Capitol News

June 8, 2017

The Michigan Legislature is scheduled to depart Lansing between June 15 and June 22, depending on finalizing the budget. The budget was caught up in a political struggle between the Governor and the Legislature over school pensions.

PENSION TAX UPDATE

Since all but one State Representative voting on the pension tax in 2011 are now gone due to term limits, Michigan SERA is pursuing more vigorously repeal or modification of the pension tax. We are somewhat encouraged by the Michigan House taking up an across-the-board tax cut bill, HB 4001, that was narrowly defeated in February. Subsequently the appropriation committees have cut $475 million from the Governor’s proposed FY 2018 budget to finance legislative priorities such as school retirement pension changes.

Our argument is this: if the legislature is in a tax cutting mood, why not eliminate the most unpopular item of the 2011 tax changes, the pension tax? There are 4 bills in the House (HBs 4052, 4092, 4132, 4182) and one in the Senate (SB 41) proposing to sunset the pension tax effective December 31, 2016.

Recall that the 2011 tax overhaul gave businesses a $1.8 billion tax cut, shifting more of the tax burden to individuals. A big part of the tax shift involved adoption of a complicated three-tier system based on age for taxing pension and retirement income in Michigan. A handy chart is available on the Michigan Department of Treasury Web site. Generally younger retirees are taxed more heavily than older retirees:

  • Public pensions for those born before 1946 (Tier 1) are exempt from taxation and there is a small investment income subtraction available also. Private pensions for this age group get a $49,861 single-filer subtraction or double that for joint filers.
  • Those born in 1946 through 1952 (Tier 2) get a subtraction from taxation of $20,000 for a single filer and $40,000 for a joint filer for pension income only with no investment income subtraction available. At age 67 the taxpayer gets a $20/$40,000 subtraction against all income (including social security and investment income).
  • Those born after 1952 (Tier 3) have their pensions taxed from the first dollar (no subtraction) and at age 67 must choose between two exemption options that allow either a $20/$40,000 subtraction against all income with no peronal exemption or claiming the personal exemption

Sponsors of the bills have been contacted to ascertain how enthusiastic the sponsor was about moving their bill. The Office of the Speaker of the House, Rep. Tom Leonard, was contacted to pitch our idea.

Michigan SERA Vice President Cheryl Streberger and I met with staff in the office of Rep. Jim Tedder (R-Clarkston), Chair of the House Tax Policy Committee, to inform him of our desire to have one of the pension tax repeal bills scheduled for hearing and reported out.

It is up to the Chair to schedule bills for a hearing in House Tax Policy Committee. Such a hearing would flush out the issues around repealing the pension tax. The House Fiscal Agency would analyze the revenue impact of repealing the pension tax. The Michigan Department of Treasury would do a similar analysis and take a position on the issue. SERA and other organizations would likely do their own analysis of the benefits of repeal. So far we have been met with cordial interest and acknowledgement of our talking points.

If you add up all Democrats and the Republicans in the House who have sponsored pension tax repeal or campaigned against the pension tax, we likely have a majority to pass pension tax repeal in the House. It has an unknown future in the Senate where many of those who voted on the pension tax are still in office. It is widely believed that the Governor would veto a pension tax repeal. If he did veto the bill, we would need 2/3 support in both Houses to override the veto. So this is a big and long haul, but we have more momentum on our side than many big ticket issues.

To create more pressure, SERA members need to contact Rep. Tedder, Chair of House Tax Policy Committee, at (517) 373-0159 or jimtedder@house.mi.gov and urge him to schedule one of the four pension tax repeal bills for a hearing.

SS Fix — Meanwhile, a couple bills to fix a perceived inequitable treatment of retired public employees not in the Social Security system under the pension tax state law provision advanced in both chambers. Those affected are usually local government retired police and fire personnel. The Senate has passed its SB 266 and a similar House version, HB 4396, has been reported out of House Tax Policy Committee.

FUTURE OF SCHOOL EMPLOYEE PENSIONS

The slow economic recovery of Michigan is now producing modest revenue gains. As the FY 2018 appropriation process has developed, it became clear that the Governor’s budget would be scaled back to make room for Legislative high priorities for that extra revenue.

MPSERS — Since 2012 MPSERS has offered a hybrid system combining both defined benefit and defined contribution elements. It is currently 100 percent funded. The defined benefit MPSERS system closed in 2012 to new employees is only 60 percent funded, similar to the state employee retirement system closed in 1997. When a defined benefit system is closed, new employees are not making contributions to it but it still needs infusions of revenue to assure that it can invest that money to pay future obligations to active employees in the closed retirement system and those already retired.

