Capitol News

July 2011

The high-stakes legislative drama of the big income tax and budget battles of April and May are now behind us and the Legislature worked in June on many topics, the most important of which to Legislators was redistricting. The Legislature will take a summer vacation in July and August, except for scheduled sessions on July 13 and August 17. Though we were told that the $1.4 billion structural deficit was permanently eliminated, recently retired House Fiscal Agency Director Mitch Bean is now saying there are $900 million of one-time fixes baked into the budget and tax plan.

Just after the Governor signed the tax bills on May 25, the administration’s leaders and many legislators took off for the annual Detroit Chamber of Commerce conference on Mackinac Island. In fact, Governor Snyder’s Relentless Positive Action was reportedly there the whole 3 days.

Supreme Court Advisory Opinion

On June 2, 2011, Governor Snyder asked the Michigan Supreme Court to issue an advisory opinion on the new tax law. A Michigan Supreme Court Advisory Opinion has the effect of by-passing the circuit court and court of appeals. For the Governor, getting the matter to the Supreme Court as early as possible is advantageous because it would avoid the potential change in the MSC after the November 2012 election of 3 justices. The current MSC is 4-3 Republican-nominated justices. Asking for an advisory opinion is unusual: reportedly there have been only 26 other Advisory Opinions issued by our high court since the 1963 Michigan Constitution was passed, the last being in 2008 about the then-new voter ID law.

On June 15, the Michigan Supreme Court granted the Governor’s request (In Re Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38, SC Docket # 143157) and ordered the Attorney General to submit by August 10 “separate briefs arguing that the reduction or elimination of tax exemption for pension incomes contained in 2011 PA 38 and the determination of eligibility of income tax exemptions for pensions on the basis of age are and are not constitutional under the Michigan and United States Constitutions.” Attorney General Bill Schuette has appointed Solicitor General John Bursch to represent to pro sides of the questions raised and Deputy Solicitor General Eric Restuccia to argue the contra sides.

The Court approved the following questions to be argued on Wednesday, September 7 at 9:30 a.m. in the Hall of Justice:

  1. Whether reducing or eliminating the statutory exemption for public-pension incomes as described in MCL 206.30, as amended, impairs accrued financial benefits of a “pension plan [or] retirement system of the state [or] its political subdivisions” under Const 1963, art 9, 24;
  2. Whether reducing or eliminating the statutory tax exemption for pension incomes, as described in MCL 206.30, as amended, impairs a contract obligation in violation of Const 1963, art 1, 10 or the US Const, art I, 10(1);
  3. Whether determining eligibility for income-tax exemptions on the basis of total household resources, or age and total household resources, as described in MCL 206.30(7) and (9), as amended, creates a graduated income tax in violation of Const 1963, art 9, 7; and
  4. Whether determining eligibility for income-tax exemptions on the basis of date of birth, as described in MCL 206.30(9), as amended, violates equal protection of the law under Const 1963, art 1, 2 or the Fourteenth Amendment of the United States Constitution.

The Court also invited “Persons or groups interested in the determination of the questions presented in this matter may move the Court for permission to file briefs amicus curiae on either or both sides of the submitted questions.”

Of course SERA will be filing an amicus brief under the able representation of Dan McLellan, who testified on our behalf against the pension tax during legislative hearings .McLellan is the former General Counsel to the Michigan Civil Service Commission and a former member of the State Employee Retirees’ System Board. We will be concentrating on the first two questions the court has approved for briefing.

Michigan SERA decided to invite the Michigan Federation of Chapters of the National Active and Retired Federal Employees to join us on the brief. NARFE participation offers a strategic advantage if we have to file a lawsuit in federal court because of an adverse Michigan Supreme Court advisory opinion. Federal retirees are entitled to the same favorable tax treatment as retired state employees pursuant to a U.S. Supreme Court decision, Davis v Mich Dept of Treasury, 489 US 803 (1989); Davis v Mich Dept of Treasury (on remand), 179 Mich App 683 (1989).

SERA and NARFE members and friends are invited to attend and observe the oral argument and SERA/NARFE news conference to follow. More information about these opportunities will be in the August newsletter.

Legislation Affecting State Employees and Retirees

There are several bills of interest to state employee retirees. See www.mi-sera.org under the Testimony tab to read our written letters to legislative committees about the bills.

