Capitol News

December 2011

The month has been highlighted by the Michigan Supreme Court’s pension tax decision, a two-week break for a hunting Thanksgiving vacation, and a rush to complete high priority bills before the legislature heads for a 4-week winter holiday.

Supreme Court Decision Disappoints

On November 18 in a 4-3 decision along party lines, the Michigan Supreme Court in In Re Request for Advisory Opinion Regarding Constitutionality of PA 38 (SC Docket No. 143157) upheld the new law imposing an income tax on pensions earned by public employee retirees born after 1945. And the court unanimously held that a provision using a pensioner’s birth date as the basis for determining eligibility for income tax exemptions did not violate either the U.S. or state Constitutions.

In the stinging words of Justice Stephen Markman writing for the majority “We are able to identify absolutely no provision within the constitution that provides that public employees, and only public employees, are entitled in perpetuity to receive pension income without having to pay taxes on that income and that such income alone will be forever exempt from having to support the costs of government.”

The bare majority held that Article IX, Section 24 of the Michigan Constitution prohibiting the impairment or diminishment of public pensions only guarantees that the pubic pensioner is entitled to the benefits earned, not that those benefits could not be taxed. The constitutional framers could have easily provided that taxes could not be imposed on pension benefits, as they did by exempting the property of religious groups from taxation. That they did not do so indicates there was no intent to exempt those benefits from tax, the majority held. The benefit the Constitution protects is the income, not freedom from taxation on that income, Mr. Markman said for the majority.

No age discrimination — A unanimous court said the provisions allowing for differences based on age do not violate the equal protection clauses. “In this case, there is a rational basis for grounding a taxpayer’s eligibility for the pension exemption upon date of birth: older persons, who are obviously more likely to be already retired or approaching retirement, have relied more on the exemption and will be less able to garner additional future income to offset the loss of the exemption,” Markman wrote.

Graduated income tax nixed — The court unanimously declared unconstitutional the provision that based a pensioner’s eligibility for exemptions and deductions on the basis of the pensioner’s “total household resources.” That provision violates Michigan’s constitutional ban on a graduated income tax, the court held.

The Constitution bans graduated income taxes on the basis of either base or rate. And while the court said it was clear the law did not create a graduated income tax on the basis of rate, it clearly created a graduated income tax on the basis of income.

During oral argument on September 7, it was clear the court was most concerned about the question of a graduated income tax, not the taxation of public pensions.

Department of Treasury officials estimate the overturned provisions will cost the state $60 million in FY 2011-12 revenues and $91 million in FY 2012-2013 revenues.

The court said the provision on total household resources can be severed from the rest of the act and not affect the entire constitutionality of PA 38 of 2011. The court attempted to distance itself from the overall policy that has been the subject of ongoing controversy and helped trigger a recall effort against Mr. Snyder. “This court is not deciding whether 2011 PA 38 represents wise or unwise, prudent or imprudent public policy, only whether 2011 PA 38 is consistent with the constitutions of the United States and Michigan,” Mr. Markman wrote.

How they voted — Joining Justice Markman in the majority opinion was Chief Justice Robert Young Jr., Justice Mary Beth Kelly, and Justice Brian Zahra. Markman’s and Zahra’s terms on the Supreme Court end December 31, 2012 and both may be Republican nominees for the Supreme Court on the November 2012 ballot.

Justice Cavanagh and Justice Marilyn Kelly dissented from the idea that the pension tax could be applied to those public workers who retired before January 1, 2012. The tax changes take effect that day.

Justice Hathaway dissented entirely from the majority, saying imposing the income tax on public pensions does violate a constitutional ban on diminishing or reducing public pensions.

“This is a direct tax on a public pension that will in most instances be deducted directly from the pension benefit at the time of distribution. This results in a financial reduction in the benefit to the pension recipient. A financial reduction of a benefit is a diminishment or impairment under any definition,” Ms. Hathaway wrote.

SERA representatives were sought by many print and broadcast media sources for comment after the decision. See the SERA Web site at for the decision and some of the coverage.

Next Steps

There are several steps that can be taken to change a statute. First, legislative repeal or amendment of the law; second, a lawsuit; third, an initiative referendum to overturn the law by a vote of the people. On Friday, December 2, SERA, AARP, the Michigan Association of Retired School Personnel, and the National Active and Retired Federal Employees held a press conference organized by AARP calling on the Legislature to repeal the pension tax before its effective date, January 1, 2012. There are two bills, HB 4818 and SB 519, which would accomplish that goal. As of this writing, December 8, there has been no movement on either bill.

The second option, a lawsuit likely filed in federal court based on a violation of the Article I, Section 10 of the U.S. Constitution, would have to be undertaken by a better financed organization than SERA, such as the public employee unions. SERA could certainly make a contribution if such a lawsuit were filed. An initiative petition drive would be very costly, estimated between $2 and $5 million dollars.

Legislature Passes Retirement System Overhaul

Both the House and Senate have approved an amended HB 4701 radically altering the state employee retirement system for future state retirees, but softening the no-overtime provision and at least providing a way for new hires to accumulate something toward their retiree health care insurance. The 60-page bill is now on to the Governor’s desk for approval, which is expected.

