November 9, 2012

Office of Retirement ServicesServing more than 530,000 customers

Michigan Public School Employees Retirement System

Agenda

Why PA 300? Reform Overview Next Steps Employer Tools Employer Contribution Rates & Funding The Funding Studies Membership State of Michigan Shared Services

Why P.A. 300?

Why Reform?

Rising healthcare costs Less than favorable investment returns Increasing retiree population Shrinking active population Michigan Public School Employees

Retirement System is paying out more than it’s taking in

To compensate for this, employer contribution rates have grown to an all-time high and were expected to grow to 35 percent of payroll costs by 2016.

…Sustainable?

Why Reform?

PA 300 of 2012 addresses most of these issues for long-term sustainability

It reduces the employer contribution rate Employees pay a greater share

Provides for a maximum retiree insurance premium of 80%

Prefunds retiree healthcare Maintains current employer contribution levels Reduces the Unfunded Liability by more than $15 billion

Reform Overview

Retirement Reform Overview

Bill signed by Governor Snyder on September 4, 2012

Members who began public school employment before September 4, 2012 are given a voluntary election regarding their retiree healthcare.

Members who began employment before July 1, 2010 are also given a voluntary election regarding their pension.

Premium subsidy for retiree health insurance is reduced from 90% to 80%.

Continued analysis through specific studies

Retirement Reform Overview

Election window is September 4, 2012 to October 26, 2012 – now passed The temporary restraining order prevented the closing date of the

window. Members are being encouraged to continue to educate themselves and elect.

Changes effective December 1, 2012 New Hire reporting requirements for DC and PHF Election window implementation – to be determined

Premium subsidy changes effective with the January 2013 pension payments

Retirement Reform Summary

Healthcare Options Premium Subsidy (default) – Continue 3% contribution for

retiree healthcare and keep the retiree health insurance premium subsidy offered by the state

Members who first worked before 7/1/08, maximum (80%) subsidy after 10 years of service

All others, graded subsidy based on years of service

Personal Healthcare Fund - A portable, tax-deferred fund that can be used for paying healthcare expenses in retirement

Member is automatically enrolled in a 2% contribution and earns a 2% employer match

Member discontinues the 3% retiree healthcare contribution as of December 1 and a refund of all contributions will be deposited into their 401K.

Retirement Reform Summary

Pension Plan Options Option 1: Increase contributions to the pension fund and keep

the 1.5% pension factor Option 2: Increase contributions to the pension fund and keep

the 1.5% pension factor until 30 years of service. At 30 years, drop back to current funding level and all future service is calculated using a 1.25% pension factor

Cost to members Basic Plan members: 4% contribution instead of 0% MIP-Fixed, MIP-Graded, and MIP-Plus Plan members: a flat 7%

contribution instead of 3.9% graded up to 6.4%

Retirement Reform Summary

Pension Plan Options Option 3 (default): Keep current level of contribution to the

pension fund Pension formula for years of service through November 30 will

based on a 1.5% pension factor Pension formula for service after that will be based on a 1.25%

pension factor

Option 4: Move to a DC plan for all future service Receive a 4% employer contribution to a tax-deferred 401(k)

account. At retirement, receive a pension based on years of service and final

average compensation as of December 1 and a 1.5% pension factor.

Retirement Reform Summary

Hired after September 4 Pension Plan: Members have 75 days to choose a retirement

plan Pension Plus - the current hybrid plan that contains a pension

component and a savings component Defined Contribution - provides a 50 percent employer match on

employee contributions of up to 6 percent of salary

Personal Healthcare Fund: Automatic enrollment Members contribute 2% and receive a 2% employer match At termination, members with 10 years of service receive a $2,000

credit (age 60+) or $1,000 (under age 60) into a Health Reimbursement Account

Retirement Reform Summary

Other Provisions

Who Can Make an Election? Active MPSERS members who earned service credit the 12 months

ending on September 4 Active MPSERS members on a professional services or military leave

of absence who have maintained their employer-employee relationship Reporting units affirmed status of members for ORS

How Does This Affect Retirees? Retirees who are not Medicare eligible will pay 20% of their health

insurance premium, up from the current 10% Medicare-eligible retirees continue to pay 10% of their premium

Employer Next Steps

Employer Information Website

Created a centralized Web page to access information and tools.

