium subsidy or coverage – instead, all new hires are in a personal healthcare fund (phf) – this is a straight 401k plan where an employee’s 2% contributions are matched 2% by the employer

3. Hybrid vs. existing dc-only option
According to the office of retirement services, using fiscal year 2016 payroll data, for all of mpsers (k-12, isd’s, psa’s, cc’s, libraries):
Benefit Structure
Total Active Members
Aggregate Wages
Percent of Members Choosing Plan Since 9/4/12
Percent of Wages by Plan Since 9/4/12
Pension Plus – July 1, 2010 – September 3, 2012
11,503
$320,902,298
N/A
Pension Plus – Since September 4, 2012
31,850
$485,141,920
76.4%
78.8%
DC Only Option – Since 9/4/12
9,834
$130,780,343
23.6%
21.2%

4. Hybrid vs. existing dc-only option
According to the office of retirement services, using fiscal year 2016 payroll data, for community colleges only:
Benefit Structure
Total Active Members
Aggregate Wages
Percent of Members Choosing Plan Since 9/4/12
Percent of Wages by Plan Since 9/4/12
Pension Plus – July 1, 2010 – September 3, 2012
1,465
$30,796,342
N/A
Pension Plus – Since September 4, 2012
4,551
$43,734,105
78.6%
78.0%
DC Only Option – Since 9/4/12
1,239
$12,355,459
21.4%
22.0%

5. What does mpsers cost employees?
For new hires that choose the pension plus/hybrid plan, the cost to the employee is 2% of salary for the defined contribution component of the hybrid, plus 3.0% of salary up to $5,000 (up to $150 total), plus 3.6% of salary between $5,000 and $15,000 (up to another $360, or $510 total) plus 6.4% of salary for earnings above $15,000.
Example: full-time person makes $50,000; their contributions are 2% of $50,000 for the DC component, plus 3.0% times the first $5,000 of salary ($150), plus 3.6% of the next $10,000 in salary (another $360) plus 6.4% of the next $35,000 of salary, for total contributions of $3,750, or 7.5% of salary (or 5.5% for the defined benefit component of the hybrid, plus 2.0% for the defined contribution component)
For new hires that choose the dc-only, if they contribute 6% of salary, they earn the maximum match of 3% from the employer (50% matching, capped)

6. What does mpsers cost employers for pension?
Normal costs (i.e., the cost to provide a year’s worth of pension benefits for a year’s worth of service credit earned)
For new employees that choose the hybrid pension plan, employers pay 3.07% for the Db component plus up to 1% match for the dc component; total of 4.07% of salary
Legacy/ual costs (i.e., the costs spread across all payroll, regardless of plan choice, to pay for any shortfalls in assets compared to benefits already earned – like a mortgage)
For all employees (including mip/basic, hybrid, and dc-only), pension ual is 14.78% plus 1.36% for retirement incentive, for a total of 16.14% for pension legacy costs
For new employees that choose the dc-only plan, employers pay up to 3% for the DC piece (depending on employee’s contributions), plus the legacy costs mentioned in the bullet above
For new hires since September 4, 2012, there is no retiree health care premium coverage available. Instead, these new hires are in a ‘personal health fund’, which is basically a ‘401k for health’, where an employee contributes 2% and the employer matches 2% (which is the maximum employer contribution).
However, even for these employees, the cost of funding the legacy retiree health care premium coverage benefits is spread on their payroll.

7. What does mpsers cost the state?
Due to public act 300 of 2012, the amount k-12, community colleges, and participating libraries pay toward the unfunded accrued liability (the legacy cost) is capped at 20.96% of salary, with the state paying anything in excess of 20.96%. For fy , the state will pay 11.32% of payroll as follows:
K-12: $960.2 million
Community colleges: $70.8 million
Libraries: $0.6 million
Higher education (slightly different rate cap): $4.0 million
In addition, for fy , the state is proposing to pay the increase in the normal cost due to lowering the assumed rate of return. (for cc’s, $3.6m)

8. What does mpsers cost employers for retiree health care?
Normal costs – 0.25% - only applied to mip/basic payroll and to hybrid payroll for people hired between july 1, 2010 and September 4, 2012, who did not choose to convert to a personal health fund (the ‘401k for health’)
Legacy/ual costs – spread across all payroll – 4.82%
Personal health fund (phf) – 2% maximum matching, applied to payroll hired since September 4, 2012 and on payroll for employees who chose to convert/monetize their retiree health care premium benefits and instead enroll in the phf

10. Current unfunded liabilities
Fiscal Year
MPSERS UAL: Basic/MIP Closed Plans
Basic/MIP Funded Ratio
MPSERS UAL:
Hybrid
Open Plan
Funded Ratio
Retiree Health UAL
Health Funded Ratio
$22.4 Billion
64.7%
Not yet established
N/A
$25.9 Billion
4.3%
$24.3 Billion
61.3%
$6.2 Million
82.1%
$21.8 Billion
5.8%
$25.8 Billion
59.6%
($1.0) Million
101.4%
$12.5 Billion
14.0%
$26.5 Billion
59.9%
($11.8) Million
110.4%
$11.2 Billion
21.1%
$26.7 Billion
60.5%
($0.0) Million
100.0%
$9.3 Billion
27.5%

