Analysis of SB 1040

SB 1040 Talking Points

Senate Republicans Kahn, Jansen, Pavlov and Walker introduced Senate Bill 1040.  This bill makes massive changes to the Michigan School Employee Pension System (MPSERS) and is designed to shift significant costs for pensions and retirement health care benefits onto school employees and retirees. 

Senate Bill 1040 essentially eliminates all retirement health care benefits for future school employees, and requires current employees to pay a much greater share of their retirement health care. (See analysis later). The Bill also requires existing employees who opt to remain in a defined benefit pension plan to increase their contribution rate to either 5% or 8%, depending on whether they were currently members of the Basic plan or the MIP plan.  The Bill will greatly increase out-of-pocket costs for those who are already retired by capping the state share of retirement health care premium subsidy at 80%, rather than at the current 90%.

Sadly, this is only the latest in an ongoing string of legislative attacks on retirees that has resulted in fewer and fewer Michigan retirees being able to count on a secure retirement.  Retirees in Michigan are having their pensions taxed for the first time as a result of legislation passed last year. 

The original summary below contains changes that have been verbally proposed by the Governor and or Legislative leaders in late April/Early May highlighted in Bold Face. WE MUST STRESS THAT THESE CHANGES ARE CONCEPTS AND  NOT YET IN BILL FORM AND THE ACTUAL BILL DRAFT MAY NOT MATCH EXACTLY.

Pension:

Allow current school employees who were employed prior to July 1, 2010 to choose one of the following options going forward:  Hybrid plan members employed after July 1, 2010 are not subject to the following:

  1.  In order to retain the current multiplier of 1.5% Basic and Member Investment Plan (MIP) members will incur an increased contribution rate beginning October 1, 2012 (5% for Basic or 8% for MIP). (NOTE: On 5/4/12 the Governor and Legislative leaders announced that these percentages will be change to 4% for Basic and 7% for MIP members)  If you are not certain what your current contributions are, refer to the following:
  • If you elected the MIP before January 1, 1990, OR were a Basic Plan participant who enrolled in the MIP by January 1, 1993, you contribute 3.9 percent of your pretax salary. If you were a Basic Plan member, it was a noncontributory plan. 
  • If you first worked between January 1, 1990, and June 30, 2008, OR are a returning member who did not work between January 1, 1987, and December 31, 1989, you contribute pretax contributions for income $15,000 and over equal to $510 plus 4.3 percent of compensation over $15,000. 
  • If you first worked between July 1, 2008, and June 30, 2010, you contribute pretax contributions for income $15,000 and over equal to $510 plus 6.4 percent of compensation over $15,000. 
  1. If a member wishes to maintain existing out-of-pocket contributions, then plan participants will realize a reduced multiplier for future years of service used to calculate their pension; it will be reduced from the current 1.5% of final average compensation (FAC) to 1.25% of FAC).  This represents a decrease in the pension of close to 17% over a retiree’s life. 
  2. Member can freeze pension benefits that were accrued under the defined benefit system and elect  a defined contribution on or before October 1, 2012, with a 4% employer contribution to a 401k.
  3. Those in the non-contributory basic system (hired before 1990 and who did not choose to go into MIP) would pay 5% of salary if they elect to retain the existing 1.5% multiplier.
  4. Those who are in the MIP system (but not in the recently created hybrid system) would pay 8% of salary, if they elect to retain the existing 1.5% multiplier.

NOTE: These higher contribution rates DO NOT include the 3% retirement health care contribution that was enacted in 2009.  (see below for more)

  1. Hybrid Plan employees (those hired after July 1, 2010) remain in the Hybrid Plan at current contribution levels.  The Hybrid Plan is a blending of a defined benefit (DB) and a defined contribution (Tier 2) plan. A person under this plan is not be able to receive pension payments until age 60, and is required to have worked at least 10 years as a public school employee. The purchase of service credit by these employees is prohibited, and cost of living adjustments to the pension is not provided. The employee contributes $510 annually plus 7.3% of salary above $15,000.
  2. MIP and Basic members will make a choice and will pay the additional contributions beginning with the first pay after October 1, 2012 and ending with the members’ retirement or “attainment date.” The added percentage of their compensation is 5% for Basic members and 8% for MIP members.  Once a member reaches his/her attainment date, he/she will then continue to pay the contributions as described in number 1 above which are the current rates.

“Attainment Date” means the final day of the pay period in which the member attains 30 years of credited service or the date the member terminates employment, whichever occurs first.