Member information and calculators

Reform Alerts - informing you important changes needing timely action

Process for reporting New Hires

Reporting requirements for December 1

Hosted Webinars Series

Employee Validation File

Throughout the Election Window: Continue to notify ORS of any status changes of each employee

as soon as possible by uploading a file through the Data Exchange Gateway

Notify ORS of any new Members that first worked prior to September 4, 2012

After the Election Window closes: A list of employees will be provided to validate the final

comprehensive list ORS will provide a list of employees with the election selection

Retirement Report Testing

Created a test site for all reporting units to test reporting changes.

Testing is available beginning October 29 through November 16, 2012

All reporting units are encouraged to take advantage of this opportunity to upload a reports

Implementation

Retirement Reporting Implementation Date The new retirement reporting file layouts will be

implemented with all reports submitted December 1, 2012, and after.

These reports must be in the new file layout, even if the report begin and/or end dates fall before December 1.

Implementation

Retirement Benefit Plan Effective Dates Reporting contribution changes for all member benefit

plan elections are effective with your first payroll period with a December, 2012 begin date.

As ORS requires that you report wages when paid, not when earned, please remember to begin withholding the new contributions for the first pay period that will be reported with a begin date of December 1, 2012, or after.

9/21/12 19

Employer Contribution Rates & Funding

Employer Rate Cap

The legislation, as passed, allows for all of the following: The Unfunded Actuarial Liability (UAL) charge to

employers will not exceed 20.96% of payroll Normal Cost is not capped

Normal Cost has minor year-to-year fluctuations based on actuarial/member demographic changes

Any UAL charges in excess of 20.96% will be paid through appropriation

Funding Retiree Healthcare

Changed from pay-as-you-go to pre-funding We are unique and leading edge in this approach

Will apply employee 3% contribution toward funding healthcare

Uses savings from 80/20 premium split

Allows investment earnings to fund what would otherwise be required from the employers

FY 2013 - EMPLOYER CONTRIBUTION RATES Effective October 1, 2012 with Temporary Restraining Order in Effect

DB CONTRIBUTIONS         ELECTION OPTIONS

 

  Basic/MIP Pension PlusPension Plus PHF

First Worked 9/4/12 or later

Pension Plus to DC with PHF

First Worked 9/4/12 or later

Basic/MIP DB to DC

with DB Health

Basic/MIP DB to DCwith PHF

Basic/MIP with PHF

PENSION CONTRIBUTIONS          

Pension Normal Cost 3.47% 2.24% 2.24% 0.00%      

Pension UAL 11.42% 11.42% 11.42% 11.42%      

Early Retirement Incentive 1.36% 1.36% 1.36% 1.36%      

Pension Total Rate 16.25% 15.02% 15.02% 12.78%These options will not be implemented

until such time as the TRO is lifted.

HEALTH CONTRIBUTIONS        

Health Normal Cost 0.93% 0.93% 0.00% 0.00%

Health UAL 8.18% 8.18% 8.18% 8.18% 

Health Total Rate 9.11% 9.11% 8.18% 8.18%

DTL2 DB Contribution Total 25.36% 24.13% 23.20% 20.96%      

 

DC CONTRIBUTIONS              

DC Employer Contributions 0.00% 1.00% 1.00% 3.00%These options will not be implemented

until such time as the TRO is lifted.Personal Healthcare Fund 0.00% 0.00% 2.00% 2.00%

DTL4 DC Contribution Total 0.00% 1.00% 3.00% 5.00%      

9/21/12 23

Funding Studies

Background

Intended to provide recommendations for a sustainable retirement system

Will be conducted by an independent 3rd party – Segal Company

Due to the legislature on November 15

Study 1: Hybrid or DC?

