Pension and Senior Tax Proposals — Since Governor Snyder’s tax and budget presentation on February 17, it has been non-stop hearings, information gathering, meetings, phone calls, e-mailing, rallies, and just thinking, thinking, thinking about how to defeat the administration’s plan to tax our pensions and alter other senior exemptions and credits.
In order to pay for a $1.4 billion structural deficit and eliminate the Michigan Business Tax that brings in $1.8 billion, the Governor has proposed significant spending reductions and a comprehensive tax restructuring plan that shifts state tax liability from businesses to individuals. Business tax revenues to the state will be reduced by 86% while individual taxes paid to the state will increase by 32%.
Four Tax Changes Would Affect Most SERA members — The income tax changes proposed by the Governor would increase the income tax by an estimated $804.4 million in FY 2011-12 and $1.67 billion in FY 2012-13. Here are the four proposals affecting pensioners and seniors 65 or better according to the House Fiscal Agency analysis of House Bill 4361:
Other Tax Changes Potentially Affecting All Taxpayers — Other proposed tax changes are:
Personal Exemption multiplied by: $100,000 minus total household resources
The last item, a reserve for future tax and fee reform, is an open-ended fund giving the administration significant unrestricted leeway to give more tax cuts to carry out the Governor’s programs.
Potential Tax Changes under the Executive Recommendation in Detail
Effective January 1, 2012
Source: Michigan Department of Treasury
Reactions — Taxing pensions alone would contribute $900 million to the $3.2 billion the Governor needs to make his tax and budget plan work. However, the 1.5 million seniors in the state are reliable voters and apparently began contacting their legislators immediately. Senator Jack Brandenburg, Chair of the Senate Finance Committee through which a tax proposal would usually flow, considers it a tax increase and opposes it. He and Senator Rick Jones have asked for an Attorney General Opinion on the legality of it. By February 25, eight Republican Senators reported they disliked the proposal to tax pensions.
The Senate Republicans developed their own proposal and met with the Governor to suggest that the pension tax only apply to future retirees and that the proposed Corporate Income Tax be increased to 6.75% with a 6% tax rate on S-corporations, limited liability corporations, partnerships and other business entities. This would raise $700 million. The other $200 million would be found through additional spending cuts. The Governor apparently indicated he liked his proposal better and intends to stick to it. Lately he has indicated that he thinks his pension tax proposal will pass in some form. The Senate Republicans will introduce their tax proposal in the coming weeks.
EPIC-MRA polling indicated that the Governor’s job approval rating dropped from 59% to 44% a couple weeks after the budget and tax proposals were introduced. EPIC-MRA President Bernie Porn said the question people are asking is simple: "Why cut business taxes that much and have seniors pay for it?" The poll found that 4 in 10 disliked the pension tax proposal and that opinion was true for those above and below age 50.
March 15 “It’s Not Fair” Rally — AARP contacted SERA and other organizations to help plan a rally on the Capitol lawn for March 15 with the theme of “It’s Not Fair.” We gladly accepted and invited our members to attend. The rally attracted 1,500 people from all over the state. I spoke very forcefully that it is both unconstitutional and unfair to tax our state pensions.
SERA Testimony at House Tax Policy Committee
The House Tax Policy Committee began having hearings in early February to educate new Representatives about the tax structure in Michigan and to allow public testimony about proposed changes. The proposed amendments to the income tax act were introduced on March 1 as HB 4361. Later HB 4480 amending the State Employee Retirees’ Act was introduced.
On March 16, SERA presented its testimony opposing those aspects of HB 4361 targeting pensions and seniors. I presented a general overview about the illegality of taxing public pensions, the public policy reasons for longstanding senior tax breaks, the low pensions of state employee retirees, the expenses of seniors, and that promises to current seniors should be kept. SERA Council President Bob Kopasz shared his personal financial story with the Committee. It was the first time the Committee actually heard so directly from an actual pensioner and they were all ears.
