Capitol News

December 8, 2017

Last month’s “Capitol News” featured the No-Fault Auto Insurance bill House Bill (HB) 5013 going down to defeat despite the backing of the Speaker of the House and Detroit Mayor Mike Duggan. This month’s Capitol News again features unsuccessful legislative efforts to institute Emergency Manager-lite on municipalities through the back door of underfunded municipal pensions and retiree benefits. Meanwhile at the federal government level, the Tax Cuts and Jobs Act has passed both houses with implications for retirees across the nation.

MUNICIPAL PENSION AND OTHER POST EMPLOYMENT BENEFITS (OPEB) REFORM

Background — There are 1,800 local units of government in Michigan and 334 of them provide either retiree health care or a retirement plan, or both. The total unfunded pension liability is currently estimated to be around $7.46 billion. The total unfunded liability for OPEB (retiree health care predominantly) is estimated at $10.13 billion.

It is estimated that, for many Michigan cities, roughly 20 cents on the dollar goes to pay pension and OPEB costs. Some plans are in good financial shape while others have fallen into increasing debt. State and local governments across the nation are also experiencing the same issues. A majority of those receiving municipal pensions are public safety personnel, most of whom are unionized.

Cities, townships, villages, and counties have experienced severe declines in revenues both because the recession crushed real estate values and because the State has cut back on revenue sharing payments to local governments. The Constitution limits the ability of local governments to add new revenue — property tax values can rise no more than 5 percent a year no matter how much market values rise, meaning many properties have not caught up with tax values in place a decade ago — and the local governments have to contend both with the labor contracts negotiated in flush times, a labor negotiation process that can leave decisions up to arbitrators, and medical cost inflation.

Why This Matters — When State officials start tinkering with one public employee retirement system, they often want to apply whatever the popular reform of the moment is to other public employee retirement systems. In 1996, Michigan was the first state to close its State employees’ defined benefit pension system and establish a defined contribution (DC) (401(k)) system for new employees after April 1, 1997. In a 2015 study, those new hires in the DC plan that are within five years of retirement were found to have a paltry $125,000 in their accounts. That is not enough to provide a decent retirement for potentially 30 years. Nevertheless, Michigan’s officials have forced 401(k) plans on school employees and many municipal systems have adopted them. Any “reform” dreamed up for municipal systems may spill over to State employees — so we watch this carefully. And we are most interested in proposals for mandated changes to current municipal retirees’ health care benefits.

Task Force Appointed — In his 2017 State of the State address, Governor Snyder announced that he would appoint a Task Force on Responsible Retirement Reform for Local Government. The Task Force was appointed in February and was comprised of 20 voting members and four ex officio members including subject matter experts representing labor and management, investment managers, insurance and finance professionals, and legislators. Its charge was to provide recommendations on municipal pension and health care reforms.

Task Force Report — On July 18, the Task Force released its report and recommendations. While the Task Force agreed on four major recommendations, there were some issues on which Task Force members disagreed, or determined further examination was needed.

Of the report’s recommendations, the Task Force proposed the State of Michigan prioritize the following four reforms:

  • Greater reporting and transparency must be required of all local units to ensure a full understanding of the size and scope of the problem.
  • A pension and OPEB fiscal stress test system for local governments should be created to alert and assist local units in crafting solutions to best position them to continue to serve their residents, while funding their obligations and protecting benefits for employees and retirees.
  • This system, along with the creation of a new Municipal Stability Board (MSB), should assist in the review of a local unit’s finances and the development of a corrective action plan. The MSB should also provide research, training, and technical assistance.
  • In addition to meeting existing constitutional and statutory requirements to pay pension costs, going forward all local governments should meet a minimum requirement to pay OPEB normal costs for new hires if offered, for example by prefunding new active employee’s current-year obligations.

There was fundamental disagreement on three issues:

  • Some Task Force members were opposed to the establishment of new funding requirements, concerned it would have too severe an impact on the local government’s ability to provide current services.
  • A majority of Task Force members were opposed to the establishment of plan design requirements for all local governments, believing that the local unit, through the collective bargaining process, should have the flexibility to agree upon what works best within their communities.
  • While the Task Force agreed to the concept of an MSB, it could not agree on the powers it would have. A majority of the Task Force members felt that the MSB’s role should be limited to making recommendations and providing technical support. A minority thought the MSB should be able to unilaterally impose changes if the local unit was unable to successfully implement a corrective action plan.

The full text of the report is available on the Governor’s website.