Senate Joint Resolution C proposes to amend the Michigan Constitution to authorize the Michigan Legislature to establish cost allocation requirements and expenditure limitations for health benefit plans for public employees and officers, and elected and appointed officials. The proposal would require any health benefits offered to state employees, local government employees, and employees of public universities to conform to the cost allocation requirements and expenditure limitations established by state law.

The State Officer’s Compensation Commission, the Civil Service Commission, merit systems for units of local government, and public universities would be prohibited from adopting, and collective bargaining rights would not extend to, any health benefit plan requirements that differed from those established by the legislature.

SJR C passed the Senate 26-12 on May 12. It was referred to the House Committee on Oversight, Reform, and Ethics, where it was referred out on June 22. The full House was unable to get the necessary 2/3 vote on June 30 to put the measure on the ballot, so the matter was postponed for the day. It could be brought up again, but the Republicans would need 10 Democrats to join them. SERA opposes SJR C.

House Bill 4572 is called the “hard cap” bill. It would prohibit a public employer from paying more of the annual health care premium than $5,500 for single-person coverage, $11,000 for two-person coverage, or $15,000 for family coverage. These hard caps could be adjusted annually based on medical cost inflation.

The House Fiscal Agency analysis says that for state employees hired before April 1, 2010, where the state is covering 90 percent of the cost of health care coverage, the state pays $7,033 annually for a single employee, $13,954 for a couple, and $19,572 for family coverage. For employees hired after that date, the state is paying 80% of the cost.

If passed it would cost state employees $162.1 million in the first year if the Constitution were amended to allow the bill to apply to state employees. SERA opposes HB 4572 because, in our experience, what happens to active state employee benefits may have an effect on retiree benefits. HB 4572 passed the House 58-52 on June 23.

Senate Bill 7 is called the “80/20” bill. As introduced, the bill required that all public employees (including state employees) pay 20% of the overall cost of purchasing health insurance beginning January 1, 2012. The bill would cause an approximate $173.9 million shift in health care cost to active state employees alone in the first year — if the Constitution were amended to allow the bill to apply to state employees of course. We had sought language in the bill to make it clear that retiree health care plans were not covered in the bill. See our March 9 testimony. [pdf file]

We had Senate Reforms Committee Chair Mark Jansen’s agreement to exclude retirees and he assigned the amendment to Senator Colbeck to implement. I sent Senator Colbeck several optional approaches and talked to his staff to make sure they knew a deal had been cut. When the dust settled and SB 7 (S-10, meaning they went through 10 versions of the original bill) passed the Senate, it did not contain an exclusion of retiree health care. I called Jansen’s and Colbeck’s offices the next day o find out what happened and was told that it was very clear in the bill that it only applied to employees, not retirees. Well, there’s many a slip between cup and lip; legislative language needs to say what it means explicitly. I was disappointed.

Because the House passed HB 4572, the hard cap bill, and the Senate passed this 80-20 bill, there were intense negotiations between the Senate and House leadership to go forward with one bill or the other, or merge the concepts into one bill. I heard Thursday, June 30 at an early morning meeting at Senate Reforms Committee that a merged bill was being worked on but there hadn’t been enough time to get it finished the night before. The Chair told us to watch for further developments that day.

Suddenly there was a notice put up in the early afternoon that House Oversight Committee where SB 7 was sitting was going to meet at 4:15 p.m. or at the call of the chair. That meant a substitute merged bill was ready. I returned home and began watching House session through the House Web site. At 4 I called the Chair’s office to see if the meeting was still going to be held at 4:15 or when had it been rescheduled for? Staff couldn’t say except to advise me to keep watching House TV where an announcement would be made. This is no way to run a railroad with trains running every which way on any track they choose and not on any known schedule. However, this is the way our Legislature occasionally acts when they suspend all their rules and just barrel through something on a deadline. June 30 was the last day of session before the summer recess and bills were flying through. I gave up watching at about 6:15 p.m. as I had an event to attend. Later I learned that the meeting occurred at 8 p.m. and that SB 7 (H-6) including both the hard cap and 80-20 concepts was reported out of House Oversight Committee.

