Legislative Update…

Supreme Court Rules 2012 School Employee Retirement Reforms Are Constitutional

The Michigan Supreme Court ruled yesterday in a unanimous 6-0 decision (Justice Richard Bernstein chose not to participate as the case was argued before his election) that Michigan lawmakers did not violate the Michigan Constitution when they amended state law in 2012 to require increased public school employee contributions to pension and retiree health care benefits.  AFT Michigan and other employee groups initially filed suit challenging the constitutionality of the law in 2012, arguing that only the Civil Service Commission had the authority to alter employee compensation, that PA 2012 represented an unlawful “takings”, and was also violation of contract law.  The Supreme Court ultimately disagreed.

Public Act 300 of 2012 included significant amendments to the MPSERS Act intended to provide greater financial stability to the system.  Some of the more significant changes included:

• Employees were required to make higher contributions to their pension benefits by choosing one of three options:
  • Increased contributions to maintain the 1.5% pension multiplier going forward (4% for Basic plan employees, 7% for MIP employees, no graduated scale),
  • A reduced multiplier of 1.25% for future years of service, or electing the reduced multiplier after 30 years of service, or
  • Move into a Defined Contribution (DC) or 401(k) plan, capping past pension credit, with a flat employer contribution of 4% and 3% match for future service.

• New employees could choose between the hybrid Pension Plus plan or a DC/401(k) plan

• No retiree health insurance benefits for employees hired on or after September 4, 2012, replaced with a DC benefit of up to 2% of pay plus a lump sum payment of $1000 or $2000 into a Health Insurance Reimbursement Account

• Increased contributions for retiree health care insurance premiums to at least 20% of premium costs, 10% for existing Medicare-eligible retirees as of January 1, 2013, and

• Continuing the 3% employee contribution for retiree health benefits created in 2010, but guaranteeing individual contributions upon cessation of employment.  Additionally, employees could forego retiree health benefits and instead receive the 2% DC benefit for health care.  This change was made specifically in response to an outstanding legal challenge to creation of the 3% employee contribution requirement in a prior round of MPSERS reforms, PA 75 of 2010.

The Supreme Court decision ruled that the 2012 reforms are constitutional.  Thus, the status quo remains in effect.  However, the Supreme Court did not rule on the constitutionality of the 3% retiree health care contribution initially created in 2010 that applied to employee contributions from July 2010 until September 2012.  Those contributions are currently held in escrow, and the Supreme Court is expected to issue an order that specifically addresses the constitutionality of that provision in the near future.

Roughly $550 million is currently being held in escrow from the July 2010 – September 2012 employee retiree health care 3% contribution enacted in PA 75 of 2010.