Bills Introduced — The bills as introduced set up a five-phase plan. The first and second phases established reporting requirements, funding ratios, and triggers for the State to label a system as underfunded. The third phase allowed a local government to receive five-year waivers from being considered underfunded if they were already working to solve the problem and the fourth phase involved negotiating a corrective plan with local stakeholders to get fully funded, which would be required within 180 days of being determined underfunded. A fifth phase was State takeover of a pension system and essentially a municipality´s budget.

The public safety unions, AFSCME, SEIU, and other municipal employee organizations opposed the last steps in the proposal because it set up a mini-emergency manager takeover of a municipality´s retirement system and likely abrogation of collective bargaining agreements. Intense lobbying resulted in insufficient support among Republicans to pass the bills in their original form and no support among Democrats. Basically, legislators did not have enough information about their own local communities´ pension systems to know how it would affect their district´s residents. Consequently, legislative leadership and the Governor backed off and in the early hours of Thursday, December 7, substitute bills were passed on a bi-partisan basis that essentially stuck with the Task Force´s four major recommendations. The main bills in the package are HB 5298, which passed 105-5, and Senate Bill (SB) 686, which passed 36-0.

The Governor is expected to sign the bills once they complete the legislative process in both chambers.

FEDERAL TAX CUTS AND JOBS ACT (TCJA)

At this writing, both the U.S. House and Senate have passed the TCJA in slightly differing versions using the filibuster-proof reconciliation process. It may be headed for a conference committee composed of representatives from both chambers to iron out the differences, or the House could simply accept the Senate bill as is. President Trump says he will sign it. The bill received a few cursory hearings compared to the last time there was a big federal tax overhaul in 1986 during the Reagan era.

Older Taxpayers — AARP’s Public Policy Institute finds that Americans 65 and older would be hard hit by the new tax law. It cites the Joint Committee on Taxation (JCT) analysis that the Senate TCJA will reduce taxes for millions of taxpayers beginning in 2019. However, the JCT also estimates that beginning in 2021, tax filers with incomes of $10,000 to $30,000 will be worse off, paying $5.9 billion more in taxes. By 2027, taxes will go up for filers with income below $75,000 by $27.4 billion. The AARP estimates that the Senate TCJA will increase taxes on 1.2 million taxpayers age 65 and older in 2019, and by 2027, 5.2 million older taxpayers will experience higher taxes. In addition, the bill will provide no tax relief for 5.1 million older taxpayers in 2019 and no tax relief for 5.6 million taxpayers by 2027.

The Senate version adopts the “Chained CPI” inflation index for calculating deductions and tax brackets, setting a dangerous precedent that could spill over into cost-of-living adjustments for Social Security.

Medical Deduction — Although the Senate legislation retains the medical expense deduction — unlike the House bill, which repeals the deduction entirely — the Senate bill does not address the 2017 tax hike on seniors. The income threshold for the deduction for those aged 65+ increased from 7.5 percent to 10 percent in 2017. Nearly three-quarters of tax filers who claimed the medical expense deduction are age 50 or older and live with a chronic condition or illness, and 70 percent of filers who claimed this deduction have income below $75,000. Maintenance of this important deduction is critical financial protection for seniors with high heath care costs.

PAYGO (“Pay As You Go”) and Medicare — AARP explains that by operation of the 2010 federal PAYGO law, the government would have to lop off $150 billion in government spending every year for 10 years. The PAYGO law was designed to keep the deficit in check by requiring the administration to institute spending cuts in many mandatory federal programs if Congress passes any measure that increases the deficit but doesn’t include offsetting revenues.

According to AARP, Medicaid, Social Security, food stamps, and other social safety net programs are exempt from the PAYGO law. But Medicare and other programs — such as federal student loans, agricultural subsidies, and the operations of the Customs and Border Patrol — are not exempt.

Medicare alone will take a $25 billion cut in Fiscal Year 2018 and another $385 billion over the next nine years if the TCJA is enacted according to a report by the nonpartisan Congressional Budget Office. PAYGO caps how much the government can trim from Medicare at 4 percent. The annual amount could increase in subsequent years depending on the size of the deficit and Medicare’s budget.

The $25 billion reduction would affect the payments that doctors, hospitals, and other health care providers receive for treating Medicare patients. Individual benefits would not change and neither would premiums, deductibles, or copays. But with so much less money going to providers, the cuts could have major impacts on patient access to health care — such as fewer physicians accepting Medicare patients.

Congress has the authority to waive the PAYGO law for a program, but waiving PAYGO would simply cause higher deficits in later years.

It is expected that Medicaid and Social Security will be in the cross-hairs for future reductions in response to increasing federal debt.

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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