On the House floor later that evening, the rules were suspended and SB 7 (H-6) passed the House 56-52. Rep. Tim Melton voted Yes with Republicans; Reps. Foster, Goike, McBroom, O’Brien, Pettalia, and Tyler voted with Dems to oppose. In the bill is contained a clause exempting retiree health care plans from its coverage! I didn’t even know the idea to exempt retiree health care was still alive after 16 substitute bills, and was surprised when I learned that it certainly was in there. Here’s the language:

Medical benefit plan does not include benefits provided to individuals retired from employment with a public employer.

See the whole bill here: www.legislature.mi.gov/documents/2011-2012/billengrossed/Senate/pdf/2011-SEBH-0007.pdf

SB 7 has been returned to the Senate for concurrence with the House changes. The Senate next meets on July 13.

SERA has opposed SB 7 because it might impact state retiree health care benefits. We are pleased that retiree health care is removed but still disappointed that active public employees may face state regulation of health care benefit cost allocation. The coalition to which SERA belongs about SB 7 and HB 4572 (Coalition for Accountability in Reform) is proud that it was able to soften the bill overall, and has some ideas on bargaining around it should it become law. Reportedly it is going to collide with the federal Affordable Care Act in some way in 2014 also.

I sent a thank you note to the sponsor of the bill who is also Chair of Senate Reforms Committee for getting retirees excluded from the bill.

SB 409 would amend the recently revised Income Tax Act to exclude from taxation retirement or pension benefits from employment with a government agency that was not covered by the federal Social Security Act. The only large groups remaining outside the Social Security system are employees of state and local government who have not chosen to join the system and federal workers who were hired before 1984. The bill would reduce income tax revenue by an estimated $15 to $23 million in the first year.

It was presented as a technical fix to the new pension tax on younger retirees, mostly affecting police and fire personnel. The Senate suspended its rules and considered the bill directly without referral to any committee for a hearing. Democrats attempted an amendment to repeal the pension tax itself, which failed 18-20, with Senators Jones, Hildenbrand, Robertson, Rocca, Green and Brandenburg voting with the Democrats. The Senate passed SB 409 35-2. In the House, there was an attempt on June 30 to suspend the rules and pass it without a committee hearing. However, that attempt failed and it was postponed for the day.

SERA has taken no position on the bill because we would like all public pensions exempt from taxation, not just public pension from jurisdictions not participating in Social Security. Neither the House nor Senate Fiscal Agencies identified the logic behind granting a tax preference to 100% of the pension of this one group of public employees when other public pensioners are required to pay income tax on their pensions and, in the younger group, potentially their social security income.

SB 519 and 520 sponsored by all 12 Senate Democrats would eliminate the pension tax entirely and prohibit the potential taxation on Social Security income from the new income tax act. House equivalent bills are HB 4817 and 4818, again sponsored by only Democrats. The Dems are clearly going to use this in 2012 elections.

HB 4701 and 4702 propose radical restructuring of the state employee pension plan. Currently the State funds retiree health care on a pay-as-you-go basis rather than pre-funding future retiree health obligations that are promised in state statute. The current cost is $420 million annually, which increases yearly due to both medical cost inflation and an increasing number of retirees.

The recent budget agreement will begin pre-funding the future retiree health care liabilities in FY 2011-12 with a $316 million appropriation, the minimum amount necessary to meet the Annual Required Contribution (ARC) that will trigger a change in the accounting method used to determine future unfunded accrued liabilities (UAL) for state employee retiree health care. The change in accounting method will reduce the UAL from $14.7 billion to $9.1 billion. SERA had hoped that the Governor was starting a yearly commitment to pre-fund and address the UAL, but our hopes were dashed when we saw the contours of these bills introduced June 1. The bills are projected to reduce the UAL by $5.7 billion, all at the expense of active state employees.

On the positive side, HB 4701 eliminates the 3% employee contribution for retiree health care required of all employees since November 2010 and refunds the contributions to employees with interest! A circuit court in February found this forced contribution without Civil Service Commission approval to be unconstitutional, so this provision is more or less the administration’s admission that it can’t win the appeal.

On the other hand, the bill excludes overtime pay from calculation of income in final average compensation, a big issue for hourly state employees working in 24/7 facilities with mandatory overtime to cover vacant positions, absences, or special projects.

Defined benefit plan employees would be required to choose between remaining in the plan and contributing 4% of their compensation toward the plan, or freezing their pension benefit and continuing their future service under the SERS 401(k) defined contribution plan.

