Capitol News
August 2013
Pension Tax Lawsuit Filed
On July 9, 2013, a class action lawsuit was filed in the Ingham County Court of Claims against the State of Michigan for promising school and state employees in many official communications that pensions would not be taxed and then breaking that promise for those born after 1945 when 2011 PA 38 was enacted and went into effect January 1, 2012. School and state employee retirees relied on this promise when planning and making the irrevocable decision to retire. Some bought extra service time to enhance their pension, calculating that pension income was not taxed and investment income would be taxed.
The lead plaintiff in the case is Tom Okrie, a retired Troy school teacher born in 1946 living in Yale, Michigan, near Port Huron. The matter is in Judge Rosemarie Aquilina’s court.
Although the Michigan Supreme Court in In re Request for Advisory Opinion regarding Constitutionality of 2011 PA 38, 490 Mich 295 (2011) ruled that 2011 PA 38 did not impair contracts in violation of the state or federal constitutions, the Supreme Court may have left the door open to a cause of action based upon the non-constitutional ground of Breach of Contract, which relies upon the equitable doctrine of Promissory Estoppel. Promissory estoppel is a term used in contract law that applies where one party has relied on the promise of the other, and it would be unfair not to enforce the agreement. The elements of Promissory Estoppel are (1) a promise; (2) that the promisor should reasonably have expected to induce action of a definite and substantial character on the part of the promise; (3) which in fact produced reliance of that nature; and (4) the circumstances such that the promise must be enforced if injustice is to be avoided.
A news conference about the lawsuit arranged by SERA was held on the Capitol steps on Tuesday, August 6 at which Okrie told the story of his 6 written notices from the Office of Retirement Services over 15 years that his pension would not be taxed. Relying on this, he made the irrevocable decision to retire in July 2000. Twelve years later, the State of Michigan began taxing his pension, abrogating the promise in all those statements and notices Okrie received.
Tom Okrie’s attorney is Gary Supanich, an Ann Arbor attorney specializing in state appeals. The lawsuit asks the court to order that the State of Michigan cease and desist from taxing the pensions of affected public employees and enter an award of damages, plus statutory interest to compensate Plaintiffs as a result of having their promised tax-exempt pensions subject to state and local taxation.
The Attorney General’s Office filed a motion to dismiss on August 9, claiming that no enforceable contract or promise existed between retirees and the state over taxation of pensions. The motion says that only the Legislature has the power to tax and that Okrie's breach of contract charge hinges on a claimed quasi-contract that allegedly was formed by non-legislative promises. The motion also cites a provision of the state constitution which expressly forbids creating a tax exemption by contract.
There are over 192,000 school retirees and over 55,000 state retirees. It is estimated that up to one-third are affected by the elimination of the state and local tax exemption for pensioners born after 1945. The class of Plaintiffs could be over 80,000 school and state retirees and the revenue generated by income tax on them may exceed $60 million in 2012 alone.
Information about the lawsuit is available on Mr. Supanich’s Web site at http://www.michigan-appeal-attorney.com/ . The SERA Coordinating Council voted to support the lawsuit and urged local SERA chapters and SERA members to do the same.
| What Michigan Seniors/Retirees Lost in the Income Tax Overhaul | |
| Tax Provision | FY 2012-13 |
| Repeal of Senior Exemption of $2,300 | $35.3 million |
| Public and Private Pension Tax Changes | $336.2 million |
| Homestead Property Tax Credit Changes | $257 million |
| Elimination of Senior Interest/Dividend Exemption | 6.3 million |
| Total | $634.8 million |
| Source: Senate Fiscal Agency, State Budget Overview, November 9, 2012 (all figures are estimates) | |
Detroit Bankruptcy
Capturing international attention last month was the formal filing on July 18 of Chapter 9 bankruptcy by the City of Detroit in federal court. It was the largest city in U.S. history to file for bankruptcy. The city has $18 billion in debt, about half of which is owed to its 23,000 retirees for their future pensions and health care. The retirees are unsecured creditors under Chapter 9, and therefore are not automatically entitled to a creditor committee. However federal judge Stephen Rhodes has ordered that one be formed. No other municipal bankruptcies have advanced to provide a court precedent for Detroit to follow when it comes to pensions, although retirees preserved contractual rights under a reorganization plan in Jefferson County, Alabama that is under current court review.