Dan McLellan, SERA member, retired former General Counsel for the Michigan Civil Service Commission and former member of the State Employees’ Retirement Board, testified about the legal issues. He stated:
Doug Drake, SERA member, state employee retiree, Chair of the State Employees’ Retirement System Board, and former manager in the Office of the Budget, testified that:
SERA Members Turn Out For Hearing — The House Tax Policy Committee Chair announced that hearings on the tax proposal would be ending soon. We therefore called on SERA members to attend the March 30 hearing. Fifteen SERA members attended, wearing prominent big stickers saying “No Pension Tax.” SERA members Duane Hoffman, Mary Ann Watson, and Vergil Pinkney submitted testimony and all submitted cards opposing the pension and senior tax changes.
Administration Defends Pension Tax
On March 23, the administration released a detailed defense of its proposed new tax on pensions and seniors in a presentation to the House Appropriations Committee. Using a fairness theme, the PowerPoint presentation asserted that its proposal treats everyone the same regardless of age or source of personal income, saying it’s all income: $100 from a pension is no different than $100 from a job. It stated that the net effective tax rate for all seniors based on adjusted gross income in 2008 was .48% compared to 2.95% for non-seniors, implying this was unfair. A table compared a retired senior couple and a working non-senior couple, both with incomes of $41,500. The table showed that the seniors had an effective tax rate of 0% while the working couple had an effective tax rate of 2.46% under the Snyder plan.Unnoticed by the media and others was the fact that the senior couple in the table had a refund of $548 under current tax provisions and would lose that refund under the Snyder proposal; an effective tax increase. Nevertheless, the table was widely quoted to the effect that Snyder’s proposal would not tax pensioners making $41,000 or less and that the Snyder proposal established a $41,500 exemption for pensions and seniors. Even our own members have been affected by the administration’s PR offensive.
While the administration’s example is accurate technically, it fails to make the point that pensions are often fixed and seniors may have no ability to enter the competitive workforce. Someone in the workforce has the potential for yearly raises, bonuses, profit sharing, overtime, longevity payments, or any number of work-based compensation in the future that a senior does not have. Pensioners and seniors have contributed to the state’s revenues for 40 or more years whereas the working person has not. SERA leaders are working on taxpayer examples that will show clearly that pensioners and seniors will lose their refunds and pay higher taxes under the administration’s proposed tax changes.
Other Legislative or Legal Developments
SCR 9, Domestic Partner Benefits — The Senate voted 27-9 to overturn the Civil Service Commission’s approval of health care benefits for domestic partners. The House attempted to reject the benefits but could not muster the two-thirds vote needed to pass SCR 9. Only two Democrats broke with their caucus, but 11 would be needed to gain the necessary 74 votes for a two-thirds majority. The House has until April 18 to take action or the benefits will go into effect. SERA submitted testimony opposing the resolution.
3% Payroll Deduction Developments — Ingham County Circuit Court Judge William Collette ruled in February that the amendment to the State Employee Retirement Act last year requiring active state employees to contribute 3% of their wages to retiree health care costs was unconstitutional. He did so on the basis that it violated Article XI, Section 5 that gives the Civil Service Commission the power to determine classified employees' compensation. "Allowing the legislature to do this would basically allow it to completely usurp the CSC's constitutionally given authority to 'fix rates of compensation,'" Mr. Collette wrote in his ruling, quoting the Constitution. "If Defendant's argument were accepted, any time the legislature needed money to fund current retirees, it could simply confiscate a wage increase granted by the CSC without having the required two-thirds vote of each house constitutionally required." On March 8, 2011, Judge Collette decided the money already collected in an escrow account should be held there until all appeals are final, but that further deductions from pay checks should cease. The administration is appealing the ruling.
Similar legislation requiring public school employees to contribute 3% of their compensation to finance their retirement health care costs is unconstitutional, an Ingham Circuit Judge James Giddings recently ruled, because it seizes the employees' property without exercising due process of law. The decision also enjoined the state from further collecting the 3 percent payments. The state is expected to appeal. Judge Giddings stated the legislative action is “quintessentially arbitrary and unreasonable” because it enacted a law to collect monies from future retirees to help current retirees and the state offers no guarantee that future retirees would receive any of the benefits.