Defined contribution (DC) plan employees would lose retiree health insurance (excluding former DC employees with more than 10 years of service, who have retired and are currently receiving the health insurance benefit). It would provide DC plan employees (other than those excluded above) a lump sum contribution into a health reimbursement account (HRA) upon retirement from the State in lieu of retiree health insurance such as current retirees have.

For those with fewer than 4 years of service or new employees, the amount contributed would be a mere $2,000 upon retirement! For employees with more than 4 years of service, the amount would be the monetized lump sum to approximate the actuarial present value as of September 30, 2011, of the projected retiree’s health benefit based on the current benefit structure and the employee’s years of service as of September 30, 2011. The lump sum range is $19,030 to $66,642.

The DC employee retiree health care financing proposal is woefully inadequate. According to an analysis by the AFL-CIO:

  • Age 45 employee with 13 years of service would have a lump sum of $35,312. If the employee retired at age 60, the lump sum would be worth $55,015 (3% increase a year provided in bill). Health care cost for a couple at that time is projected to cost $31,722 annually. So the fund would last less than 2 years and leave the employee with 3 years to self-finance health insurance until Medicare eligibility at age 65. Medicare only covers 80% of medical costs (or less), so the retiree would be on the hook for a Medigap private policy.
  • Age 25 employee would get $2,000 upon retirement. If employee retired after 30 years of service at age 55, the employee would need $1.7 million to finance 10 years of retirement health care before Medicare eligibility. Employee would have to save $800 per month to afford retiree health care for age 55-65.

SERA opposes most of the bill because we advocate for maintaining a strong retirement plan for current and future retirees. A strong retirement system attracts and retains the best and brightest to the state service. Since the structural deficit was supposedly eliminated in the recent budget and over $300 million was appropriated for pre-funding retiree health care, there is no need to shift retiree health care cost to employees at this time. Sera believes the state should continue progress by pre-funding. If that fails to sufficiently reduce the UAL, bonding is a possibility that other jurisdictions have implemented.

Other criticisms are that the actuarial basis for the 4% amount proposed as a contribution from DB employees is not documented. Like the unconstitutional 3% contribution imposed on state employees without Civil Service Commission approval, a 4% contribution from DB employees required in the bill may also be an unconstitutional reduction of employee compensation without Civil Service Commission approval.

HB 4702 creates individual health reimbursement accounts (HRAs) within the irrevocable health care trusts created under PA 77 of 2010. The HRA would hold the one-time lump sum employer contributions toward retiree health care costs as calculated and provided upon retirement to applicable DC employees under House Bill 4701. Problems are that the concept is underfunded, not individualized or portable.

HB 4156 would require local government pension boards to publish on their Web sites the minutes of meetings, travel expenditures of the Board, and the annual report. We asked that all pension boards, including the state-run pension boards, be included in the scope of the bill. As passed by the House, our suggestion was not included, but we have support for amending the bill when it reaches the Senate. The bill passed the House and has been assigned to the Senate Reforms Committee.

Other News

As of July 1, the Governor has signed 60 bills. House members have introduced 857 bills, 32 House Concurrent Resolutions, 29 House Joint Resolutions to amend the Michigan Constitution, and 113 House Resolutions. Senators have introduced 560 bills, 17 Senate Concurrent Resolutions, 13 Senate Joint Resolutions to amend the Michigan Constitution, and 71 Senate Resolutions.

Some of the issues are redistricting, authorization for building a new international bridge, feral pig regulation, public employee collective bargaining reforms, teacher tenure reforms and other controls on school employee bargaining rights, environmental regulation limits. helmet requirement repeal, bridge card (food stamps) reform, welfare reform (hardening 48-month limit), and the medical services tax. Meanwhile recall petitions for the Governor and 15 Republican legislators are circulating or in the planning stages.

The Governor has appointed Kari Sederburg to serve as director of the Michigan Office of Services to the Aging. Her immediate past employment was as director of public policy for the Michigan Nonprofit Association. She previously served as vice president of marketing and communications for Gerontology Network in Grand Rapids and as senior account executive for The Rossman Group, a Lansing PR firm. She is the daughter of former Senator John Sederberg.

“News of the Day” is a periodic compilation of media stories about news of interest to SERA members along with some commentary. This publication is a benefit of SERA membership. If you would like to receive this e-mail, please e-mail a request to michigansera@comcast.net.

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 michigansera@comcast.net.

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