Detroit’s retirees have sued to protect their benefits based largely on Article XI, Section 24 of the Michigan Constitution which says that already accrued public pensions are a contractual obligation that cannot be diminished or impaired. Michigan Attorney General Schuette has pledged to defend public pensions and the state constitution, but his office has to also represent the Governor and the State of Michigan’s interest in the bankruptcy.
As a result of the Detroit bankruptcy filing, three Michigan municipalities (Saginaw County, Genessee County and Battle Creek) delayed bond sales because they could not get favorable interest rates as bond investors have apparently become wary of any municipal bonds coming from Michigan.
And Detroit made history in another way in early August when a write-in candidate for mayor, Mike Duggan, got over 50 percent of the primary vote, more than all the other candidates on the ballot.
Medicaid Expansion Update
The Michigan Senate Government Operations Committee held three hearings in July concerning Medicaid expansion to 133 percent of the poverty level (about $15,000) which would provide basic health insurance for over 300,000 people in Michigan with 100 percent of the costs being picked up by the federal government for the first several years and then going to 90 percent in 2018. HB 4714 (S-7) has the support of the Governor, Senate Majority Leader Randy Richardville, an unknown number of Republican Senators and all of the 12-member Senate Democratic Caucus. Several other bills to reform the basic Medicaid program but not expand it were also introduced and all have been referred out of the Committee. The plan is for the Senate to vote on the matter August 27 and then over to the House for concurrence on August 28.
Bolger/Schmidt Grand Jury Inquiry
Ingham Circuit Judge Rosemarie Aquilina, acting as the one-person grand juror to investigate the actions of House Speaker Jase Bolger and former Rep. Roy Schmidt when they implemented a strategy where Mr. Schmidt, a lifelong Democrat, would become a Republican at the last moment before the filing deadline to run for re-election and recruiting a faux-Democrat to file as a candidate. The plan backfired when the faux-Democrat withdrew and blew the whistle on the scheme. Senate Minority Leader Gretchen Whitmer (D-East Lansing) and then-Democratic Party Chair Mark Brewer requested the empaneling of a grand jury to look into the mess. Judge Aquilina said in an order that “the exhaustive and diligent” investigation found “no presentment of any articulable crime or unlawful wrongdoing.”
Quick Hits
The Governor has appointed Ron Jones of Haslett to replace Doug Drake on the State Employee Retirement System Board to represent retirees. He currently works for the Municipal Employees’ Retirement System of Michigan and serves as its investment compliance counsel. Drake served on the Board for 8 years and as its chair in recent years. He is a SERA member and we thank him for his service.
The Michigan Corrections Organization and more than 2,200 of its members filed suit against the Michigan Department of Corrections to collect unpaid wages and overtime compensation owed to them over the past three years. The suit, which is brought under the Fair Labor Standards Act, has been filed in U.S. District Court for the Eastern District of Michigan. The suit involves MDOC’s requirement that officers perform certain “pre-shift” and “post shift” work for which MDOC does not compensate them.
Former Michigan Supreme Court Justice Diane Hathaway who was convicted of bank fraud earlier this year will apparently be serving her one year and one day sentence at the Alderson Federal Prison Camp in West Virginia. That is where Martha Stewart served her time for securities fraud.
The Governor has announced the Regional Prosperity Initiative, a voluntary competitive grant process that was included in the Governor’s FY 2014 Executive Budget to encourage local private, public and non-profit partners to create vibrant regional economies. Under the initiative, the current system of delivering state services is being revamped by state departments. For example, more than 80 state services now are provided in a regional fashion with almost none of the regions sharing common boundaries. There will be 10 regions and regional cooperation will have to be shown to gain a grant.
Recent News — If you are a SERA member, you are eligible to receive Recent News, a periodic e-mail about breaking news and media stories of interest to state employees and retirees. Write to michigansera@comcast.net 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 michigansera@comcast.net.
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