Capitol News

May 2014

Pension Tax and Court Transfer Lawsuits

First the good news! On April 17, the Court of Appeals granted retired school teacher Tom Okrie’s motion for oral argument in his challenge to the constitutionality of the transfer of the Court of Claims from the Ingham County Circuit Court to the Court of Appeals. It is scheduled for 9 a.m. on Tuesday, July 8, 2014 in the Court of Appeals ’ courtroom on the 14th Floor of the Cadillac Place, 3020 West Grand Boulevard, Detroit. Each side will be allowed one-half hour to address the Court of Appeals in a special session. In addition, the Court of Appeals invited interested groups to file amicus briefs.

If you can possibly be there in the courtroom, please join us. We need to show our interest in this issue that affects all of state government. It is quite obvious that the transfer was made for political reasons — to get state government cases heard by the Court of Claims out of a predominantly Democratic judicial bench to another friendlier setting where the outcome would be more favorable to the legislative and gubernatorial actions that often are challenged in the Court of Claims.

Less pleasant news arrived on April 21, when Court of Appeals Judge Servitto, sitting as a Court of Claims Judge, dismissed Okrie’s challenge to the pension tax. Okrie’s attorney, Gary Supanich, filed a motion for reconsideration on May 7 and intends to pursue further appeals.

Funds are still needed to support the enormous amount of legal work these two cases have required. See Supanich’s Web site at www.michigan-appeal-attorney.com for updates and contact information.

Thirteenth Check Issue Surfaces

The spotlight on the Detroit bankruptcy situation has revealed the pension system policy of issuing so-called 13th checks to pensioners. The 13th check is a yearly bonus payment that cost the City of Detroit General Retirement System nearly $1 billion over 22 years. It was cited during bankruptcy proceedings as a significant factor in the underfunding of the city’s pension plan for civilian employees.

A reporter from the Detroit Free Press, Paul Egan, inquired about whether the state issued 13th checks and discovered that the State Employee Retirement System and the School Employees Retirement System distributed nearly $900 million through 13th checks between 1982 and 2002. About $641.4 million was paid from the Michigan Public School Employees Retirement System and about $238.5 million from the Michigan State Employees Retirement System. His story made page one in the Lansing State Journal.

Act 230 of 1943, as amended at MCL 38.20g describes the method to calculate the 13th check for state employee retirees. If the pension fund exceeded 8 percent in earnings, then there would be a distribution according to a formula taking into account years of service and years since retirement. Beginning in 1988, all state pension recipients became eligible for automatic three percent annual benefit increases with a maximum of $300 annual increase if they retired on or after October 1, 1987. If retired before that date, they were eligible for the greater of the supplemental payment or the combination of the 1987 one-time adjustment and the automatic increase.

According to the Office of Retirement Services, state government retirees haven’t received a 13th check since 2001. The DFP article quotes Lauren Leeds of DTMB as saying that the state takes the position that such payments are required only when returns exceed 8 percent over the life of the fund, which dates to the 1940s. It’s possible though highly unlikely the next 13th checks could be paid in 2018, Leeds said. Annual returns exceeded 8 percent in 12 of the 17 years from 1997 through 2013.

SERA Coordinating Council Chair Bob Kopasz was quoted extensively in the DFP article as was Bruce Andrews, President of the SERA U.P. Chapter. Kopasz said the state used to issue the bonus checks based on annual returns, but in the late 1990s began using a leveling calculation that considered the rate of return over longer time periods. The law never changed, but the state’s interpretation of it did, Kopasz said. Andrews, who retired in 1984 after 34 years of service in the Department of Natural Resources, said he used to really look forward to the 13th check.

CSC Rejects Challenge to Prison Food Contract

The American Federation of State, County and Municipal Employees and the Michigan Association of Governmental Employees challenged the privatization of the Department of Corrections food service to Aramark after its takeover in December 2013. On May 7, a bitterly divided CSC 2-2 decision affirmed the privatization.

The MCSC ’s four commissioners deadlocked on whether to grant the appeal, leaving the original approval of the privatization intact. Commissioners Charles Blockett and Robert Swanson urged rejection of the contract and suggested improvements in the standards for approving all disbursements for personal services in the future, such as including quality standards. Commissioners Thomas Wardrop and James Barrett stuck by evaluating proposed disbursements on the basis of cost savings alone, leaving the issue of performance evaluation to departments.

Commissioners Blockett and Swanson argued in their dissent that the CSC is charged in the state Constitution with making sure the state ’s civil service is performed on merit and fitness as well as efficiency. “Clearly, by approving this contract, we have failed to meet this responsibility, ” Blockett and Swanson wrote. “Our experience with good government is being undermined at an accelerating rate, ” they said. "We are moving to a covert, hidden, shadow workforce of contractual employees.”

Public Policy Matters

The Legislature returned from their spring break and now is in the last throes of passing appropriations bills. The May Revenue Estimating Conference is scheduled for May 15, when the expenditure side of it hits the reality of what is available to spend.

