Michigan House Democrats finalize 3% teacher retirement tax cut, but debate on its effects goes on

Rep. Matt Koleszar (D-Plymouth) discusses his legislation, HB 5803, that would reduce school district contributions toward teacher retirement and use the excess money to supplement classroom needs. June 25, 2024. Photo by Jon King.

Legislation to permanently end a 3% tax many public school teachers pay into a health care fund for their retirement is on its way to Gov. Gretchen Whitmer for her signature after receiving final approval in the Michigan House.

“By lowering costs for qualifying teachers on each paycheck and freeing up resources for local school districts, we are increasing flexibility for both,” Whitmer said Wednesday in announcing her plan to sign the bill into law. “We can help our educators pay the bills, put food on the table, and live better lives right here in Michigan. At the same, we can ensure our schools have the funding they need to invest in classrooms, computer labs, and libraries, expand on-campus mental health options, or shore up campus safety.”

But partisan debate over what the pending law will mean long-term isn’t over. The dispute lies in the fact that the teacher retirement system has two parts; one that funds health care costs, which is fully funded, and the other that covers pension liabilities, which is not. 

Whitmer and her fellow Democrats in the Legislature say those are separate funds and the state no longer needs to pay off additional costs, likening it to a homeowner paying off a mortgage early. Republicans have insisted they are both part of the same fund and the savings realized by the health care portion being paid off should be used to pay down the pension liability.

 HB 5803, sponsored by state Rep. Matt Koleszar (D-Plymouth), passed along party lines 56-52, with majority Democrats pushing through the reform that was initially passed by the House in late June as the Legislature was working to finalize an $82.5 billion budget for Fiscal Year 2025. 

A substitute version was approved by the state Senate, also along party lines, last week. That bill, SB 911, sponsored by state Sen. Kevin Hertel (D-St. Clair Shores), had been set for a vote Wednesday, but Koleszar’s version was passed instead. 

Hertel told Michigan Advance last week the bills were identical.

However, state Rep. Jaime Greene (R-Richmond) issued a statement after the vote, calling it a “raid” on the teacher pension fund, which she said was still $24 billion in debt. 

“This is a betrayal of trust to every teacher who selflessly pours their heart into our classrooms,” said Greene. “The teacher retirement fund is there as a promise to our teachers for their years of service and dedication – not to serve as a piggy bank for politicians to dip into whenever they see fit. We must prioritize the needs of our educators, ensure the promises made to them are kept, and stop sacrificing their future for shortsighted projects. Our teachers and our students deserve better.”

Hertel has disputed that contention, saying the fund in question is currently 140% funded, and he doesn’t see any sense in putting money into the fund that will be better used in classrooms and teacher paychecks.

The FY 2025 budget, which goes into effect Oct. 1, was the first in nearly a decade that failed to include an increase to the per-pupil allowance for the School Aid Budget, keeping it at $9,608 per student. 

Instead, it included a decrease in rates paid to the Michigan Public School Employees’ Retirement System (MPSERS), allowing the Democratic-led Legislature to redirect $670 million from the system into additional funding for schools, which Gov. Whitmer’s administration originally proposed when she rolled out her $80.7 billion budget blueprint in February.

The bill passed Wednesday codifies a 5.75% rate reduction in payroll costs starting in FY 2026, and makes that savings permanent.