Senate — The Michigan Senate majority apparently wants to close the current hybrid Michigan Public School Employee Retirement System and force all new employees into a 401(k) defined contribution system. Proponents of closing the MPSERS hybrid plan say it hasn’t faced a recession and is doomed to future indebtedness. However, no vote has been taken to know if there are 20 votes for closing the hybrid MPSERS plan.

Dems — Democrats say they want to invest the extra revenue in schools and improving roads, not tax cuts or closing the hybrid MPSERS plan.

Governor — The Governor has been opposed to closing the MPSERS hybrid plan, saying it is working as planned. He said it is a risk to put one-time money in the budget toward the costs of closing the hybrid plan when the cost of closing it will be an annual event. The state is already scheduled to start committing hundreds of millions of new money from the General Fund to roads and an expanded Homestead Property Tax Credit.

Others — You can guess which side of this debate financial institutions like Voya, the current 401k vendor for state-run pension systems, are on. And which side school employees and their unions are on.

Agreement — At this writing the parties seem to have cut a tentative deal: the current hybrid pension plan would close to new public school employees; new employees would be automatically enrolled in a defined contribution 401(k) plan, but they could opt out and instead enroll in a new hybrid plan with some pension and some 401(k) mix.

With a tentative deal in place, the Governor and legislature will need to review the appropriation bills already completed without the Governor’s involvement. Hearings on the formal bills to close the current MPSERS hybrid system and set up the new system will likely get attention in the coming weeks left in the legislative session. The current bills are HB 4657 and SB 401.

BALLOT ISSUES UPDATE

Two more ballot issues were approved by the Board of State Canvassers in May so there are three ballot petition drives now:

Keep Our Lakes Great is a proposed initiated law to revoke the easement allowing Enbridge Energy’s Line 5 pipeline that runs under the Straits of Mackinac.

Regulate Marijuana Like Alcohol is a proposed initiated law to authorize the personal possession and use of marijuana by those aged 21 or older, control the commercial production and distribution of marijuana and impose a 16 percent total tax for non-medical sale.

Protecting Michigan Taxpayers is a proposed initiated law to repeal the Prevailing Wages and Fringe Benefits Act.

Ballot language is available on the Michigan Department of State, Board of State Canvassers Web site. Circulators have to get the requisite registered voter signatures in a consecutive 180-day window period before July 2018.

Part-time Legislature — Lt. Governor Brian Calley announced on May 30 that he is leading an effort called the Clean MI Committee to amend the Michigan Constitution to institute a part-time legislature and align legislative pay with average teacher pay, prorated. Effectively it would cut legislative pay in half. Members of the House and Senate are now paid $71,685 per year.

Michigan has had a full-time Legislature assisted by legislative staff, the fiscal agencies, and the Legislative Service Bureau since the adoption of the 1963 Constitution, 52 years ago. Combining relatively low pay with term limits, which the proposal would leave intact, would produce an entirely different kind of legislative candidate.

The Legislature currently meets for about 90 session days a year, on Tuesdays, Wednesdays and Thursdays, from January through June, one day in July and in August, and then in the fall. The House and Senate held more than 100 session days in 2015 and more than 80 in 2016, an election year. In the current fiscal year, the Legislature receives $147.9 million to run its operations.

Under the proposal, the Legislature would effectively be restricted to meeting only during the first three months of the year with a limit of meeting for 90 consecutive calendar days. The Legislature could only meet outside that 90 days if called into emergency session by the governor. It also calls for eliminating legislator pensions and health care after they leave office (those no longer exist, but this would put a prohibition into the Constitution).

According to the National Conference of State Legislatures, 40 states have part-time legislatures. Alaska, California, Florida, Illinois, Massachusetts, Michigan, New York, Ohio, Pennsylvania and Wisconsin have full-time legislatures. Most of these are populous states with complex economies.

Lt. Governor Calley is expected to announce his candidacy for Governor in the near future.

Redistricting — At this writing, the various organizations working on language for a Constitutional amendment on redistricting to remove legislative control of political district line drawing has not yet submitted language to the Board of State Canvassers for approval.

BILLS THAT ARE MOVING

The Governor has signed HB 4131, now PA 43 of 2017, to amend the Public Employee Retirement Benefits Forfeiture Act to provide for forfeiture of an individual's rights to a vested retirement benefit and accumulated employer contributions, for a conviction or no contest plea for a felony arising out of the individual's service as a public employee. Unlike the statute it modifies, it would allow no judicial discretion in the matter. The bill passed both chambers unanimously.

The House Committee on Law and Justice has held two hearings on HB 4289 and HB 4076 that creates the crime of altering data used for official reports with intention to falsify or mislead by a public employee. The issue arose through the Flint water crisis prosecutions.

HB 4205, which would prohibit state agency rules from being more stringent than federal regulations, passed the House recently and has been referred to Senate Oversight Committee.

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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