Compares the current Pension Plus hybrid plan to a SERS-style Defined Contribution plan 4% employer mandatory contribution 1:1 employer match up to 3%

Alternative DC plan designs Possible plan changes (assumptions, benefits,

etc.) for the existing plans Evaluation will be based on adequacy, cost,

sustainability, risk, and economic impact

Study 2: Funding Mechanism

Will evaluate the Current Operating Expenditures (COE) model that was included in earlier versions of SB 1040

Other types of alternative funding mechanisms

Evaluation will include: Sustainability, fairness, stability, risk of manipulation Which reporting units should participate in which

mechanism (i.e., k-12, charters, ISDs, universities, libraries, community colleges)

Study 3: Pre-Funding Healthcare

Will evaluate the pros, cons, and costs of pre-funding retiree healthcare vs. the pay-as-you-go system

Stranded Costs Occur when school employers intentionally reduce

covered payroll, e.g., retirement incentives offered by local schools, special contractual arrangements.

School employers who do not intentionally reduce their covered payroll bear a disproportionate share of pension UAL and retiree health care costs (their own share plus).

Membership Decline

Privatization Considerations

What are the risks when you transfer an asset out of your control?

What do you really save? Some districts invited their services groups to compete

with privatized competitors – and they have won Cost shifting versus cost saving

Responsibility to be stewards of the broader education community

Saving Opportunity vs. Shifting

How much of retirement contributions are eliminated with privatization?

How much of retirement contributions are reassessed to all schools in the system due to privatization?

Normal Cost Unfunded Accrued Liability (UAL)

3.17%/4.4% 20.96%

Normal Cost Unfunded Accrued Liability (UAL)

3.17%/4.4% 20.96%

Good Stewardship: Cost/Benefit Analysis

When considering privatization, careful cost/benefit analysis is required

Private companies should only be used when they produce real savings

Inaccurate cost/benefit analysis has contributed to a downward spiral

State of MichiganShared Services

State of Michigan’sDTMB Office of Support Services

Fleet Services

Printing

Mail & Delivery

Surplus Services

Records Management

Motor Vehicle Fleet Services The State of Michigan leases its motor vehicle fleet Managed Fuel Managed Maintenance Accident/Maintenance Call Center, Available 24/7

www.michigan.gov/dmb > Services and Facilities > Vehicle Services

Printing Large volume printing for items from brochures to tax forms

State of Michigan’sDTMB Office of Support Services

Digital Print Offset Printing

Color Printing Variable Data Printing

Mail Delivery Inserting Presorting to obtain maximum postal discounts Small package shipping

www.michigan.gov/dmb > Services and Facilities > Mail & Delivery

Surplus Services Helps reduce storage costs and generate revenue through online

and live auction services. Federal Surplus Property Program. Obtain vehicles and other heavy

equipment, computers, furniture, and other property no longer needed by federal agencies.

www.michigan.gov/dmb > Services and Facilities > Shop Surplus!

State of Michigan’sDTMB Office of Support Services

Records Management

Do you know what paperwork and electronic records you should save?

Records Management Analyst Services provides consultation and recommendations of best practices for records management.

www.michigan.gov/recordsmanagement

State of Michigan’sDTMB Office of Support Services

Discussion

What have I missed?

What questions do you have?

Strengthening Communities and Securing Futures

Contact Information

Office of Retirement Services Website: - www.michigan.gov/ors Member Customer Services – 800-381-5111 Employer Reporting Website- www.michigan.gov/psru Employer Customer Services - 517-636-0166 Angie Schrauben – 517-322-6547

schraubena@michigan.gov

Steve Crippen – 517-322-6857crippens@michigan.gov

… for a successful today and a secure tomorrow.