Legal analysis suggests Michigan House Bill 6060 violates state law

A version of the following testimony was provided to the Michigan State Senate on December 18, 2024.

Thank you for the opportunity to submit technical comments regarding Michigan House Bill 6060.

The bill you are considering today would have profound consequences for your teacher pension system, for the entire public K-12 education system in Michigan, for the ability of Michigan's school districts to manage their budgets and financial health for the long term, and for every public service offered by the state. While the costs associated with the bill are breathtaking-between $17 billion to $20 billion in guaranteed new school district spending over the next 30 years-the risks to K-12 service delivery and long-term school district financial solvency are even more extreme.

Due to its far-reaching implications, a bill of this magnitude demands rigorous analysis. However, this bill has not received a proper actuarial analysis, a critical step for understanding how decisions impacting every K-12 hire today can ripple out decades into the future and move in unforeseen directions. In fact, actuarial analysis of proposed pension benefit changes of this magnitude is actually required by law in Michigan under MCL Section 38.1140h, a step that did not happen during the House process of passing the bill. We commissioned a legal analysis from the Grand Rapids-based Plunkett Cooney law firm to inform our assessment of the updated legislation.

The entire letter is available here, and the summary conclusion is as follows:

"[I]t is our opinion that the amendments in HB 6060 to the Public School Employees Retirement Act will result in increases to employees' pension benefits. That increase triggers the requirements of MCL 38.1140h(5) which include seven days notice and a supplemental actuarial analysis of the impact of the proposed changes on the pension funds."

Despite the seeming violation of state law associated with House passage, we have built a robust actuarial model for the Michigan Public School Employees Retirement System, MPSERS, to help policymakers and stakeholders understand the potential impacts of HB 6060.

The Great Recession was devastating for teacher pension systems across the country, generating hundreds of billions of dollars in underfunded liabilities, driving up retirement-related spending for public K-12 systems, and forcing money intended for the classrooms to be spent on higher payments to cover the retirement of past educators. MPSERS was no different and arguably was hit harder than most, as the legislature had failed to fully fund the annual required actuarial contributions to the plan for several years prior. Accordingly, MPSERS entered the Great Recession with approximately $9 billion in unfunded liabilities in 2007, which skyrocketed to nearly $25 billion by 2011.

This prompted one wave of reform in 2012 that made some fairly small improvements around the edges, but that reform failed to meaningfully move the needle on cost and risk due to a flawed design. In 2017, the legislature enacted the current plan design of MPSERS to avoid a doubling of unfunded liabilities and annual pension contributions, which are already projected to exceed $5 billion per year in the coming decades. The logic was to offer all new teachers a choice of two risk-managed plan designs, a defined contribution plan or a risk-managed hybrid pension design that splits costs and risks equally with teachers, a fair and even balance when considering that the teacher then receives a 100% taxpayer guaranteed retirement for life. This was an improvement upon the previous benefit tier, where teachers were covering two-thirds of their pension costs.

Since the 2017 reform took effect, the legislature has enacted a range of additional improvements to funding policy, assumptions setting, and other key pension mechanisms on a bipartisan basis. Some of these improvements involved recognizing previously hidden underfunding and aggressively moving to pay down MPSERS' unfunded liabilities much faster. Today, MPSERS stands at $29 billion underfunded, but it also now has several key financial guardrails in place, such that there is a realistic plan to pay off that debt within the next 15 years.

HB 6060 would place all new hires into a re-risked pension system instead of a de-risked one by eliminating critical protections against financial risk. The bill eliminates employee contributions to their pensions, forcing public school districts to bear nearly the entire cost. It also allows the purchase of five years of credited service for all teachers and guarantees a 6% conversion rate on those liabilities.

Our analysis and actuarial modeling find that:

• House Bill 6060 will add between $17 billion to $20 billion in new employer costs over the next few decades, depending on market performance. Because the recently enacted 15.21% rate cap for employers applies to unfunded liability payments and not to normal costs, making up the loss of employee contributions will be entirely placed on school districts and university employers.

• HB6060 would require immediate increased additional annual employer contributions of between 7 to 10 percent of payroll that would persist for at least the next 30 years.

• If MPSERS were to hit all of its assumptions and pay off all of its current unfunded liabilities by 2037 as planned, the annual employer "normal cost" contributions under HB 6060 contributions would be 13.7% in perpetuity, nearly double the 7% employer normal cost today.

Further, transferring current defined contribution account balances to MPSERS pension at the current discount rate would create a major immediate financial risk of immediate underfunding of those transferred liabilities. The bill would allow defined contribution plan participants to abandon their plan, transfer up to five years of credited service toward an actuarially equivalent pension benefit, and join the defined benefit plan. The member's previously earned service would be transferred using a relatively high discount rate of 6.0%. Such transfers would create the risk of a pension-obligation-bond-like situation where any downturn in market performance (meaning, any year where investment returns underperform 6%) or any future lowering of the MPSERS assumed rate of investment return would generate immediate unfunded liabilities. The bill would further allow a first-of-its-kind purchase of defined benefit service by defined contribution members who have at least 10 years of service. This means that a five-year purchase of service option is available to every single teacher in Michigan, regardless of which plan (DB or DC) they choose.

In conclusion, HB 6060 would reverse decades of responsible pension reform, skyrocket pension costs, make it almost impossible to increase teacher salaries in perpetuity, and force local governments to make difficult spending tradeoffs with the rest of their budget in order to put more resources toward MPSERS. The move would also likely be viewed as a credit negative by the rating agencies, who looked favorably upon the 2017 reform as being a credit-positive factor for the state's long-term financial stability. Instead of moving backward, we believe the legislature should focus on restoring the funding that it diverted from MPSERS this year in order to remove pension debt from the state's books as fast as it can.

Read the full legal analysis: Michigan House Bill 6060 Legal Opinion for Reason Foundation

Public link

Please use the above public link if you want to share this noodl on another website.