SJR C and SB 7, Legislative Power Grab Over Public Employee Benefits — SJR C proposes to amend the State Constitutional to authorize the Michigan Legislature to establish the cost allocation between a public employer and its employees for health care benefits. A companion bill, SB 7, would require all public employees to pay 20% of the cost of their health care benefits. If the public employer had a health care plan that included a health care savings account in combination with a high deductible health plan, then the employee would only be required to pay 10% of the cost. SERA opposes these bills and has submitted testimony on them.
SERA belongs to a coalition opposing these two measures because this would be a huge cost shift to active public employees. If active public employees are required to pay more for their health insurance, it is likely that pubic employee retirees would be expected to pay a higher premium if not Medicare eligible or to pay an increased premium for a Medigap wrap-around health insurance benefit. To reduce costs, the public employer might even drop certain coverages for retirees. There is no constitutional protection against diminishment of our retiree health care benefit like there is for our pension.
Pension Board Transparency — HB 4156 would require that Detroit pubic pension systems publish and make available to the public on a Web site all expenditures made by the board of a Detroit retirement system on a quarterly basis. Sponsor of the bill, House Oversight Committee Chair Tim McMillin, stated that he wanted to limit the legislation to Detroit because of the public revelations that the Boards spent $380,000 in one year traveling to conferences in Singapore, Hong Kong, Edinburgh, San Diego, San Francisco, Scottsdale, San Antonio, San Juan, Miami Beach, New Orleans and Dubai. The Detroit Free Press had to bring a lawsuit to enforce a Freedom of Information Act request.
SERA testified in favor of the bill if it were expanded to all pension boards. Whereas we don’t suspect the SERB members of any shenanigans, the general principal of transparency is appropriate for all pension board expenditures. And we are interested in more transparency in the reporting from the Investment Advisory Committee handling our pension funds.
At the Governor’s March 21 special message on local government reform, the Governor supported SERA’s position that all public pension boards should be transparent in their operations. He called on the Legislature to support legislation that would implement local pension board best practices saying:
First, local pension boards should be subject to transparency rules. They should be required to report their annual performance and funding level in a standard format. This would allow all plans to be benchmarked against all others. Also, strict restrictions and disclosure requirements should be in place for all board member travel and expenses.
Second, local pension boards should have to meet certain best practice requirements. Modeled after recent Securities and Exchange Commission (SEC) rules, the state should adopt a strict prohibition against the practice known as pay to play. The SEC regulations that apply to the largest organizations should be applied at all levels including third-party advisors. If anyone contributes to government officials in a position to influence the decision of a pension board they should be banned from conducting any business with the board for two years. Also, a financial advisor or anyone acting on their behalf should be prohibited from making or soliciting political contributions to a local or state political party where they wish to conduct business.
The House has referred HB 4156 back to Representative McMillin’s House Oversight Committee and one hearing has been held about how to approach amendments to the bill to cover more entities.
SERA Members Should Take Action
Keep Contacting Your Legislators — Your Legislators need to hear from you about your thoughts on the pension tax and other aspects of the Governor’s proposal. The Governor’s goal is to have the budget done by the end of May, so contacting them earlier has more influence than contacting them later. Legislators’ contact information is in the SERA Directory, or SERA’s Web site at www.mi-sera.org and at the following places:
House members: www.house.michigan.gov/find_a_rep.asp
Senate members: www.senate.michigan.gov/fysenator/fysenator.htm
SERA Resources — The Capitol News page at www.mi-sera.org contains not only this Capitol Report in its longer form and put on the Web site earlier than the monthly Lansing SERA newsletter, but SERA’s legislative docket, a link to the Michigan Legislature Web site where all bills can be found, and Find Your Senator/Find Your Representative links. A new page labeled Testimony contains our testimony at legislative hearings.
I have formed a distribution list for “News of the Day” which is a compilation of media stories about the income tax battle we are experiencing and my own commentary. If you would like to receive this e-mail news, please let me know by e-mailing me at firstname.lastname@example.org.
Editor’s note: Mary Pollock is the Lansing SERA Chapter and SERA Council’s Legislative Representative. She may be contacted at 1200 Prescott Drive, East Lansing, MI 48823-2446; Phone 517-351-7292; E-mail email@example.com.
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