LANSING – Governor Rick Snyder signed into law one of the biggest-ever changes to state employee benefits with an overhaul he said would prune $5.6 billion from the state’s $15 billion in long-term unfunded liabilities.

In signing HB 4701 and HB 4702 , designed to shore up the state’s pension and retiree health care benefits, Mr. Snyder announced the state would cease, starting December 22, collecting the 3 percent of state employees’ pay it had claimed for about a year to fund future retiree health care costs. Snyder also announced state employees would see a refund in their January 19 paychecks of the 3 percent contributions employees were required to make, plus interest.

“We’re talking about long-term government reform,” Snyder said shortly before signing the bill at a ceremony at the Romney Building. “This reform though is a major movement in terms of the balance sheet for the state of Michigan.”

With the demise of the 3 percent contribution, the law instead requires workers under the plan to pay 4 percent to remain in the defined benefit program, and that 4 percent would go toward funding the state’s pension liability. The Supreme Court on Wednesday let stand a Court of Appeals opinion holding the 3 percent contribution, which was mandatory for all employees, as unconstitutional.

Those choosing to not to pay the 4 percent would exit the defined benefit program for future service, have the level of their pension frozen at current levels and switch to a 401(k)-style plan. State officials said they do not have an estimate of how many employees might switch.

Unions will review whether to sue the state over the 4 percent choice on the contribution, said Ray Holman of United Auto Workers Local 6000, the largest state employee union.

“We feel there’s some constitutional issues with that,” he said. “In essence, the state is telling workers you don’t have a choice, you can either be hit in the head with a brick or a stick, and we don’t think it’s much of a choice.”

But Snyder said this plan, structured as giving employees a choice instead of forcing the contribution as the 3 percent law did, would survive legal scrutiny.

“I believe this is a different set of issues,” Snyder said, noting the 3 percent not only was required, but to fund retiree health care, not pensions. “I feel good about this situation where this is prospective, asking people, to say we’re not forcing them.”

Overall, Holman said while the UAW opposes the bills because of the 4 percent contribution and end of retiree health insurance for new hires, they are much improved from their initial form, when they would have ended retiree health insurance for all employees hired after 1997.

“When the bills were first introduced, it was just horrible legislation,” he said. “Over the summer and into the fall, we traveled the state meeting with various lawmakers from both sides of the aisle, educating them on what this legislation would do to the workforce. Fortunately, they were able to hear us.”

Holman also said the UAW hopes the state can refund the money to employees before the Christmas holiday.

“What better way to go through the holiday season with a little extra cash,” he said.

Rep. Maureen Stapleton (D-Detroit) said while she had been pushing to have the money returned before Christmas to provide an economic stimulus during the holiday season, she said this was acceptable.

“What is clear is that the courts have spoken and this money is due to these employees,” she said.

The bill would use a six-year average of overtime when determining a worker’s final average compensation.

Retiree health care changes also would be significant.

Workers in the defined contribution system hired before January 1, 2012, would decide whether to remain in the graded health care subsidy plan for retiree health care or monetize existing years of service and credit that monetization to a 401(k) or 457 plan.

Under the current graded subsidy plan, state employees earn 30 percent state retiree health care premium coverage after 10 years of service, with an additional 3 percent of state coverage earned per year, up to a maximum of 80 percent or 90 percent. Employees could now decide instead to “monetize” their retiree coverage and receive an amount, determined by formula, paid directly into a tax-deferred account.

New hires, and those switching to a 401(k) or 457 plan, would see a huge change in retiree health insurance coverage. They would lose their retiree health insurance, and the state would instead make a matching contribution up to 2 percent of the employee’s compensation. Employees hired on or after January 1, 2012, also would see the state deposit $2,000 into their health reimbursement account when the employee terminated his or her employment at age 60 with at least 10 years of service or $1,000 with at least at least 10 years of service.

The legislation would not change the retiree health care plan or coverage available to employees hired before March 31, 1997, whether those employees are still in the defined benefit system or whether they chose to convert their service to the defined contribution plan in 1997.

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