The Senate Fiscal Agency concurrence analysis says HB 4701 would:

  • Require a Defined Benefit (DB) member to choose whether to contribute 4% of salary (pre-tax) to remain in the DB system, or whether to not pay the 4% and instead “freeze” his or her compensation and years of service and convert to the Defined Contribution (DC) system for future service. A DB member choosing to pay the 4% would be required to further choose whether to make the contribution until attainment date (30 years of service) or retirement/termination.
  • Within two pay periods after the effective date of the legislation, discontinue the existing 3% contribution all State employees are currently making into the irrevocable trust created in the Public Employee Retirement Health Care Funding Act. Contributions made between November 1, 2010, and the discontinuation date would be refunded on or before the first pay date after April 1, 2012, with interest.
  • Spread the unfunded accrued liability for the pension system across both the DB and DC payrolls, rather than just across the DB payroll.
  • Prohibit deferred, vested members who are reemployed on or after January 1, 2012, from rejoining the DB system, and instead place those employees into DC. These employees would receive a pension based on prior service, but no new DB service (or adjustments in wages) can accrue for the purposes of calculating the pension.
  • Prohibit nonworking, nonvested DB members who are reemployed on or after January 1, 2012, from rejoining the DB system, and instead place those employees into DC for future service. However, if these members returned to work by January 1, 2014, they would receive a “frozen pension” benefit for prior service and DC credit for future service.
  • Require the retirement system to design and implement an automatic enrollment feature for employee contributions into 401k and 457 plans.
  • Allow the State to make matching contributions to a different plan or account than the elective contributions made by an employee.
  • Use a six-year averaging of overtime for inclusion in a DB member’s final average compensation, for any prospective overtime payments (overtime earned after January 1, 2012).
  • Allow working DC employees hired by the State before January 1, 2012, to choose (between January 3, 2012 and March 2, 2012) 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.
  • Allow nonworking DC members, with at least 10 years of service to date, who rejoin the State’s workforce by January 1, 2014, to choose between graded retiree health premium coverage or a monetization of their prior service. If they rejoin after two years, then their prior service will be monetized and they will join the “DC for health” plan.
  • Eliminate retiree health insurance coverage from the State for any new employee hired on or after January 1, 2012, or for any existing DC employee choosing to convert to the 401(k) or 457 plan for health care. Instead, the State would make a matching contribution up to 2% of the employee’s compensation to an appropriate tax-deferred account, such as a 401(k) or 457. In addition, for employees hired on or after January 1, 2012, the State would deposit into a health reimbursement account $2,000 when the employee terminated employment after age 60 with at least 10 years of service, or $1,000 upon termination with at least 10 years of service.
  • Prohibit employees from borrowing against the 401k or 457 matching contributions for health care.
  • Require the State to offer the option for those workers choosing to monetize their prior premium coverage, or for those employees first hired on or after January 1, 2012, to purchase retiree health care coverage from the State’s health care plans upon separation or retirement.
  • Provide maximum insurance subsidy coverage if an employee becomes disabled or dies while in service to the State, even if the employee had previously chosen to monetize their credit and participate in the 2% matching plan.
  • Require a report from the retirement system by January 1, 2017, providing the projected impact of the $2,000 and $1,000 deposits into health reimbursement accounts with regard to the annual required contribution as used by the Governmental Accounting Standards Board.
  • Appropriate $1.9 million to the Office of Retirement Services for administration of the changes proposed under this bill.

The yearly cost to finance current state retirees’ health care is nearly $500 million.  The current unfunded liability for future retiree health care is between $9 and $14 billion, depending on the formula used to calculate it. HB 4701 is an attempt to reduce the taxpayer’s future liability for state retiree health care by shifting the cost to the employee and retiree. It will make the state less competitive in attracting new employees and certainly force current state employees to work longer before retirement.

Other State News

Legislation has been introduced to spur local government pension board reform requested by the Governor in his local government message. Several provisions will affect state retirement pension investments. SB 797 would increase the allowable investment in foreign securities from 20 to 30% and increase the ability to invest an additional 5% in private equity but only if it is Michigan private equity. The bill has bi-partisan sponsorship and is likely to be considered after the new year.

State unions have now ratified their contracts with the state for FY2013 and FY2014 with Civil Service Commission approval expected at its December 15 meeting. The contracts include a 20% health care premium. Non-exclusively represented employees may see an extra increase in pay to make up for a zero increase in FY2011.

Attorney General Bill Schuette has appealed to the Michigan Supreme Court the lower court’s decision to deny his lawsuit challenging the Civil Service Commission’s approval of domestic partner benefits for state employees. Both the House and Senate have passed HB 4770 and 4771 prohibiting public employers from providing domestic partner benefits. SERA opposed the bills because they intrude on the CSC’s authority to decide wages and benefits and interfere with the collective bargaining process.

Representative Paul Scott (R-Grand Blanc) was recalled November 8, but Republicans have apparently decided not to pursue retaliatory recalls of House Democrats. A resolution calling for a constitutional amendment to tighten up the recall provision has been introduced with apparently bi-partisan support.

The Michigan Senate embarrassed itself and the state on November 2 by passing a controversial school anti-bullying bill with a provision permitting bullying based on religious or moral conviction. The House moved forward with a more acceptable bill, which the Senate quickly concurred in at their first opportunity after return from the Thanksgiving recess. At the bill signing the Governor admitted that he had been bullied in school because he was a nerd.

Although business leaders are very pleased with the Governor’s performance, his popularity in Michigan has hit new lows, with only 19.3 percent of voters rating his job performance as “excellent” or “good,” according to MSU’s quarterly survey. Another 42.1 percent gave him a “fair” rating and 38.5 percent rated his performance as “poor.” The reason: blanket TV ads sponsored by the Ambassador Bridge owner linking the Governor with a new international bridge.

News of the Day — If you are a SERA member, you are eligible to receive News of the Day, a periodic e-mail about breaking news and media stories of interest to state employees and retirees. Write to giving your name and chapter.

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

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