11. Senate bill 102 (S-3) of 2015-2016 session
The bill would do the following:
Close the hybrid system to new hires (existing employees would remain in it)
Replace with a straight defined contribution (dc) plan
New dc plan would mirror state employees plan in place since 1997:
4% mandatory employer (school) contribution
3% matching employer (school) contribution on employee 3% contribution
Maximum employer (school) cost of 7%
Would transfer any employees who already had chosen the existing straight dc option into this plan since it would be more generous

12. Costs under Sb 102 (S-3) of 2015-2016 session

13. First ‘bucket’ of additional potential costs
Best practice (not required) – accelerated funding
Gasb would not require accelerated payments, but it would be an actuarially recommended best practice for cash flow reasons.
Over five years, the cost to accelerate funding (if it were implemented) would be $2.1 billion. However, over 30 years, there would be $4.9 billion in net savings due to accelerated funding.
Accelerated funding results in savings because the more money invested in the system now, the longer those investments have time to earn money in the stock market and in other asset arenas.
If system were closed, this accelerated funding likely would not occur because of short-term cost concerns.

14. Second ‘bucket’ of additional costs
Lower assumed rate of return (aror) in out-years
At the time of the analysis last december, the assumed rate of return in the legacy plans was 8%. With that aror, the fy cost due to lowering the aror in out- years across mpsers, sers, and jrs was $340.5 million; the five-year cost was $1.4 billion; and, the 40-year cost was $24.1 billion. (because mpsers is open, sers and jrs use mpsers’s open/riskier investment strategy and so would face costs under a lower aror investment strategy.)
Now that the administration is going to be lowering the aror for mpsers to 7.5% over the next two years, and for sers and jrs in the next year, the costs listed above will be less, but a revised fiscal estimate from the office of retirement services is not yet available.

15. Second ‘bucket’ of additional costs (cont.)
Why is it necessary to lower the aror in out-years under a closed system?
When a system is closed, and after any old ual has been paid off (i.e., there are no longer any large ‘mortgage’ payments coming into the system to make benefit payments), the investment strategy needs to become more conservative to meet the cash flow needs of the system, needing cash on hand to make pension payments.
When the existing ual is paid off (est. 2038), and large dollar contributions currently being made to pay down the ual are finished, it is likely that the aror would need to be reduced to something less risky to preserve principal and provide enough cash on hand to make payments to what would basically be a retiree-only system.
The costs shown above assume that the aror would be lowered gradually to 5% and would be amortized over 40 years (as prescribed by the legislation). Different assumptions on the aror and amortization periods would impact the estimated costs and payment schedule. E.g., a lower aror and/or shorter amortization would increase costs.
At least for the first number of years, these additional costs (which increase unfunded accrued liability) would be borne by the school aid fund, until such time as the ual fell below 20.96% of payroll.

16. Third ‘bucket’ of additional costs
The employer normal cost of the existing hybrid is currently just over 4% of payroll (3.07% for the db pension piece, plus 1% dc matching), and is expected to decline over time as more payroll moves into the hybrid with new hires.
The employer normal cost of the existing dc-only plan is a maximum of 3%
The employer normal cost of the dc-only plan proposed last December is a minimum of 4% and a maximum of 7%, or 2.93% more than the hybrid.
The additional employer normal costs would be on-going, although a conversion to a mandatory dc-only plan would eliminate any potential for future unfunded accrued liabilities.
sfa December 2016 estimates showed a 30-year total normal cost increase of $9 billion; ors’ estimates show a 30-year total normal cost increase of $11 billion.

17. Other alternatives and considerations
Lower the assumed rate of return in the existing hybrid
Currently, the hybrid assumes 7% - if that were reduced to 6.5%, the normal cost would increase from 3.07% to 3.97%. Since payroll in the hybrid is still fairly small, The increase in the normal cost across the entire mpsers system (paid by employers, unless an appropriation were made to cover it) would be $16 million in the first year, growing over time with payroll.
If the hybrid’s aror were reduced to 6%, the normal cost would be 4.88%, with a normal cost increase of $32 million in the first year.
Ual would exist for the first time in the hybrid ($21.7 million with a 6.5% aror, and $43.4 million with a 6% arror), which could be funded with a lump-sum saf payment if desired.
Could improve existing dc-only plan, but at some point, if too much payroll is diverted to optional dc, question would be if it becomes, de facto, a closed system and then incurs costs
A dc-only plan does eliminate potential for future ual, but incurs significant costs from closing the system, and additional normal costs (if modeled like sers).
A dc-only plan eliminates risk from employers, and shifts that risk onto employees.
Orp exists for full-time instructors or administrators of community colleges.