  1.  SB 1040 caps the salary amount used for calculating pension benefits for new employees hired after July 1, 2012 at $100,000. That amount will be adjusted annually by the cost of living as determined by the consumer price index.
  2.  Beginning July 1, 2012, previously allowed tax-sheltered annuities, investments, longevity pay and merit pay will not be considered compensation under the bill.   Under the current plans, longevity, tax-sheltered annuities and merit pay are factored into the calculation to determine the final average salary.

SERVICE CREDIT ISSUES

A.  Members who elect to continue to receive credit for service and compensation and continue to pay the current contributions shall have their retirement calculated on the following basis:

  • All service accrued prior to October 1, 2012 shall be subject to the 1.5% multiplier of final average compensation, including purchased service contracted for prior to September 30, 2012. 
  • Beginning October 1, 2012, any service credit accrued or purchased after September 30, 2012 shall be subject to a 1.25 % multiplier of final average compensation.

            Health Care Cost Shifting/Elimination:

  1. Currently the health insurance premium subsidy is 90% for those persons eligible for a regular pension.  Under SB 1040, the subsidy will not exceed 80% for current retirees and employees hired prior to July 1, 2012 and elect health, dental, vision and hearing insurance.  Insurance premiums in effect for 2012 have retirees paying $99.90 a month for a single only plan; $155.25 a month for a two-person plan; and $179.59 for full family.  These out-of-pocket costs would double under SB1040. To see all  the insurance rates go to http://www.michigan.gov/documents/R072C_128095_7.pdf
  2. Beginning on July 1, 2012, current employees who retiree will receive health insurance if they are 60 years old.  However, there would be a phase-in period for current employees; up until June 30, 2013, those who are not yet age 60, could qualify for health benefits if their age plus years of service equals or exceeds 85 by June 30, 2013. Under current law, you are eligible for health benefits in the Basic plan if you are at least age 55 with 30 years of service credit;  under MIP, you are eligible for health benefits if you are at least age 46 years of age with at least 30 years of service credit.  (NOTE: on 5/4/12 the Governor and Legislative leaders announced that age and service requirements to receive health benefits in retirement will not change from current law, i.e. the sentence immediately above this one).
  3. This bill will retroactively apply graded premium retiree subsidy coverage for all employees.  This represents a significant cost shift to future retirees for health insurance.  Under current law, only employees hired since July 1, 2008 are in graded retiree health care premium coverage, but this bill retroactively applies graded premium subsidies to all employees who retire on or after July 1, 2012. (NOTE: on 5/4/12 the Governor and Legislative leaders announced that the graded premium subsidy will not apply to employees hired prior to 7/1/2008. This applies to this paragraph and the paragraph immediately below).

Retirements will need to occur before July 1, 2012 to avoid the impact of a graded premium should years of service not equal the 80% subsidy or the rule of 85.  Translated this means that a prospective retiree who is at least 60 years at the time of application for benefits and has 25 years of service credit, would receive 80% of health insurance subsidy.  The graded premium subsidy plan provides a retiree with a health premium subsidy provided they have at least 10 years, but less than 30 years of service. The system would pay 3 percent times the years of service (e.g., 30 percent of the monthly premium for ten years, 45 percent for 15 years, etc.).  More on graded premiums subsidies can be found here.

  1. SB 1040 creates a 2% retiree 401k account for new employees hired after July 1, 2012, but they would have no retirement health care premium subsidy as current employees/retirees enjoy. Employees could contribute up to 2% of their salary to the account and have up to that amount matched. 
  2. In lieu of any other health insurance coverage for those employed on or after July 1, 2012, a credit to a Health Reimbursement Account (HRA) shall be made by the employer in the amount of $2,000 to those employed on or after July 1, 2012; are 60 years of age or older; and who have at least 10 years of service at termination of their employment.  The employer shall pay $1,000 to an employee’s HRA who was hired on or after July 1, 2012 and who is less than age 60, but has 10 or more years of service.
  3. This bill maintains the 3% employee contribution for retirement health care (which is still being litigated) for current employees only. (As described above, new employees would instead pay the 2% into the health reimbursement account.) (NOTE: On 5/4/12 the Governor and Legislative leaders announced an intention that the 3% currently being litigated would be dedicated to prefunding health care and would create a right to receive health care upon retirement per rules above. The 3% would be supplemented by an employer contribution to health care and the State will make up part of the const through payments from the School Aid Fund. Details are ).

SB 1040 Talking Points