Governor proposes change to pre-funding of certain MPSERS health benefits
On Wednesday, February 7, 2024, Governor Whitmer unveiled her state budget proposal for the upcoming fiscal year. It included changes to the state’s pre-funding of MPSERS “Other Post-Employment Benefits” (OPEB), which covers crucial healthcare benefits for public school retirees, like medical, dental, vision, and hearing coverage.
With various stakeholders, legislators, interest groups, and media outlets all providing commentary, MARSP wanted to give you the facts as we understand them. Read MARSP’s recent article, Understanding MPSERS Finances: Debt is Only Part of the Story, for further context on this subject.
History of pre-funding MPSERS healthcare
Understanding the history of MPSERS pre-funding is pivotal in grasping the significance of these changes. Over the past 15 years, several legislative reforms have reshaped MPSERS. One notable shift in 2012 mandated the pre-funding of OPEB under the MPSERS Act.
Before 2012 and since the early 1990s, Michigan funded OPEB on a “pay-as-you-go” basis, covering healthcare bills for retirees as needed. This approach initially worked well as expenses typically matched available funds. In the 1990s and early 2000s, unforeseen spikes in healthcare costs, poor market performance, and legislative changes to the School Aid Budget led to a decline in the Funded Ratio of OPEB. This prompted worries about financial stability.
In actuarial terms, the “Funded Ratio” is the value of assets in a pension plan divided by its obligations. It offers a financial snapshot of a plan’s status at a single moment. If the amount of the funded ratio is less than 100%, that amount is referred to as Unfunded Actuarial Accrued Liability (UAAL), essentially a complicated way to say “debt.” (Keep in mind, not all the bills are due today.)
As the funded ratio of MPSERS OPEB declined, policymakers made the wise decision to start putting money aside to fulfill future retiree obligations. During the 2011-2012 session of the Michigan Legislature, they passed legislation to keep the system solvent and pre-fund OPEB benefits. The approach worked. As of FY 2022, OPEB was funded at 99.2%. This legislation also improved the funded ratio for MPSERS pensions, which rose from 59.6% in 2012 to 63.8% in 2022.
The Governor’s proposed transfer
Under the current MPSERS Act, annual state UAAL contributions must not decrease from the previous fiscal year. With OPEB projected to be over 100% funded once the books are closed in the current fiscal year, the Governor proposed transferring the amount of the state’s extra annual payment towards OPEB “debt” into ongoing funding for school districts, around $670 million. The proposed transfer, which requires an amendment to the MPSERS Act, would increase funding for priorities such as universal preschool and special education.
MARSP’s key takeaway
The Governor’s budget proposal continues to dedicate funding to paying down MPSERS pension UAAL. Please also keep in mind that this proposal addresses OPEB funding within MPSERS – not pension funding. The pension portion of UAAL (debt) is still projected to be fully paid off around 2038.
MARSP is analyzing the Governor’s proposal and urges policymakers to proceed carefully. The decisions they make today must not harm the future stability of the retirement system. We’ve seen the state take great strides to improve MPSERS financial health in recent years, but we’ve also seen how quickly that financial position can change. Prioritizing the repayment of MPSERS debt as soon as possible promotes staff retention by ensuring that both current and future retirees receive their promised benefits. This, in turn, positively impacts Michigan’s current and future students.
Stay tuned for future updates and potential opportunities for action!