General Budget — The Michigan House passed a $36.5 billion omnibus budget bill, increasing money for counties from sales taxes by $65.4 million to $211 million, in line with Gov. Rick Snyder’s proposed budget. It also boosts by 3.8 percent to $765 million the revenue that the state Constitution requires be given to cities, townships and villages.

The Senate passed a $1.5 billion higher education budget, up from $1.4 billion in fiscal year 2014. This increases higher education funding by 6.8 percent.

A $3.7 billion transportation budget bill passed the Senate, down from $3.8 billion in 2014. It includes one-time money for highway and bridge construction.

The Senate also approved a $17.5 billion community health budget, up almost $958 million from 2014. An increase of about $1.08 billion covers Medicaid expansion in the state and projects savings of $232.1 million on related programs for the year because of federal matching funds.

Transportation Budget — At this writing the House has passed bills designating $450 million annually for the state’s crumbling roads and bridges. That is short of the $1.2 to $2 billion Governor Rick Snyder and others say is necessary, but it is a good start to negotiations over a final number people are saying. The bills modify competitive bidding requirements for the Department of Transportation and local road agencies; make some changes to the state’s registration fees; increase fines and permit fees for overweight trucks; upgrade replacement warranties on the state’s roads; repeal the current fuel taxes and replace them with a 6 percent tax on the wholesale price of fuel; eliminate the flat tax on motor carriers; and shift about $370 million in sales and use tax collected on fuel from the General Fund to transportation with a seven-year sunset on the 1 percent of the use tax being dedicated to roads.

Educator Evaluation — HB 5223 and HB 5224 would set up a new system for evaluating educators across the state. The bills advanced to the House floor after two years of study, recommendations, and legislative hearings since January. Under current law, the role of student growth in a teacher ’s evaluation is set to increase to 50 percent for the 2015-2016 school year.The bills would change that progression, keeping the percentage at 25 percent through the 2016-2017 school year. Then, beginning in the 2017-2018 school year, the rate would move to 40 percent. The bills complete the teacher tenure reforms the Legislature enacted in 2011.

Second Wolf Hunt Question Approved for Ballot — A second ballot question designed to stop wolf hunting in Michigan was recently approved for the November ballot by the Board of State Canvassers (BSC). Those opposed to wolf hunting first sought to overturn PA 520 of 2012, which the Legislature and Governor approved allowing gray wolves to become game species. A repeal referendum was put on the ballot and approved, nullifying PA 520. The Legislature went around the voters and passed PA 21 of 2013 which gave the Natural Resources Commission the power to designate game species for hunting. The NRC promptly approved the first organized wolf hunt in state history this past fall. This prompted the anti-wolf hunting groups to mount a second ballot initiative. This question will ask voters to overturn Public Act 21 of 2013.

A rival coalition of hunting groups, Citizens For Professional Wildlife Management, is circulating petitions to codify the NRC ’s ability to name game species. A minimum of 258,088 petitions is due by May 28. There may be three questions on the ballot concerning wolf hunting.

Detroit Bankruptcy — Detroit bankruptcy Judge Steven RHODES recently approved the city ’s proposed bankruptcy exit plan, allowing it to be sent to creditors for a vote. Creditors include the public safety and the general system retirees. To qualify as accepting the plan, more than two-thirds the amount of claims and one-half in number of class members have to say yes. The plan stipulates that if retirees vote for the plan, they “may” be waiving the right to sue the state to recover the full amount of the pension.

The Detroit Retired City Employees Association agreed to cuts in pensions of 4.5 percent and elimination of their COLA, but this is dramatically less than those first proposed in February under the plan of adjustment that Emergency Manager Kevyn Orr outlined. At that time, he called for cuts in pensions for all retirees who were not either former police officers or fire fighters of as much as 34 percent. If the retirees agreed to the plan of adjustment then the cuts would have been trimmed to 26 percent.

The plan says the state would pay $194.8 million if it awards pensioners its portion of the “grand bargain” money up front. The grand bargain is an agreement to both save pensions and the DIA art by contributions from art patrons and the state as well as pension concessions.

The votes are due July 11. This isn ’t final confirmation of the plan, which will come later at a hearing set for July. Even if enough creditors don ’t vote to support the plan, the judge can still force the plan into action, which is called a “cramdown” in bankruptcy court.

Meanwhile the Michigan House has formed a special committee to consider the legislative package on the Detroit bankruptcy settlement, part of the Grand Bargain. An 11-bill package defining the state’s role in resolving the Detroit bankruptcy has been introduced that provides $194.8 million from the Budget Stabilization Fund that would then be repaid through tobacco settlement dollars. Under the legislation, a seven-member commission would be established to oversee Detroit’s finances for the next 20 years. The bills also would require the city to move all new employees to a defined contribution retirement benefit instead of the existing defined benefit system. The city will be banned from providing retirement and health-care benefits to new employees greater than the levels offered to state employees. Speaker Bolger has stated that the city unions need to cough up some contribution to the bankruptcy plan as well.

SERA Recent News — If you are a SERA member, you are eligible to receive SERA 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.

Return to top of page